Red Ink (2 page)

Off and on for the past thirty years, the federal budget and the budget deficit—the difference between what the government takes in and what it spends—have pushed their way onto newspaper front pages and widely read blogs, into presidential debates and congressional hearings, into AARP ads and Business Roundtable press releases, into calculations of traders on Wall Street and strategies of the secretive managers of China’s foreign-exchange hoard, estimated at a staggering $3 trillion. Occasionally, talk about spending and taxes and deficits and debt even pops up in the kitchen-table and bar-stool conversations of ordinary Americans—the ones who pay the taxes, count on Social Security and Medicare, and elect the members of Congress who have, so far, been unable to fix what ails the national government’s finances.

The Washington jargon of budgeteers like Lew and Ryan excludes rather than informs the citizenry. It is peppered with words like
baseline
,
authorization
,
appropriation
,
entitlement
, and
expenditure,
and phrases like “
Byrd droppings” and “changes in mandatory program spending,” or
CHIMPS. The scale of the budget is overwhelming, the numbers so huge they are impossible to comprehend.
As humor columnist Dave Barry once wrote, the dimensions of the federal budget are hard to grasp because millions, billions, and trillions sound so much alike.
One has to think about golf balls, watermelons, and hot-air balloons to get an idea of the magnitudes.

In fiscal year 2011—from October 1, 2010, to September 30, 2011—the federal government spent $3.6
trillion,
$400 million an hour, more than $30,000 per American household. By any measure, that’s a lot of money. In
chapter 3
, I’ll look more closely at where the money goes. But for now, a few observations:

Congress does have to pass legislation every year to keep the government operating. When it delays until the federal fiscal year begins on October 1, as it has lately, scares percolate about a government shutdown in which workers deemed “nonessential” would be told to stay home, national parks would be closed, and bureaucrats’ phones would go unanswered. But much of the money the government spends—nearly 63 percent in 2011—goes out the door every year without any affirmative vote of Congress. Social Security benefits get deposited. Health care bills for Medicare for the elderly and disabled and Medicaid for the poor are paid. Food stamps are issued. Farm subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds. Congress can alter these programs, but if it does
nothing, the money is spent. As Eugene Steuerle, a Treasury economist in the Reagan years who is now at the Urban Institute think tank in Washington, puts it: “
In 2009, for the first time in the nation’s history, every dollar of revenues had been committed before Congress walked in the door.” The government’s total take was only enough to pay for promises that had been made in the past—interest, Social Security, Medicare, Medicaid, and so on. For everything else, the government had to borrow.

The United States spends about $700 billion a year on its military. That’s more than the combined military budgets of China, the United Kingdom, France, Russia, Japan, Saudi Arabia, Germany, India, Italy, Brazil, South Korea, Australia, Canada, Turkey, the United Arab Emirates, Spain, and Israel. Generals and admirals counter that the United States asks its military to do more than the forces of all those countries combined as well—to keep sea lanes open for international trade, for instance, and to be prepared to deploy almost anywhere. In all, $1 of every $5 the federal government spent in 2011 went to defense, and about 20 cents of that $1 was spent on the wars in Iraq and Afghanistan.

For every dollar the United States spends on the military,
it spends another nickel on foreign aid, international development aid, and humanitarian assistance.
Yet in a CNN poll in March 2011, the typical respondent estimated about 10 percent of the entire federal budget goes for “aid to foreign countries for international development and humanitarian assistance.” The reality: about 1 percent. That’s another problem with budgeting: the public makes woefully wrong assumptions about virtually every aspect of it.

Wages and benefits for everyone from the president to air force pilots to postal service clerks cost $435 billion in 2011. In all, the federal government employs
4.4 million workers, measured as full-time equivalents. About 35 percent are uniformed military personnel and another 29 percent are civilians working for the departments of Defense, Veterans Affairs, and Homeland Security. Wages and benefits account for $1 of every $8 the government spends, not an insignificant sum. But eliminating the federal workforce entirely would have pared the federal budget deficit in 2011 by only one-third.

Where does the rest of the money go? A lot of what government does is siphon money from some and give it to others, or occasionally to the same people. About $2.3 trillion, two-thirds of all federal spending last year, went to benefits of
some sort for individuals: Social Security, Medicare, Medicaid, food stamps. Another $220 billion went for grants to state and local governments for everything from schools in poor neighborhoods to sewage-treatment plants.

“
It’s the things that people want that are causing the problem,” Jack Lew says. “People have this feeling that others are getting the benefit, but when you look at what’s driving the deficit, it’s Social Security that people very much want. It’s Medicare that people very much want. It’s Medicaid, which is the long-term care program that means that people don’t have their eighty-year-old mothers and fathers living in the guest room when they need round-the-clock care.”

For all the talk about avoiding a government-run health care system in the United States, about half of all spending on health already comes from federal, state, and local governments.
The heart of federal health care spending is Medicare and Medicaid. In 1981, they accounted for 9.5 percent of all federal outlays besides interest. By 2011, the two programs were consuming nearly 25 percent of all outlays, the result of three decades in which health care costs have risen more rapidly than almost anything else and the number of people reliant
on the government programs has grown. In 2021, if current policies remain in place, government spending on health care will consume 33 percent of federal spending, according to the Congressional Budget Office (CBO), the nonpartisan arm of Congress that tracks such things.
The Medicare prescription drug benefit alone will cost the government more over time than the wars in Afghanistan and Iraq. The spending on the wars will end someday; the drug benefit is permanent.

Nearly all the growth in the federal budget over the next ten years is going to come from spending on health care and interest payments unless something changes. “
You can’t fix this without doing health care,” says Paul Ryan. “I mean, health care is the driver of our debt.” And, as he and others routinely observe, even though the United States spends far more per person on health care than any other country, it isn’t close to having the world’s healthiest population.

The financial crisis was an economic calamity. It provoked the worst recession since the Great Depression, the cost of which went far beyond the boundaries of the federal budget. The Great Recession, as it became known,
wiped out $7 trillion in home equity. Two and a half years after the economy had resumed growing, nearly 13 million Americans were still out
of work. The United States faced significant deficits even before the recession, but the size of today’s record-busting budget deficits are, in large measure, the consequence of revenues lost, taxes cut, and spending increased because of the recession.

In rescuing the banks, the big insurance company American International Group (AIG), money market mutual funds, and automakers General Motors and Chrysler, the government—that is, the taxpayers—took enormous risks. “
At one point, the federal government guaranteed or insured $4.4 trillion in face value of financial assets. If the financial system had suffered another shock on the road to recovery, taxpayers would have faced staggering losses,” the bailout’s Congressional Oversight Panel concluded in its final report. Indeed, private investors who risked their money to shore up big financial institutions—Warren Buffett, for one—demanded much better returns than the government did.

But actual direct cost to taxpayers for the much-maligned bailout of the banks proved to be a lot lower than expected. The sticker price on the Troubled Asset Relief Program (TARP) was $700 billion, the mind-blowing sum that George W. Bush and his Treasury secretary, Hank Paulson, got from Congress in October 2008. As of the end of March 2012, the Treasury said it had disbursed or promised
only $470 billion of the $700 billion. In the end, it turned out, the banks didn’t need all the money that Congress authorized, and the government didn’t spend all $50 billion Congress originally earmarked for beleaguered homeowners.

By early 2012, about 67 percent of the money that went out had been paid back with interest, another $12 billion had been written off, and much of the remainder looked likely to be recouped. The biggest losses to taxpayers are expected to come not from the banks but from AIG and GM; the ultimate cost depends on the price of the AIG and GM shares the government holds. At last tally, the CBO and the White House Office of Management and Budget projected the ultimate cost of the program will be between $32 billion (CBO) and $60 billion (OMB). But the headline is the same: the cost is significantly less than the hundreds of billions the agencies—and the media—anticipated in the darkest days of the financial crisis.

The biggest direct hit to taxpayers from the financial crisis, so far, isn’t from TARP, but from the bailouts of Fannie Mae and Freddie Mac, the mortgage giants that were created by the government, later turned into private companies, and effectively nationalized in 2008.
As of December 2011, the government had pumped a net of $151 billion into them and they weren’t close to standing on their own. The ultimate cost depends on housing prices.

There are a dozen ways to measure the slice of income that the government takes in taxes, and most point in the same direction. One meaningful metric: the CBO estimates that
for families in the very middle of the middle class, the federal government took an average of 19.2 percent of their gross (before deductions) income in 1981 in income, payroll, and all other federal taxes. State and local taxes have risen for some since then, but the federal tax bite has eased. In 2007, just before the recession hit, according to the CBO, the tax take for these Americans was 14.3 percent—and it has fallen since. The Tax Policy Center, a joint venture of two Washington think tanks, the Urban Institute and the Brookings Institution, estimates that the folks in the middle of the middle paid 12.4 percent of their income in taxes in 2011.

Nearly half of American households—46 percent—didn’t pay any federal
income
taxes at all in 2011. It’s not that they all cheated, though some did. Rather, the vast majority didn’t make enough money to owe taxes, or they took advantage of tax breaks that Congress has created to help the working poor, the elderly, and students, or to reward investors who put money into municipal bonds or other favored investments. About half of those who didn’t owe federal
income
taxes were hit by
payroll
taxes levied on wages to finance Social Security and Medicare.

Americans turn over less of their income to local, state, and federal governments than citizens of almost any other rich country, even when taking into account that budgets of foreign governments often include the cost of providing health care for
all, and in the United States
less than a third of the populace gets health insurance through the government. The Organization for Economic Cooperation and Development, a Paris-based consortium of developed-country governments that makes apples-to-apples comparisons, says
government at all levels in the United States took in taxes about 25 percent of the income in the economy in 2010. Twenty-seven countries took more, including Japan (27 percent), Canada (31 percent), the United Kingdom (35 percent), Germany (36 percent), and France (43 percent).

The U.S. tax code is like a big piece of Swiss cheese. It has a lot of holes. Over time, Congress and presidents have cut new holes and expanded old ones. Taxpayers and their clever lawyers and accountants have also enlarged the holes, sometimes with help from the courts. More holes means the government has to get more money from somewhere else.
All these tax breaks added up to about $1.1 trillion in 2011. That is approaching the total take of $1.3 trillion from the individual and corporate income tax.

When “tax cuts” are politically popular and “government spending” is not, politicians favor new or bigger tax breaks over
spending increases—to help college kids meet tuition bills, to encourage energy companies to develop alternatives to fossil fuels, you name it. This “spending through the tax code,” as it is sometimes called, is cherished by those who benefit and pushes up tax rates needed to finance the government. Hence, the growing enthusiasm for “tax reform” that would eliminate some of these tax breaks and bring down tax rates. But—and there’s always a
but
in these conversations—the bigger income tax breaks are by far the most popular: allowing homeowners to deduct mortgage interest payments and excluding employer-paid health insurance premiums from workers’ taxable income.