Red Ink

David Wessel, “Red Ink: Inside The High-Stakes Politics of the Federal Budget”  Crown Business, 2012, 162 pps  plus 32 pps of notes

David Wessel, the Pulitzer-Prize-winning reporter, economics editor for the Wall Street Journal, columnist, and bestselling author of In Fed We Trust,  dissects the federal budget: a topic that is fiercely debated today in Congress and the media, and yet is little understood by the American public.  Wessel looks at the 2011 fiscal year (which ended September 30) to see where all the money was actually spent, and why the budget process has grown wildly out of control. This book attempts to help the public get a grasp of this subject.

My Notes:

Pg. 20:  In the last fiscal year ending Sept. 30, 2011 the federal government spent $3.6 trillion, more than $30,000 per American household.  Nearly two-thirds of this annual spending is on autopilot and doesn’t require an annual vote by Congress. 

Pg. 21:  The U.S. defense budget, $700 billion a year, is greater than the combined defense budgets of the next seventeen largest spenders.  In all, $1 of every $5 the federal government pent in 2011 went to defense and about 20 cents of that $1 was spent on the wars in Iraq and Afghanistan. 

Pg. 23:  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.  In 2021, if current policies remain in place, government spending on health care will consume 33 percent of federal spending, according to the CBO, the nonpartisan arm of Congress that tracks such things.

Pg. 24:  The Great Recession, as it became known, wiped out $7 trillion in home equity.  The U.S. 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. 

Pg. 26:  The biggest losses to taxpayers from the “bailout” 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 projected the ultimate cost of the program will be between $32 billion and $60 billion.  The biggest direct hit to taxpayers from the financial crisis, so far, isn’t from TAR, 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 still weren’t close to standing on their own.

Pg. 27:  Nearly half of American households—46 percent—didn’t pay any federal income taxes at all in 2011.  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.  More than 46 million Americans were using food stamps at the end of 2011, one in every seven people.  (The stamps have now been replaced by a debit card good for an average of $285 a month per household.)

Pg. 29:  For every dollar the U.S. government spent in 2011, it borrowed 36 cents, much of it from China, where the income per person is about one-sixth of that in the U.S. Except for four unusual years at the end of the 1990s and the beginning of the 2000s, the federal government has spent more than it took in every year for the past four decades.

Pg. 63:  In 2001 the CBO issued the annual ten-year budget projections and stated that if current policies continued, the U.S. would run budget surpluses each year from 2002 through 2011.  Collectively, these surpluses would total $5.6 trillion, enough to pay off the entire federal debt.  Why did this not happen?

·        First, the economy did worse than the CBO and most other forecasters anticipated.  The dot-co bubble burst, precipitating the recession of the early 2000s, which was compounded by the shock of the September 2001 terrorist attacks. The hits to the economy kept coming first the housing bubble burst, then the financial crisis hit, and the Great Recession was on.  This net from the economy: $3.3 trillion.

·        Two, Congress cut taxes—repeatedly.  The big one was George W. Bush’s 2001 tax cut, enacted at a moment when there was genuine concern about the prospect that government might run such persistent surpluses that it would pay off all its debt.  The first Bush tax cut reduced revenues by about $1.2 trillion over ten years.  Smaller tax cuts followed over the years, and then came the ones that Obama pushed to fight the deep recession.  Net from tax cuts $2.8 trillion.

·        Three, the government spent more—a lot more.  The cost of the wars in Afghanistan and Iraq came to roughly $1.2 trillion over the decade, and there was extra spending on homeland security after 9/11.  The expansion of Medicare to cover prescription drugs cost about $275 billion just through 2011.  TARP and the Obama-backed stimulus package added another $500 billion through 2011, but much of that was later recouped as banks paid off their loans.  Net from spending $4.3 trillion.

·        Four, bigger deficits mean more borrowing.  Instead of having no interest payments by 2011 as forecasted by the CBO in 2001, we owe interest each year on $10 trillion.  Net increase in the deficit from interest: $1.4 trillion.

Where the $3.6 trillion 2011 federal spending went according to the OMB:

Social Security:             20.1%

Medicare, Medicaid                 21.0%

Defense                                    19.4%

Benefits besides health  15.1%  (I have no idea what this means)

Interest                                     6.4%

Everything Else             18.0%

Pg. 88:  The average social security benefit is $1,229 a month, or $14,750 a year.  Most who draw benefits are retired workers, but about 30 percent are disabled or are children, spouses, or, in a small number of cases, parents of workers who died.  A quarter of the elderly get 90 percent of their income from the program.

Pg. 94:  Tricare.  In 2011 the Defense Department spent $54 billion on health care.  One big reason is Tricare, the military health insurance program created in 1995; it is significantly more generous than insurance offered to other employees.  About 15 percent of enlisted men and women and 50 percent of officers stay in the military the twenty years needed to qualify for health insurance after they ‘retire,” often in their forties.  The annual premium was set at $460 a year per family in 1995, and for those who signed up before October 1, 2011, it hasn’t changed since.  If they signed up later, it is still a bargain at $520 annual premium. For similar coverage, federal civilian workers pay around $5,000 a year.  Later, when military retirees reach age sixty-five and become eligible for Medicare, a program called Tricare for Life picks up the tab for insurance to cover things that Medicare doesn’t.  Other Americans pay around $2,100 a year for such policies.  Tricare for Life is costing us $11 billion a year in the defense budget…basically enough to buy a new aircraft carrier every year.

Pg. 103:  Today the U.S. federal government gets money primarily in two ways: it taxes and it borrows—a lot of each.  In 2011 it collected $2.3 trillion in taxes, fees, and other revenues—about $19,400 per household—and borrowed another $1.1 trillion, or $9,300 per household.

Pg. 105:  The top marginal tax rate hit 92 percent in the 1950s, though few actually paid that because there were so many ways to avoid it.  Ronald Regan’s landmark Tax Reform Act of 1986 brought it down to 28 percent by eliminating deductions, exemptions, and tax shelters (which mostly grew back since then).  Today’s top marginal rate, 35 percent, applies to couples with taxable income (that is, after deductions and credits) of $338,350 and up.

Pg. 115:  The payroll tax is a big deal.  In 2011, about 40 percent of all households paid more in the employee share of the payroll tax than they paid in federal income taxes.  Combining the employee and employer shares of taxes (total 15.3% plus another 2.9% for Medicare), over 60 percent of households paid more in payroll than income taxes. 

Pg. 118:  Nixon paid just $5,100 in combined federal income taxes for 1970, 1971, and 1972 on income that totaled $795,000. His 1970 tax bill was only $792.  Nixon had taken a questionable $576,000 deduction for donating his vice presidential papers to the government, though the transfer documents were later found to have been backdated.  He overdid the home-office deductions for his San Clemente, California, house, claiming it was his primary residence even though he was living in the White House, and then, to top matters off, he didn’t pay state taxes in California despite alleging that he was living there.  Nixon ultimately agreed to pay $465,000 in back taxes for those years.  No surprise, evey president since Nixon has released his tax returns voluntarily. Ford reported paying more than $95,000 in federal income taxes in 1975 on gross income of $252,000, a 38 percent tax rate.

Pg. 120:  Today’s tax code does take more from the rich than from the middle class and the poor.  The political issues are whether the rich, whose share of national income has been growing, should pay even more and whether making them do so would have undesirable side effects on the economy.  Here’s where things stand toay—produced by the Tax Policy
Center:

·        The bottom 40 percent of Americans, whose gross incomes were below $33,500, got 12 percent of the national income in 2011 and paid 3 percent of all federal taxes.

·        The middle class, the 40 percent with incomes between $33,500 and $103,000, got 33 percent of the income and paid 27 percent of the taxes.

·        The best-off 20 percent, whose incomes range upward from $103,000, got 55 percent of the income and paid 70 percent of the taxes.

This last group includes those famously branded “the 1%” by the Occupy Wall Street protesters, the ones with incomes above $533,000 in 2011, got 17 percent of the income and paid 26 percent of the taxes.  The top tier 0.1% with incomes above $2.2 million, got 8 percent of all the income in 2011 and paid 13 percent of all federal taxes.

Pg. 122:  The tax burden on those at the bottom of the pyramid has been steadily lightened.  One big reason is the earned income tax credit introduced in 1975 as an alternative to spending more on welfare.  The EITC is a bonus the government pays the working poor, reducing the taxes they would otherwise owe or, depending on their circumstances, giving them cash.  After food stamps, the EITC is now the federal government’s biggest antipoverty program, worth nearly $60 billion in 2011 to 27 million households, more than one in every five households.

Pg. 123: Spending through the tax code.  These tax expenditures add up to a lot of money. There

is a credit for adopting a child, another for investing in biomass generation of electricity, and the popular deduction for home-mortgage interest cost $98.6 billion in 2011.  More than 60 percent of all federal subsidies for energy are routed through the tax system rather than through direct spending.  The provisions that allow workers to get health insurance from employers without paying taxes on that as wages cost $184.5 billion in 2012.  Put all these together, and they added up to $1.1 trillion in forgone revenue in 2011. That’s enormous, given that the total revenues of the U.S. government that year were $2.3 trillion.  Erskine Bowles calls them “backdoor spending through the tax code.”  It’s just spending by another name.  It’s somebody’s social policy.  The deficit-reduction commission he cochaired recommended doing away with most of them.

Pg. 160:  If all the cuts needed to put the budget on a sustainable course by 2022 were put only on the big entitlement programs—Social Security, Medicare, and Medicaid—they would need to be each cut by 25 percent.