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August 6, 2012

News & Opinion: Red Ink

By: Dylan Schleicher @ 10:49 PM – Filed under: Current Events & Public Affairs

You may know David Wessel as the white bearded journalist from Washington Week. What you may not know even if you watch that show is how great a writer he is. He is the Wall Street Journal economics editor, has multiple Pulitzer Prizes, and when we were still reeling from financial catastrophe in 2009 he wrote a brilliant book, In Fed We Trust, about the folks putting out the fire that made me feel as the world might not end after all.

His new book, Red Ink: Inside the High-Stakes Politics of the Federal Budget (published last month by Crown Business), isn't quite as comforting, but it's also not the apocalyptic screed we've become accustomed to hearing when discussing the country's deficit. Like his previous book, Wessel does a masterful job of taking on a topic that has been hyper-politicized and stripping away the over-sized, hyperbolic rhetoric we're all force-fed in what passes for political discourse every day and in its place explains clearly and concisely the history of priorities and programs that have brought us to this current moment, and how each side of the aisle has contributed to the debate and the resulting debt we now face. He very smartly walks us through the exact breakdown of how our tax dollars were spent in 2011, but before doing so, Wessel first chronicles the history of the modern budget in six pieces.

For this post, I've excerpted a bit of each of those pieces (heavily edited for brevity) below, but if you're intrigued by this history (or just want to see how to write a brief and brilliant history of a monumental topic through the experiences of just one man that's been close to it all—in this case Leon Panetta) you'll want to pick up the book and read more.

The New Deal: The Beginning of "Big Government"
With Social Security—the first of the enduring and popular social programs that enlarged the federal government's role in providing for the poor, sick, and elderly—FDR also planted the seeds of the modern American welfare state and a bigger federal government. When he died in 1945, government spending, swollen by the cost of fighting World War II, exceeded 40 percent of GDP. It fell after the war but would never return to pre-FDR levels.

"From the mid-1930s to the 1970s, the government made a set of commitments that led to expectations on the part of the American people about what their government owes them," says Robert Reischauer, a former director of the Congressional Budget Office. "And they're totally unprepared to go back to a different world."
The Great Society: Guns, Butter, and Medicare
Before Medicare, only about half the elderly had any health insurance. ... But Medicare is a leading example of the law of unintended consequences. It's a living laboratory. Science moves in unpredictable spurts. Government incentives often do much more or much less than expected. Profit-minded entrepreneurs exploit the government's largesse. Cost squeezed out of one place pop up elsewhere; save money by discouraging inpatient surgery and outpatient costs skyrocket, for instance. And it is increasingly expensive. Adjusted for inflation, the federal government spent more on Medicare and Medicaid in 2011 than it spent on everything in 1960.
Nixon: Congress Strikes Back
Among his other accomplishments (or transgressions), Richard Nixon antagonized Congress by refusing to spend billions of dollars that lawmakers had approved. In 1974, Congress struck back with the Congressional Budget Act ... The most durable innovation was the creation of the Congressional Budget Office, or CBO, which freed Congress from relying almost exclusively on economic forecasts and budget analysis from the White House budget office. [...]

"To a degree that may have been unforeseen when the 1974 act was formulated," University of Maryland budget maven Allen Schick says, "the new system institutionalized and expanded budgetary conflict." Eventually, the two branches have to agree on spending bills or the government shuts down. "But first," says Schick, "they fight ... [not] over the details, as was once common, [but] over big policy matters—the size of government, defense versus domestic programs, how much total spending and revenues should rise ... whether to cut the defecit by trimming expenditures or by boosting taxes, and so on."
The Reagan Revolution: The Beast Is Not Starved
The Reagan presidency was styled as a turning point in American politics: the end of the New Deal and the beginning of an era in which government would retreat from the economy. Ronald Reagan made three significant promises during his campaign for the presidency: cut taxes, rebuild the nation's defenses, and balance the budget. He delivered on the first two, but not the third. [...]

... [T]he result was the 1981 tax cut without the hoped-for spending cuts. [Reagan's budget director David] Stockman famously predicted deficits of "$200 billion a year as far as the eye can see," numbers that sounded huge at the time. He was prescient. The 1980s broke a pattern in which the federal government ran deficits only in wartime. The deficits topped $200 billion a year from 1983 through 1992. They would have been even bigger if Reagan hadn't flinched on taxes, accepting significant tax increases in 1982 and 1984.
The Arrival of Surpluses: Reading George H.W. Bush's Lips
Bush was elected in 1988 with one memorable promise: "Read my lips, no new taxes." Republican pollster Richar Wirthlin once called them "the six most destructive words in the history of presidential politics." [...]

Beyond the important details of spending and taxes, the 1990 deal made two significant changes:

It established a pay-as-you-go rule that made it hard for Congress to cut taxes or increase benefits without offsetting tax increases or spending cuts. For more than a decade this rule restrained Congress from significant expansion of government benefits. A decade later, when this rule lapsed, Congress and the president did exactly what the rule was sought to avoid: expanded Medicare to cover prescription drugs without funding the new program. After bumping up spending in the first year to buy congressional backing for the deal, the 1990 agreement also set multi-year caps on annual appropriations for the first time. Congress was, essentially, tying its own hands, or at least promising to do so. In one sense, the caps held. Adjusted for inflation, annually appropriated spending in 1996 was 13 percent below the 1990 level. [...]

The 1990 deal was only a down payment, though. Debate over how much the government should spend and on what continued.
The Return of Deficits: Tax Cuts, Wars, and Prescription Drugs
For four years, 1998 through 2001, the federal government ran surpluses, a remarkable development that put deficit worrywarts nearly out of business and made all the warnings about rising health care costs and the approaching retirement of baby boomers much less threatening. As a presidential candidate, George W. bush promised to tap the surpluses to cut taxes. [...]

Once in office, George W. Bush delivered on his campaign promise to cut taxes. His first tax cut, in 2001, was smaller than Reagan's but was followed by additional tax cuts the following four years that collectively exceeded Reagan's. Simultaneously, most of the spending restraints written into his father's 1990 deficit deal expired. Then, at the end of Bush's first year in office, his presidency was redefined by the 9/11 terror attacks, and so was the federal budget. Two wars and intensified efforts at homeland security increased spending significantly. In 2001, defense spending was 3 percent of GDP, half the Reagan-era peak. In 2011, it was 5 percent.

Bush also signed into law the first significant expansion of Medicare in forty years.
Wessel moves on from there to explain the specifics of the budget, where the money comes from, and where it ends up. Would you like to know how farm subsidies came into existence, who receives them, and how exactly they're paid out? They've been around since the Great Depressionm but they've changed a great deal since then. Wessel explains:
The 1996 Freedom to Farm Act severed some ling-standing links between the subsidies farmers receive, the crops they grow, and the prices they get for them. For what was supposed to be a five-year transition, the bill offered farmers $5 billion a year in direct payments.

The revolution didn't last but the new "temporary" payments did. Sixteen years later, about $5 billion in direct-payment checks are still being written annually ... These payments are based on an arcane formula tied to what was grown on the land years ago, no matter what crops—if any—are grown on the land now. Because the payment rights transfer with these specific plots, real estate prices are boosted—even on land that has never been cultivated by their current owners. Journalist Dan Morgan calls these payments "an entitlement tied to ownership of land—a construct that some would associate more with 19th century Prussia than 21st century America." Half of the direct payments go to farmers with incomes above $100,000.
You might also be interested in how farm subsidies are historically connected to food stamps and continue to be to this day. But that is a relatively small part of the budget. How about defense spending, Medicare, Medicaid, and Social Security? Maybe you would like to know what non-defense discretionary spending, the 18 percent of our budget that goes for everything from NASA to preschool, actually consists of?

These are all topics I thought I knew a lot more about than I actually did. Wessel does a great job of explaining it all very simply without condescending his reader. The only time I remember his coming close to condescension is when discussing why the defense budget is so contentious, writing "Some of the decisions are too complex for ordinary civilians to understand." But he's certainly right on that score, and he does the larger arch of the narrative a service not getting bogged down in specifics that are above 95% of his readers pay-grade to explain the specifics we can all at least begin to get a grasp on—for instance, how many aircraft carriers we need as a nation and how that number affects our budget. He also makes points in simple ways that are succinct and sticky, writing for instance, "The Pentagon is more than an armada, though. It's also among the world's largest employers, with all that implies." And as it turns out, that implies a lot. As Wessel informs us, during the Iraq War "the government was spending as much on healthcare—about $50 billion—as on the war." And like most employers, that cost has only risen in subsequent years. Wessel begins the book by quoting Jack Lew:
"The purpose of power is to get things done," he once said. "Budgets aren't books of numbers. They're the tapestry, the fabric, of what we believe. The numbers tell a story, a self-portrait of what we are as a country."
The problem is that we have two parties that are painting two incredibly different pictures, we're split as as a population on which is better, and we're all pretty convinced we're right. When laid out in front of us in the clam and talented hand of Wessel, we begin to understand in more detail exactly what we're deciding on, and that while it's not going to be easy, fixing the deficit is entirely doable. It will most likely not be solved in this election season, but hopefully instead of arguing over illusions we can focus on the issues and begin a national dialogue that does eventually lead to a solution. If you're interested that dialogue and in further education instead of soundbites and the pontification of pundits this election season, then this is certainly a book for you.

About Dylan Schleicher


Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.