TOPICS > Economy

‘Red Ink’ in the Federal Budget: Understanding Why the U.S. Has So Much Debt

October 25, 2012 at 12:00 AM EST
With a federal budget of $3.6 trillion, a deficit of $1 trillion and a total debt of $16 trillion, it can be difficult to fully comprehend where all this money comes from and what the U.S. government spends it on. Paul Solman talks to The Wall Street Journal's David Wessel about his new book "Red Ink," a primer to the budget.
LISTEN SEE PODCASTS

TRANSCRIPT

PAUL SOLMAN: You have heard the numbers before, federal budget, $3.6 trillion, deficit $1 trillion, debt $16 trillion. But where do all the trillions actually go? Anything we can do about them?

The Wall Street Journal’s David Wessel has written a primer, “Red Ink,” to itemize and explain. So we asked Wessel to take us on a D.C. budget tour to give us the hard truths and hard answers, starting on Capitol Hill.

OK, this may be a little hokey, but we’re in the House Budget Committee room. I’m sitting in the chairman’s seat. And since I ask questions on behalf of the American public, I ask you, the expert on the budget, what do we need to know about it?

DAVID WESSEL, The Wall Street Journal: You know, one of the reasons I did the book was because of the times I have sat in this room and heard Democrats and Republicans argue about the budget. And you would never know if you were an outsider listening what were they talking about, because it would be impossible for all the things they say to be true.

I just thought it would be useful to put some facts on the table.

PAUL SOLMAN: And so, as if a witness at a budget hearing, Wessel testified to hard truth number one.

DAVID WESSEL: Last year, 63 percent the government spent went out the door without a vote of Congress. It was spending that’s on autopilot. It was paying for promises that have been made in the past, Social Security, Medicare, Medicaid, farm subsidies, veterans’ pensions, and, of course, interest on the federal debt.

PAUL SOLMAN: That’s not to say we won’t modify, some might say renege on, some of the promises. But who’s willing to modify the main one, health care?

DAVID WESSEL: In 1960, the federal government spent 9.5 percent of all its money on health care. This year, it’s 25 percent. The Congressional Budget Office says it will be 33 percent in a decade. One cannot control federal spending without finding some way to control health care costs.

PAUL SOLMAN: OK, two-thirds of the budget on autopilot, health care costs going up inexorably. Anything else the public needs to know?

DAVID WESSEL: Even if we fired every single federal employee, from the person who’s watering Michelle Obama’s tomatoes to the woman who’s sitting in some silo in North Dakota with her finger on the button to launch a missile if need be, if we got rid of all of them, we would have saved a lot of money, but it would have only made a small dent in the deficit.

The deficit was over a trillion dollars last year, and we would have saved $435 billion in wages and benefits if we fired every federal employee.

PAUL SOLMAN: Including the military?

DAVID WESSEL: Including the military.

The point is that most of the money the federal government collects doesn’t go to pay bureaucrats. It goes right back out again in the form of benefits or state and local government grants or contracts. If we are going to restrain spending, someone is going to get less money from the federal government.

PAUL SOLMAN: So, if not health care, how about something else?

And I can guess why you wanted us to go here. That’s the Pentagon.d

DAVID WESSEL: Right.

PAUL SOLMAN: And this must be military spending, which is how much of the total budget?

DAVID WESSEL: It’s about 20 percent of the federal budget now, $700 billion last year, more than the combined defense budgets of the next 17 largest defense budgets, more than China, plus Russia, plus Germany, plus France, plus Spain, plus Israel, plus the United Arab Emirates, and a few more that I can’t remember.

PAUL SOLMAN: Do we really want to skimp on defense, with China, an emerging superpower, making offensive moves in the South China Sea and in those islands in Japan?

DAVID WESSEL: We want to have enough defense left to protect ourselves, but the question is, how much defense do we really need and how much can we afford to be the cops of the world?

The thing that strikes me about the defense budget is how large the component decisions are. So take this one question. How many aircraft carriers are enough? The Congress has told the Navy they have to have 11 aircraft carriers. That’s about 10 more than any other country has.

And the Navy says we need to replace one aircraft carrier every five years for the rest of my life and then some. Each aircraft carrier is $11 billion. It’s as much money as we spent to replace 750,000 shoulder, knee, and hip joints for people on Medicare. One aircraft carrier, 750,000 joint replacements, that’s the magnitude of the decisions we have to make.

PAUL SOLMAN: Twenty percent of the federal budget spent on defense, about 25 percent on health care, including Medicare and Medicaid, another 20 percent or so on Social Security.

Americans do see the deficit as a problem. We just can’t agree on how to solve it.

MAN: I would cut a fair bit of the entitlements. We need some — definitely some entitlement reform.

WOMAN: I wouldn’t cut defense.

MAN: Considering that we have so much defense as it is, I would cut a little more there perhaps, cut some pork, and not quite as much from social welfare.

MAN: I don’t know exactly what to cut. If I did, I would probably run for office.

(LAUGHTER)

PAUL SOLMAN: On the other hand, if he did know and ran on drastic cuts, he probably wouldn’t win.

Meanwhile, Wessel escorted us to the Treasury Department to explain one last fact slice of the pie: yearly interest on the $16 trillion national debt.

DAVID WESSEL: Alexander Hamilton was the first secretary of the Treasury, and in many ways he’s the father of the federal debt. After the Revolutionary War, he convinced all the individual states, instead of trying to pay their debts off individually, which was proving a big problem for some of them, he convinced them to combine them all, so we had one federal debt.

PAUL SOLMAN: And this is the next big line item?

DAVID WESSEL: Interest on the federal debt last year amounted to about $230 billion. That’s more than the combined budgets of Commerce, Education, Homeland Security, Interior, Justice, and the federal courts combined. It’s 6 percent of all federal spending that went to interest payments last year.

PAUL SOLMAN: And that’s with interest rates near all-time lows. If those rates rise, so will the interest tab. But, of course, spending is only half the budget battle.

DAVID WESSEL: You can’t talk about the federal government without talking about revenues, without talking about taxes.

And one thing that people in the middle class don’t believe, but they should, is that the tax bite on them, the federal tax burden, has been going down for the middle class for the last 30 years.

It was about 19 percent in 1979, before Ronald Reagan came to Washington. In 2007, before the great recession, it was 14 percent. The line goes down, and it has gone down even further since because of the great recession and the tax credits we put in to try and address it.

PAUL SOLMAN: Going down for all of us, and for our special interests, too. Wessel chose The Monocle, one of D.C.’s choice spots for a power lunch, to make the point, telegenically.

DAVID WESSEL: This is where lobbyists meet members of Congress. It’s not the floor of the House. C-SPAN doesn’t come in here, but this is where the deals are really cut.

PAUL SOLMAN: And what impact does that have on the budget?

DAVID WESSEL: The budget of the United States is huge. It’s $3.6 trillion, right? And in there are all sorts of deals to favor one industry or one company or one segment of the society. Last year, the government took in $1.3 trillion in tax revenue, but the Treasury adds up the value of all the loopholes, deductions and credits, and they amounted to $1.1 trillion.

So they gave away almost as much money as they collected.

PAUL SOLMAN: Largely, says Wessel, because over a nice lunch, lobbyists can convince lawmakers to change the tax code.

DAVID WESSEL: Someone says, you know, the law isn’t really clear on this facet or the tax court has ruled this, and if we could just get a piece of legislation in that would clarify this, it would be in my interests. And, by the way, Congressman, I was so happy to see you at your fund-raiser last night.

PAUL SOLMAN: Well, it can’t be that blatant.

DAVID WESSEL: It’s rarely that bald a transaction, although occasionally it is. But you are naturally more likely to have lunch here with someone who’s raised a lot money for your campaign than someone who turned down every invitation.

PAUL SOLMAN: So, tax-cutting for citizens and businesses, big spending mostly on autopilot, result? Fat deficits, fatter debt.

Back at the Pentagon, we asked Wessel, what would he do?

DAVID WESSEL: I’m trying to say that in this conversation, it’s the role of the journalist to say, you have to think about defense spending, you have to think about taxes, you have to think about health care costs.

And these are the fundamental building blocks from which you can make choices. I’m afraid, if I list out my choices, the people who don’t like them won’t listen to my facts. And I’m trying to avoid that.

PAUL SOLMAN: We are trying to avoid that, too.