August 5, 2012 8:14 pm

Red Ink

This lucid, dispassionate book by David Wessel should be a first port of call for American voters sadly misinformed about their federal budget

Red Ink: Inside the High-Stakes Politics of the Federal Budget, by David Wessel, Crown Business, RRP$22

 

Three years ago, the American actor Craig T Nelson appeared on a rightwing television show to complain about the size of the US government and discuss his intention to no longer pay taxes. His logic, if it deserves the label, was peculiar: “I’ve been on food stamps, I’ve been on welfare. Did anybody help me out? No.” Food stamps and welfare are government programmes, of course, and his comments were roundly mocked for their obvious dissonance.

Yet such ignorance is typical: polls show again and again that Americans are sadly misinformed about how their government collects and spends money. The median respondent to one poll believed that the US spends 10 per cent of its annual budget on foreign aid; it actually spends less than one per cent. Similarly wrong beliefs apply to how much goes to education, poverty relief and public pensions. Many also fail to recognise public benefits for what they are. More than four out of 10 Americans surveyed who received Social Security retirement payments or unemployment insurance claimed they had not used a social government programme.

This failure of comprehension may seem like laziness, a shirking of civic duty or possibly a hint of more fundamental numeracy problems. Americans’ unfamiliarity with their federal budget is also understandable: fiscal matters can be boring and complicated. Yet the budget deficit has been as responsible as any issue for the partisan fractiousness of American politics the past few years.

David Wessel, economics editor of the Wall Street Journal, brings clarity and dispassion to the subject in his slim new book, Red Ink. Wessel’s aim is to explain for a general audience the basics of the budget – where the money comes from and goes to – and to make the explanation interesting. He succeeds.

The evolution of the budget over the past decade is really stunning. It was just in 2001 that the Congressional Budget Office was projecting 10 years of budget surpluses totalling $5.6tn. Instead the government ran combined deficits of $6.1tn.

What happened? The economy underperformed expectations, increasing the number of people eligible for benefits and shrinking revenues. The Bush tax cuts shrunk them further. These two causes accounted for more than half of this astonishing reversal. The rest was down to the wars in Iraq and Afghanistan, other unexpected spending, including measures to fight the financial crisis, and interest costs.

Last year, the government spent $3.6tn while taking in revenues of $2.3tn; the rest was borrowed. It was the third straight year of the deficit exceeding $1tn. But these figures’ importance has been exaggerated, mainly by the Republicans. As a share of GDP the deficit has been declining since 2009 and is likely to continue declining as the economy heals, temporary measures are reversed and the wars are wound down.

The deficit’s longer-term trajectory, however, is clearly upward. Wessel’s lucid description of why is the best part of the book.

In short, the problem of high and rising healthcare costs dominates all others. Thirty years ago, one in every 10 dollars spent by the US government was for federal healthcare programmes for the poor and elderly. It is now one in every four and the ratio will keep climbing. Demographic trends are making more people eligible for Medicare and they will require more healthcare, while healthcare inflation is outpacing other kinds.

Annual spending on the military is also unconscionably high. On the other side of the ledger, the government loses huge amounts of revenue to tax loopholes, deductions and credits. A simpler tax code would help. But it is the likely path of healthcare spending that makes steeply rising future deficits seem inevitable.

The book is not without flaws. Possibly because Wessel wished to avoid taking a partisan or ideological side, he gives the reader little sense of just why fixing the deficit is so politically difficult. And his references to the relationship between debt and economic growth lack the appropriate nuance. Wessel writes that US debt-to-GDP will eventually exceed 90 per cent, a “dangerously high” level. He is probably alluding to a paper by economists Carmen Reinhart and Kenneth Rogoff, but it is a controversial finding. The breezy comparison between future US debt levels and Greece’s current situation or Argentina in 2002 in the last chapter is also problematic given the radically different contexts.

These are small quibbles. Books to satisfy wonkier minds already exist. I wouldn’t recommend that this be the last book American voters read on the US budget, but they will have a difficult time finding a better first.

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