Red Ink (3 page)

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. It borrows the difference, essentially promising that taxpayers in the future will pick up the tab for government spending today. The U.S. government is by far the world’s biggest borrower even though the United States is by far the world’s biggest and richest economy, a historical anomaly. By any yardstick, its borrowing in recent years has been huge. Part of this was
automatic: when people are out of work, they pay less in taxes, and government spending on unemployment benefits and food stamps goes up because more people qualify. Part of this was deliberate policy: Congress increased spending and cut taxes.

The bottom line is that the
U.S. government borrowed $3.6 billion a day in 2011, holidays and weekends included, or about $11,500 for every man, woman, and child in the country. About half of that borrowing
came from overseas.
The net interest tab on the government debt was about $230 billion last year, which exceeded the budgets of the departments of Commerce, Education, Energy, Homeland Security, Interior, Justice, and State, plus the federal courts,
combined
. As deficits persist and interest rates rise from recent very low levels, as they inevitably will, interest payments will claim an increasing slice of the federal budget, crowding out spending on other things.

For all the dire rhetoric about the dangers of debt, all the scares about the United States becoming another (albeit far larger) Greece, big U.S. government deficits have not been an economic problem—at least not yet.

The deficits have been big. Measured against the value of all the goods and services produced in the United States, known as the gross domestic product (GDP), deficits in the
Ronald Reagan years peaked at 6 percent. In the past three years, they came in at 10 percent of GDP in 2009 (the fiscal year that spans the end of the George W. Bush presidency and the beginning of Barack Obama’s) and at 9 percent and 8.7 percent in the two subsequent years.

Running bigger deficits in a deep recession and sluggish recovery is still Economics 101—even if one can get a good debate going among serious people about how best to do that and how well the medicine works. Running
deficits
means the government has to borrow the difference between income and outgo. The sum of all that borrowing is the government
debt
. Borrowing by government, banks, business, and consumers soared so much during the 2000s that at the end of 2008 the U.S. economy as a whole owed twice as much as it did in 1975, measured against the size of the economy. Since then, private borrowing has come down, but government borrowing has gone up—a lot—in a deliberate effort to cushion the economy from the pain caused when so many lenders pull back and so many borrowers try to pay off loans or walk away from them.

Despite the anxiety about the capacity of a paralyzed political system to grapple with deficits projected for the future—and despite the headline-making move by ratings agency Standard & Poor’s to strip the U.S. Treasury of the prized AAA credit rating that signifies the safest risks—savers, investors, and governments around the world still view U.S. Treasury bonds as the most secure place to put their money. For now. The only other big government bond markets—Europe and Japan—are in
places that have big problems of their own, which makes the United States the world’s tallest midget. What’s more, the flood of money from all over the world has pushed down the interest rate that the U.S. Treasury pays to fifty-year lows. But this ability to borrow enormous sums at incredibly low interest rates cannot and will not last forever, even if no one can say exactly when the day of reckoning will arrive.

“
A lot of us … didn’t see this last crisis as it came upon us. This one is really easy to see,” says Erskine Bowles, a former investment banker who was Bill Clinton’s chief of staff, later cochairman of an Obama-appointed commission on the deficit, and now an unlikely itinerant preacher on the urgency of dealing with the deficit. “The fiscal path we are on today is simply not sustainable. These deficits that we are incurring on an annual basis are like a cancer, and they are truly going to destroy this country from within unless we have the common sense to do something about it.

“We face the most predictable economic crisis in history.”

A
t seventy-four years old, Leon Panetta is one of the few American politicians who can give a truly emotional speech about the federal deficit. Maybe that’s because he is one of a generation of thrifty Americans who elected politicians unwilling to fund many of the benefits they promised. Or maybe it’s because he has spent so much of his adult life in the belly of government—from the House of Representatives to the White House to, now, the top job at the Pentagon. “
This country cannot continue to run trillion-dollar deficits and expect that we can remain a powerful nation,” Panetta has said, meshing a little old-time deficit religion with his current job. “When you run those size deficits … the borrowing we have to do around the world … makes us more dependent on those countries that are purchasing our securities. It deprives the country of the resources we need regardless of your priorities. Worst of all, it raises the most regressive tax of all: the tax on our children who have to ultimately pay the interest on that debt.”

In textbooks, the chief governmental actors are the president, along with an amorphous institution called Congress, represented by the familiar profile of the Capitol. In the case of the budget, this simple model holds true—to a point. The president and the top leaders of Congress ultimately do make the big calls. But below decks is a squad of people who spend most of their careers contemplating, framing, influencing, negotiating, measuring, and executing decisions about spending and taxes.

Panetta has been one of them. His life spans three-quarters of a century of evolving American fiscal policy, from Franklin D. Roosevelt to Barack Obama. He was born in June 1938 to Italian immigrants, owners of a small Northern California restaurant called Carmelo’s Café. At the time, Roosevelt’s New Deal was expanding the federal government dramatically. By the time Panetta came to Washington, in the mid-1960s, Lyndon Johnson’s Great Society was expanding it further, promising benefits in old age to then young baby boomers (including two of Panetta’s three children). As a Democratic congressman from California in the 1980s, Panetta voted for Ronald Reagan’s big 1981 tax cut, though he later condemned it as “
a dangerous experiment” and a “riverboat gamble.”

A decade later, Panetta was among a handful of congressional leaders who cut a deal in 1990 with President George H. W. Bush to raise taxes and cut spending, a move still controversial twenty years later. He was in Bill Clinton’s White House when the government ran its first budget surplus in nearly thirty years.
And after a twelve-year hiatus in California, Panetta returned to Washington in 2009 as Obama’s CIA director, among those overseeing the killing of Osama bin Laden. In 2011, he became defense secretary, supervising a $700 billion budget, a sum so large that the Pentagon would be among the world’s twenty biggest economies if it were a nation. In 2012, the veteran of decades of deficit wars was warning of irreparable damage to U.S. national security if Congress didn’t undo legislation that would cut the defense budget in 2013 and beyond. “
I’ve become very eclectic,” he says.
A natural politician with an easygoing manner, Panetta has a disarming habit of launching a deep belly laugh at his own jokes. He laughs at this line.

In 1938, Panetta’s birth year, federal spending came to 7.7 percent of the gross domestic product, or GDP, the value of all the goods and services produced in the United States that year. That simple ratio—the government spent almost 8 cents for every dollar of goods and services produced in America—prevents us from being confused by the changes that occur over time, such as the effects of inflation or the simple fact that America is not the same place it was three-quarters of a century ago.

In 1938, for example, you could buy a pair of denim overalls out of the Sears catalog for 95 cents; in 2012, the same overalls cost $39.99, roughly forty times more. Adjusted only for inflation, federal spending has increased nearly thirtyfold since 1938. But the United States today has twice as many people as it did in 1938, which increases the cost of government the same
way having more kids increases a family’s grocery bills.
Every week, for example, thirty-two thousand more people enroll in Medicare, the government’s health insurance for the elderly.

The United States is also far richer than it was in those Depression years. It can afford more of everything—cars, electronics, massages, restaurant meals, and government.
Back then, the entire output of the U.S. economy was about $86 billion at 1938 prices, which is $1.1 trillion in current dollars. Since then the economy has grown to $15.1 trillion. That’s a much bigger pie. And the federal government is also spending a far larger share of it, roughly a quarter for every dollar of output, 24.1 percent last year versus 7.7 percent in 1938.

Each decade of the fiscal history of the United States has been the subject of dozens of books.
The Fiscal Revolution in America,
by the late Herbert Stein, an economic adviser to Richard Nixon, ran to over six hundred pages—and that takes the story only through 1994. With budgets, as with so much of life, it’s hard to know where you’re headed until you know where you’ve been.

So here’s a quick history of the federal budget in six pieces.

From the end of World War I through the early years of the Great Depression, a “balanced budget” was regarded as an
unquestioned virtue, and the U.S. government consistently ran surpluses.
Until Congress created a Bureau of the Budget inside the Treasury in 1921, the president didn’t even submit an annual budget to Congress. At the end of 1931, Herbert Hoover, committed to the “balance the budget” orthodoxy of the day and determined to maintain the gold standard after the British abandoned it, proposed a tax increase. In words that echo those uttered in the halls of Congress today, Hoover told Congress in December 1931: “
The first requirement of confidence and of economic recovery is financial stability of the United States Government. Even with increased taxation, the Government will reach the utmost safe limit of its borrowing capacity.” Taxes were raised and the Federal Reserve kept credit too tight. The federal government was smaller—4.3 percent of GDP in 1931—and narrower.
About 70 percent of the spending went for three things: defense, veterans’ benefits, and interest payments on the national debt. “
The federal budget was not then, as it later became, a machine constantly generating new programs and expansions of old ones,” Herbert Stein wrote.