Where Does the Money Go?

I recently read a book called Where Does the Money Go? by Scott Bittle and Jean Johnson. The book talks about the US budget — the different sources of revenue and the various expenditures. And the main message of the book is that we need to do something about the huge and growing US debt.

The book appears to be sincerely non-partisan. It offers a lot of suggestions for what can be done, some that are more right-wing, some more left-wing, and it leaves it up to the reader to decide which way to go.

The book has a Dummies-like sense of humor that sometimes works and sometimes falls flat. It also tends to repeat itself a lot. But in between the fluff there’s a bunch of useful information, some of which really surprised me.

Here’s my quick summary…

THE DEFICIT AND THE DEBT

For 31 out of the last 35 years, the US has run a deficit. The four outstanding years were 1998-2001, at the tail end of the .com bubble (and Clinton presidency) and just prior to 9/11.

The total debt is now roughly $9 trillion dollars. That’s $30,000 for every US citizen.

There’s a clock in Manhattan that counts the national debt. It will need to be upgraded as soon as the national debt reaches $10 trillion because it doesn’t have enough digits to count that high.

To give you an idea of how big these numbers are, consider that if you added the fortunes of the 10 richest people in America (Gates, Buffet, Adelson, Ellison, Allen, the Waltons, and Dell) it would still be less than the Us government’s deficit for the 2006 tax year alone ($248 billion).

SO WHAT?

There’s one view that says that this debt is not that bad. How so? Well, the debt ($9 trillion) is roughly 3.5 times the US government’s annual tax revenue ($2.4 trillion). That’s kind of like a person who makes $50,000 a year having a mortgage on his house for which he still owes $175,000. That doesn’t sound so bad, right? Well, the difference is that people with mortgages follow a very specific plan to pay them off. The government has no such plan, and the accountability mechanisms are far more fuzzy.

If I were to stop paying my mortgage, eventually the bank would reposes my house. Also, my credit rating would be shot, which means that I would have a hard time taking out any kind of loan in the future. What if the US government were to fail to pay its debt? What exactly is there to reposes? And who would do the reposessing?

Of course, there wouldn’t be any kind of reposessing. The government has the nice luxury that it can always deal with its debt by raising taxes (whereas I’m less likely to be successful if I were to turn to my boss and say “you’re going to have to pay me more this year”). The government can also choose to spend less on various things (defense, roads, social security) in order to pay back its debt. All of these alternatives come at a cost to you and I — either we pay more or we get less.

But for now the government hasn’t had to resort to these measures because it has an easy enough time just borrowing more and more money to keep up with its growing expenditures. The trick is that at some point the lenders might decide that the US government is maybe not the same old safe investment vehicle it used to be. If they choose to invest their money elsewhere, the government will either have to entice them back with higher interest rates or simply go without the loans.

More than $2 trillion of the US debt is owed to foreign banks and other international investors. Biggest on the list…not China! It’s actually Japan, at $612 billion. But China is in 2nd place at $420 billion. Then come the UK, various Oil exporters, various Caribbean banking centers, Brazil, Luxembourg, Hong Kong, Korea, and Taiwan. What if you lumped China, Hong Kong, and Taiwan into one group? It would still be second place, but it would be much closer. Also, debt to China is growing faster.

China is in an interesting position. As long as wages in China are so low, they can afford to manufacture goods at a low cost. Consumers in the US are happy to buy these goods as long as the US economy is doing well enough (as long as people have jobs). So, to some degree it’s in China’s best interest to do what’s necessary to keep the US economy healthy, which includes lending the US money.

GOVERNMENT REVENUE

The government collects about $2.5 trillion each year. The majority of the government’s revenue comes from taxes you and I pay:

Some money always goes uncollected — some people don’t pay their taxes. It’s hard to know exactly how much this is, but one rough estimate is $250 billion (10%).

Part of the reason some people get away with not paying all the taxes they owe is that the tax code is huge and horribly complex. We have a progressive tax system, where richer people pay a higher rate. This kind of system is always going to be more complex than some alternatives because you need to keep track of how much each person is making. Our tax code is even more complex because we use it as a tool for social policy — we give tax credits to things that we think are good. For example, I get a nice tax credit on the interest I pay on my home mortgage because as a society we’ve decided that owning a home is a good thing.

The amount of taxes paid by the super-rich has fluctuated with the coming and going of various administrations. This graph shows the percent paid in taxes for every dollar you make beyond the first $200,000 in a given year:

I was pretty surprised to see what a big change Ronald Reagan made, and now I understand why it was such a big deal when Bush Sr promised no new taxes and then renigged.

Social security is considered a regressive tax — you only pay this tax for the first $94,000 (or so) you make in a given year. That means that lower-income people pay social security for every dollar they earn, while rich people only pay it for a small portion of their overall income.

How does our tax rate compare to other countries? It’s relatively low…

GOVERNMENT SPENDING

The majority of the government’s spending goes towards five things: social security, defense, medicare, medicaid, and paying off interest on loans the government took previously.

Lots of other programs you typically think of as government spending don’t really account for very much:
* Science, space, technology (including NASA, NSF, etc.): $23.6 billion (less than 1%)
* Arts & humanities: $124 million (0.009%)
* Foreign aid & international relations: $29.5 billion (1.1%)
* Food stamps and other welfare: $70.9 billion (2.7%)
etc.

And although we all like to criticize pork-barrel spending (and I do sincerely hope we cut it as much as possible), the truth is that it also doesn’t account for very much, relatively speaking. The Pig Book from the Citizens Against Government Waste says that in 2006 there were nearly 10,000 pork projects that totaled $29 billion — about 1%.

What if the war in Iraq never happened? It would help, but not nearly enough. Through mid-2007 the country spent $400 billion on the war. During the same time, we added $2.3 trillion to the debt.

WHAT TO DO?

Bush Jr instituted a bunch of different tax cuts, and most of them are set to expire in 2010 (some a little sooner). If we let them all expire, it would bring the US budget to a surplus by 2012. However…there are issues. First off, this would be a temporary fix at best because the problems with social security and medicare/aid continue to grow (more on that below). Second, not all of these tax cuts are likely to be repealed. Much to my surprise, they are not all tax cuts for the rich. For example, there’s a child tax credit that democrats are likely to want to renew. Expect a big fight in Washington as 2010 closes in.

The areas of biggest concern in the US budget are social security, medicare, and medicaid. Why? Because: 1. they’re already big, and 2. they’re growing faster than any other part of the budget.

Social security is a pay-as-you-go program, which means that taxes I’m paying today are used to pay people who are retired today (the money I pay is not held in my name). The trouble is that the baby boomers are retiring now, which means that a huge part of the population is going from paying money into the system to pulling money out of the system. The workforce is shrinking, which means that the taxes collected are also shrinking. As a result, the government needs to borrow more and more to cover the social security checks it needs to write.

So one thing we could possibly do is cut social security payments. Apparently it’s political suicide for anyone who walks this road, but there are a few ideas that sound reasonable to me: cut payments for ultra-rich retirees (they don’t need it anyways), raise the retirement age to match growing life expectency, etc. Whatever we do, we have to be careful about it because sometimes in the last 30 years Americans stopped saving money for retirement…

I’m not saying this is a good thing. I think it’s totally irresponsible of all these people to not save up for retirement. But if we suddenly cut their social security payments, it would be a huge mess.

Medicare and Medicaid have their own issues, namely that prices for medical care are growing faster than any other costs. There are various suggestions on what we can do to try to lower medical costs, and I won’t go into them here (too much detail to mention). One thing to note is that there is general agreement that Veterans Affairs has been run in a very efficient manner, so perhaps Medicare/Medicaid can steal a page from its book.

AS ELECTIONS CLOSE IN

Part of the issue is that politicians have every incentive to promise new spending and no incentive at all to talk about raising taxes, cutting programs, or balancing the budget. About the only kind of tax raising that is safe enough to talk about (for democrats) is taxes on the rich, but that’s partly because 90% of us consider ourselves to be middle class

In New Zealand, just prior to elections, the government has to report on how campaign promises will affect the budget. It would be great if we had that system, but we don’t. For now, we should all educate ourselves on what kind of spending each candidate has in mind and what it might do for the budget. There are a few websites listed below to help us out.

REFERENCE

Websites and other resources suggested by the book:
www.publicagenda.com – the authors work for this organization
www.concordcoalition.com – information on the “Fiscal Wake-Up Tour”
www.nifi.org – they publish guides, each of which focuses on some public issue and offers 3-4 alternative policies; one of these guides talks about the national debt
www.vote411.org – get yourself registered to vote!
www.taxreformpanel.gov – a short-lived government panel that tried to devise a simpler tax code
www.FairTax.org – group that wants to replace income tax with a national sales tax
www.clubforgrowth.org – group that wants to repeal the estate tax
www.responsiblewealth.org – group that opposes the repeal
www.wyden.senate.gov – Senator Wyden has an idea for a simpler tax code that has just 3 tax brackets and fewer deductions
www.cagw.org – they release an annual book on pork spending (The Pig Book)
www.transparency.org – they rate countries on corruption (in 2006 Haiti was #1, with Guinea, Iraq, and Myanmar close behind; Finland, Iceland, and New Zealand were most honest)
www.expectmore.gov – where the Office of Management and Budget posts its ratings of how well government agencies function
EMILY’s list – funds promising women political candidates
Cook Political Report – forecasts how much of a battle to expect for different seats in congress
www.FactCheck.org – keeps tabs on the tall tales candidates tell when they’re running for office
CQMoneyLine – a website focusing on lobbying
www.taxpayer.net/awards/goldenfleece – Another pork spending website; former Senator William Proxmire from Wisconsin started the Golden Fleece Awards given to congressmen for high achievements in fleecing the taxpayer
www.vote-smart.org – information on candidates running for office
www.opensecrets.org – find out who’s backing various political candidates
www.maplight.org – ties legislation to the people and groups who backed it