GECON200(HONORS)-Topic #3 Budgets and the Fiscal Cliff

The first three chapters of David Wessel’s “Red Ink: Inside the High Stakes Politics of the Federal Budget” covers the background for recent spending increases and tax cuts, as well as expected changes in the coming years. Wessel notes, “In fiscal year 2011—from October 1, 2010, to September 30, 2011—the federal government spent $3.6 trillion, $400 million an hour, more than $30,000 per American household (loc. 115).” Wessel also points out, that 2/3 of our budget (both taxing and spending) are on autopilot, and that the majority of discretionary–non autopilot–spending is on the military. Of government outlays, nearly $1 in $5 is spent on the military, and $1 in $4 is spent on health care. At the same time, we are one of the lowest taxed populations in the world in terms of income tax. Americans pay all sorts of taxes: sales, excise, payroll, inheritance, capital gains, corporate, and income taxes, many levied at the state, local, and federal level. However, the largest share of all taxes comes is the federal income tax.

Much of our current spending is the legacy of the New Deal–begun under FDR in the 1930s–and the Great Society–started by LBJ in the 1960s. Medicaid, Medicare, Social Security, and other programs were brought about through these landmark changes in policy, and some politicians have sought their undoing ever since. Wessel quotes Rep. Paul Ryan–current VP nominee–as saying, “I do believe government has a role in making sure we have a safety net to help people who cannot help themselves or are temporarily down on their luck, but I don’t want to see government turn that safety net into a hammock.” So, even a purported deficit hawk like Rep. Paul Ryan is not proposing to completely eliminate the government’s safety net, but he and others are proposing substantial changes. Robert Reischauer, a former director of the Congressional Budget Office is cited by Wessel as saying, “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, [a]nd they’re totally unprepared to go back to a different world (loc. 347).” This comment is echoed by Doug Elmendorf, the current director of the CBO, “The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.”

So, where do we go from here? Is the U.S. doomed to be an “insurance conglomerate protected by a large, standing army” as Ezra Klein puts it? The problem with that, is that health care spending is rising rapidly for a number of reasons.

“Health care spending is rising faster than any other major part of the federal budget, driven by a costly trio of factors. One, the number of insured is rapidly increasing as Congress expands the pool of those who are eligible, fewer people get health insurance on the job, and the huge baby boom generation turns sixty-five and becomes eligible for Medicare. Two, those insured through government-subsidized insurance are using more health care, undergoing more procedures, and availing themselves of new technologies. Three, the price of that health care is rising faster than the price of other goods and services (Wessel loc. 720).”

Questions you might consider:

  • I want you to find some fact in the first three chapters of Wessel’s book that surprised you, and dig deeper on it elsewhere. Find a related article–from a reputable source–that fleshes this information out in more detail. Whether this be a spending or tax “fact” I want you to think about what changes would need to take place in order to help “balance” the federal budget. Remember that you only have about a page to dissect an argument, so try to state a fact Wessel points out and then go from there. Try to find competing thoughts on the issue. For example, if you’re looking at the $1 in $5 spent on the military, find someone who supports maintaining or increasing military spending, and compare that to some other source that supports reducing military spending.

(Note, the “loc.” references are Kindle location references and not page numbers.)

16 thoughts on “GECON200(HONORS)-Topic #3 Budgets and the Fiscal Cliff”

  1. The fact that I was most surprised by in David Wessel’s book was that “about $1 of every $4 the federal government spends goes to health care today, and that share is rising inexorably.” According to the Congressional Budget Office, government spending on healthcare will consume 33 percent of federal spending by 2021 if current policies remain in place. During an interview with the New York Times, Dr. Victor Fuchs of Stanford University stated that the costs of healthcare in the United States are high due to the fact that we have higher administrative costs and a complicated billing system, a 2 to 1 ratio of specialists to primary care physicians, more standby capacity, less social support for the poor, and because drug prices and physician salaries are higher. Dr. Fuchs does not believe our spending goes without benefit; “it is not without benefit that we can get a scan more quickly and more conveniently than people in other countries. It is not without benefit that we have specialists. It is not without benefit that we can choose our health plans” (Kolata, 2012). But is all the spending on healthcare really necessary?

    The New England Healthcare Institute doesn’t believe so. From their research, they found that “up to 30 percent of total spending could be eliminated without reducing healthcare quality” (NEHI, 2008, p. 7). The NEHI discovered six underlying causes of waste that had the greatest financial impact on wasted healthcare spending, including “unexplained variation in the intensity of medical and surgical services, misuse of drugs and treatments, overuse of non-urgent emergency department care, underuse of generic antihypertensives, underuse of controller medicines in pediatric asthma, and the overuse of antibiotics for respiratory infections” (NEHI, 2008, P.7). To help “balance” the federal budget, the government must take action to enforce policies that will reduce wasteful healthcare spending nationwide without reducing care. To reduce this waste, primary care physicians need to establish universal guidelines to help better treat patients themselves, rather than passing patients off to specialists at a higher price, and more evidence needs to be presented before conducting surgeries and treatments so that there is less variation in intensity of clinical care. The answer is simple: to cut healthcare costs in the budget, eliminate wasteful spending that will not impact quality.

  2. In David Wessel’s book “Red Ink Inside the High-Stakes Politics of the Federal Budget,” Wessel states that “The federal government gives up almost as much money from tax loopholes, deductions, credits, and all other tax breaks as it collects in individual and corporate income taxes” (28). Wessel explains that the sum of all tax breaks in 2011 was $1.1 trillion dollars, a number that comes precariously close to the $1.3 trillion take of taxes from individual and corporate income tax in 2011 (28). It seems reasonable that if we just eliminate these loopholes and tax breaks, we would be well on our way to eliminating our debt. However, this task is politically impossible, as ten of the largest tax expenditures that account for 70% of all tax breaks go to things such as employer health insurance, employer pensions, and lower capital gains tax rates. With the most expensive tax breaks going to things citizens generally like it’s inconceivable to think they would be eliminated easily. Instead, we are left with our politicians fighting over tax breaks for things such as ethanol, which had its tax credit ended last year. But while the government has saved $6 billion from the elimination of this tax credit, this number is miniscule compared to the staggering sum of tax breaks handed out. Without compromise from our politicians on large tax breaks, it will be difficult to significantly reduce our debt by eliminating small deductions and tax breaks. While the idea of eliminating loopholes and tax breaks seems good in theory, it does not appear to be a feasible solution in balancing our nation’s budget.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.

  3. David Wessel presented many interesting facts in his book, Red Ink. While dissecting government spending, he discussed the various institutions that our government injects money into, including military, healthcare, etc. One fact I found very interesting is that, “$1 of every $4 the federal government spends goes to health care, and that share is rising inexorably” (Wessel p. 23). Wessel believes that if current policies remain, spending on healthcare will rise to 33%. I was surprised to see how much money was put towards programs such as Medicare and Medicaid; I didn’t realize how much people depended on them. With so much reliance, what can be cut? According to Pete Hegseth, author of an article for the Concerned Veterans of America (CVA), “It is the defense budget that it is on the chopping block- while entitlement programs such as Medicare and Medicaid (as well as Social Security) remain relatively untouched.” Hegseth also notes that there needs to be a balanced approach when it comes to a spending reform. Concerning healthcare, there is a lot of controversy surrounding the amount of money spent, and the idea that Obama’s new health care system will increase spending. The Obama campaign greatly supported their argument by dictating how Medicare cuts would greatly affect people. When ABC news analyzed the positions of the each side, it was concluded that, “Ryan’s health plan is expected to save the government $615.38 per beneficiary compared with the current law (plus other possible policy changes), but it will cost those beneficiaries $6,358.97 more per person, according to the nonpartisan report.” Despite the cloud of controversy hovering around health care, it is unlikely that it will but because, according the Wessel, the number of people reliant on the government programs has grown. Not to mention, Jack Lew states, “Slashing it [Medicaid] would mean we’d be in a world where the most vulnerable were getting sicker and sicker,” (Wessel p. 16-17).

  4. In the recent years the US has spent about one-fourth of it’s entire budget funding healthcare, primarily Medicare and Medicaid. If continued on the same track without any adjustment to the budget, health care would make up about 33% of the national budget by 2021. Obama has taken much of his time to configure the budget in order to maintain health care efficiency, but at the same time not severely increasing funds. His recent addition to his bill states that he will target reductions in health care funds by multiple efforts to avoid fraud and abuse. In this, Obama is seeking to keep the costs for Healthcare as low as possible, as well as a goal to lower the total deficit. These cuts in Healthcare are projected, by CBO, to reduce the deficit by $143 billon from 2010 to 2019. Obama’s plan allows for the budget to slowly balance in itself, with other cuts being needed, but not to a large extent. Romney, on the other hand, will firstly repeal the law Obama put through. The CBO stated that this would ultimately increase spending on Healthcare by $716 billion through the year 2022. This is through Romney’s idea to allow private insurance to be an option for citizens, rather than strictly Obama’s government issued one. In his plan, the only way to balance the budget accurately would be to cut a large amount of funds in other areas of the budget. These two ideas differ in that Obama attempts to lead the deficit lower with pure Government issued Healthcare, while Romney wants more individual decision in the matter, which would ultimately increase Healthcare spending and fluctuate the nation’s deficit.

    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.

  5. In the book Red Ink, David Wessel says “Nearly two-thirds of annual federal spending is on autopilot and doesn’t require an annual vote by Congress.” To properly consider this amount, we have to actually consider how much money is spent by the federal government. According to the Congressional Budget Office, the federal government spent $3.5 Trillion last year. So, two trillion dollars is mandatory spending, which as Wessel says, required no annual vote by Congress to be spent. This money is spent as it is needed and there is little that Congress can do to stop the spending, without angering their constituents.

    The Revenues that the US government has collected only covers Mandatory spending and Net Interest on the current US debt. The large majority of this Mandatory spending comes from Medicare, Medicaid, and Social Security. The most significant problems with making cuts to these programs is that people like these programs, and they are good for votes. The problem with this is that people want to expand these programs but they are already overburdened. Add in the possibilities of more people using government healthcare and the system is on the verge of collapse. Some people have said that we should establish caps on the “Mandatory spending”. I believe that we need to limit, significantly, the amount of money that we are spending on Medicare and Medicaid. We also need to cut down on the discretionary spending and, possibly, slowly raise taxes that are paid by the public. We have to be careful with how much we try to raise taxes and who we raise them on. If we cut spending, we also need to make sure that the revenue that we bring in can pay for this spending.

  6. Wessel’s book, Red Ink, discussed many interesting facts about the United States’ economic history. The fact that I found most interesting was that from 1998-2001, the federal budget had surpluses. This was the first time the budget had had a surplus since 1969, and the reaction was incredible. With 63 billion extra dollars to spare, most economists recognized that no immediate major change would occur, but it did show that their current plan budget plan was working. Yet in Washington, no one knew how to proceed, because none of them knew how to handle a surplus. The reason for the unexpected surplus was due to drastic changes to try to reel back the deficit for the eight years prior to the surplus; no one had anticipated to work as well as it did. This surplus lasted for four years, and was calculated to last longer, but came up short in 2001 when an abrupt slowing of the economy occurred, and federal spending dropped to a point it hadn’t been in 16 years. After 2001, many people argued if the country would sink back into the deficit norm from the 1990’s, and those individuals were correct. Now, eleven years later, the deficit is continuously growing. No one knows if we can eventually get back to these levels, as well as the loss of surplus in 2001, because the cause of the 1998 surplus surprised so many and was for the most part unexpected. As many people said at the time, and many still say today, you will never fully know the budget until after the fact.
    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.

  7. One fact that surprised me as I was reading David Wessel’s Red Ink was that “the U.S. defense budget is greater than the combined defense budgets of the next seventeen largest spenders.” In 2011, approximately 700 billion dollars, or 19.4%, of the federal budget was allocated to defense.

    Defending its people is undoubtedly one of the government’s main duties. Many people tend to view the solution to balancing the budget dichotomously: do we reform the defense budget or do we reform entitlement programs, such as Medicare, Medicaid, and Social Security?

    Military spending has become a major issue of this year’s presidential campaign. Obama has proposed to cut military spending, while Romney plans to expand it. Congress has until January 2nd to propose a new plan to reduce the deficit or their self-imposed sequestration will begin. Sequestration is a series of drastic budget cuts that are equally damaging to both defense and non-defense programs, as well as unsatisfactory to both parties.

    Although, it would be an unpopular stance for a politician to take, military salaries along with veteran’s benefits are two possible targets for budget cuts. Fighter jets, weapons, and other military technologies are being analyzed for their true value.

    Some argue that the U.S. military can still provide the same level of security at a cheaper cost and that there are ways to reduce spending that would not prove detrimental to the military’s performance or national security.

    After 9/11, it makes sense that there was a significant increase in military spending. But now that our presence in Iraq and Afghanistan is waning, doesn’t that mean our spending should follow suit? On the other hand, it is almost impossible to predict what kind of threat the U.S. will face next and when or where it will occur.

  8. “And, as he and others routinely observe, even though the United States spends far more per person on health care than any other country, it isn’t close to having the world’s healthiest population.”
    This fact did not surprise me, however it intrigued me. I wanted to see just how unhealthy America is compared to other developed countries. In a study of 13 industrialized countries, Japan spent the least on health care while the United States spent the most. However, according to Bloomberg Buisnessweek, Japan is ranked as the 5th healthiest country in the world, and the United States is not even ranked on the top 20 list. This is largely due to the high obesity rate in America of 35.7%, compared to 3% in Japan. United States health care costs more than in other countries because of our high health care spending and a greater use of expensive technology. On top of this, a lack of tort reform causes doctors to have to practice defensive medicine, which is costly due to fear of litigation. We are one of the very few wealthy nations that do not provide universal health care, yet we spend more on health care than any other nation. If we had universal healthcare, there would be more preventative medicine, which would in turn decrease the amount of severe, expensive medical cases. Spending a lot on great health care is one thing, but spending a lot on mediocre health care is unacceptable.

  9. I found the fact about the US having surpluses to 1998-2001 in Red Ink very interesting and relevant to today’s politics. During this time period Bill Clinton was in office and often gets credit for this surplus. In fact during the presidential debate last week President Obama even mentioned Clinton’s policies leading to surpluses in the economy and claims that he wants to adopt similar policies to Clinton in order to achieve this again. But, was it really Clinton’s policies that can account for these surpluses? According to Newt Gingrich, it was the shutdown of the government in 1995 and the policies put in place by the House of Representatives that led to the economic surplus. Many other Republicans simply deny that the surpluses even occurred. The democrats, however, claim that it was Clinton’s original budget set in 1993 that eventually led to the four years of surpluses. This budget proposed a raise in tax on the wealthy as well as raising gas taxes. Another article claimed that these surpluses had to do with “deliberate cuts in expenditures, particularly in the defense sector”. It’s no surprise that cuts in the defense sector would cause surpluses to occur considering that, as Wessel pointed out, our defense is one of the biggest expanses in the federal budget. I believe a raise in taxes on the wealthy as well as cuts in defense spending could be a good way to lower the deficit or possibly create surpluses.

  10. In Red Ink: Inside the High-Stakes Politics of the Federal Budget, written by David Wessel, he asserts that in 2003, President Bush made the first substantial expansion to Medicare in forty years. Due to this change, 1$ in every 8$ outlaid by Medicare is spent on prescription drug coverage and the costs are projected to increase by 10% a year. Unfortunately, there are far more drawbacks to increased funding for prescription drugs. First, there is no mechanism in place to pay for the changes that occurred in 2003. Tax has been decreased, which is generally how social programs are funded. There is also a major problem with the projections. In 2003, economic advisers predicted that the inflation rate of medication would be the same as the regular inflation rate; however, the inflation rate for prescription drugs is anywhere from 3.6% to 6%, while the average rate of inflation is 2.5%(1)(2). Lastly, the money is being used for new name brand drugs, rather than older generic drugs that are still effective. Although there are many negative consequences that need to be dealt with, it appears that change is not likely. Currently, the United States population is aging and the percentage of older individuals is increasing due to the baby boom (3). More people will qualify for Medicare. As a consequence, voters from this generation will be less likely to support a candidate that would decrease the benefits of this program, or increase taxes creating an even larger deficit for the generations to come.


  11. One fact I wanted to research further was when Wessel stated “nearly half of American households – 46 percent – didn’t pay any federal income taxes at all in 2011.” This quote coincides with the famous 47% quote that presidential candidate Mitt Romney gave earlier this year. While it is true that an estimated 46.4 percent of American’s didn’t pay income tax last year, there are reasons for that large number. Most of the population believes that everyone who makes any sort income has to pay a tax, however that is just not true. In 2007, before the economic recession, it is estimated that 40 percent of households did not owe federal income taxes. This number more accurately reflects the percentage of the population who doesn’t normally pay income tax. This is still a rather large number but that number doesn’t mean that 40 or 47 percent of the US population pays no sort of taxes. Roughly two-thirds of that 40 or 47% pay payroll taxes, and most people pay some sort of state, local, sales, gas and property tax. Also according to 2011 data from the Tax Policy Center, more than half of the people not paying income taxes were those with incomes less than $16,812 a year. Other groups that are part of the 47 are the elderly ( about 10.3,) students, and the disabled. So presidential candidate wouldn’t have been wrong if he said that 47 percent of Americans didn’t pay income tax. However he should definitely worry about them, considering that elderly almost overwhelmingly vote Republican and because of 2008 data from the nonpartisan Tax Foundation stated that eight of the top 10 states with the lowest income tax liability are leaning Republican.

  12. I think one of the facts that blew me away was that “the share of income most American families pay in federal taxes has been falling for more than thirty years. Today, Americans pay less of their income in taxes than citizens of nearly every other developed country”. Combining this with the fact that almost half of all households pay no income taxes it’s no wonder that the American government is amassing an astronomical debt. The worst part about all this is that while the percent of income the government is receiving and the amount of people paying are both decreasing, the demand(and cost) by the American people for government services is increasing. As Joseph F Benning says the people want to “have their cake and eat it too”. However all of this stems from the fact that the top 5% of earners in our country pay 60% of the taxes and the ones who benefit (the middle and lower class) don’t pay as much. So those receiving the benefits want more and those paying the most for it want less. In my opinion we can’t just keep on taxing the wealthier more so we can redistribute the wealth to the middle and lower class; that is border lining on socialism. We are going to have to charge more in taxes to keep providing these services or at least have everyone pay federal income taxes because this is our governments primary source of revenue.,8599,1916570-1,00.html

  13. “The CBO estimates that for families in the very middle of the middle class, the federal government took an average of 19.2% of their gross income in 1981…the Brookings Institution estimates that the folks in the middle of the middle paid 12.4% of their income in taxes in 2011.” (page 27)

    I found this to be an amazing fact. Taxes are constantly an issue in political debate yet the tax rate is extremely low. For the average American, who makes a little over $46,000, the tax rate of 15% is the lowest it has been since 1941. Also, there are only 5 tax brackets in our current tax plan compared to 16 in 1986 and 27 in 1978. This means that over the past years, the top incomes are grouped together until there is no distinction between people who make $379,000 a year and those who make $3.79 million. But the tax rate for these high income Americans have also been steadily decreasing since the 1940s. In 1944, the tax rate for someone making the equivalent of $379,000 today was 65% while the members of the highest tax bracket making the equivalent of $2.5 million or more paid 94% in taxes. Today America is faced with a huge deficit and the expectation to have to pay more money through Social Security and healthcare that they have already promised. It is estimated that by 2020, 70 million Americans will be collecting Social Security compared to the 45 million collecting it in 2000. And Medicare will experience a similar increase to 64 million compared to 40 million in 2000.

    The other side of the argument is that the tax rate must stay low in order for people to have enough money to spend in the economy. Both Democrats and Republicans have the same manifestations of the same idea. More money in the pockets of the Americans means more money in the US economy. The current payroll tax cut holiday in effect today supplies and average of $1000 more in the pockets of every family. This extra money stimulates the economy and job growth through increased consumer spending. Unfortunately, all the American family knows is low taxes and an increase now could have a major effect on the economy. But if the Federal Government continues to spend more money without increasing its revenue, there may be even worse economic effects.

  14. When Rob Portman, a Republican U.S. senator from Ohio and George W. Bush’s White House budget director, was asked what concerned him most with the budget, he simply replied, “It’s two words: health care.” This statement, along with the opinion by Erza Klein that the United States is now insurance conglomerate protected by a large, standing army, had me genuinely surprised and intrigued. In 2011, Social Security, Defense, Medicare, and Medicaid accounted for 60.5% of all federal spending; taking out interested owed on securities, all other benefits and everything else only accounts for 33.1% of federal spending. When education accounts for 2%, transportation infrastructure accounts for 3%, veteran benefits at 7%, and science/medical research an embarrassing 2%, the question needs to be asked, “What does America value?” According to the Department of Defense the United States has 662 military foreign sites in 38 countries: providing some justification for the $700 billion budget in 2011. America is a global super power that has a responsibility to not only its own citizens but the entire world. According to David Wessel, the number of insured is rapidly rising as baby boomers turn 65, those already insured are using more health care, and the price of health care is rising faster than the price of other goods and services. These facts point to the ever nearing scenario that health care will balloon in cost, throwing America further into debt. Yet, healthcare and defense spending are not only numbers, they represent the health and employment of millions of Americans. Countless citizens, countless more to come with the Baby Boomers, are relying on Medicaid, Medicare, and Social Security who cannot be left behind.

    Congress has until January 2nd 2013 to give a new plan concerning the deficit or the self-imposed sequestration will begin. These series of drastic budget cuts will deal crippling blows to both defense and non-defense programs. The Department of Defense employs over 3 millions individuals so cuts to this department will puts thousands of Americans out of work.

    Cuts must be made to the defense because there is no reason to be spending more money then the next 17 countries combined on defense. Reducing of subsidies from government to health care companies will be a good start to the health care problem but substantial budget plans have to be made to prevent this problem from being passed on to the next generation.
    Wessel, David. “Red Ink Inside the High-Stakes Politics of the Federal Budget.” New York: Crown Publishing, 2012.

  15. non- honor’s blog

    Cut government spending, because we are already a powerhouse and the only feasible option to reduce funding to is the military, right? Being the largest spender, there is no reason to continue to develop our military further. While some have proposed this as the proper perspective, the innovations and security supported by military funding have clearly not been considered. Declared by President Eisenhower, “We must guard against the acquisition of unwarranted influence.. the potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this… endanger our liberties or democratic processes.” Kennedy stated that US military spending is used to help other countries, not just our own and with “your help man will be… free and independent.” Even though defense spending has risen, “the increases are not funding a lot of new technology, but rather existing weapon programs and health care requirements. ‘When you get through all of that, the actual increase in defense spending is around $10 billion.’” Ten billion dollars is considerably less than other countries are spending on military. If spending is reduced, Buck Mckeon vowed, “”I will not be the Armed Services Committee chairman who presides over the crippling of our military” and the President’s own defense secretary fears the US will become a paper tiger, “a person or thing that appears threatening but is ineffectual.” Currently we are spending the most overall on military spending, but this benefit wards off other countries from attacking us and causes us to have a higher status. This status should be protected. Another consideration is that $1 goes a lot further in other countries and “that as a percentage of GDP the Saudi’s are way out front in military spending,” of 8.7%, while the USA spends just 4.7%. Another forgotten development funded by military spending is the internet. The internet was “designed to share mainframe computing power and to establish a secure military communications network… The internet owes its very existence to the state and to state funding.” Without spending allotted to the military, such an invaluable invention would not have been possible. If we reduce spending, more invaluable creations may never be designed. It is necessary to increase military funding to increase security, improve technological developments, and protect other countries. Just as Congressman Bartlett stated, “I understand that we want a balanced budget. I understand there are other priorities, but if we don’t do this right, no other priority matters.”

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