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Red is the new black: the federal budget, explained

Al Gore attends the Johnny Cash VIP party at the new Johnny Cash Museum on May 29, 2013
Al Gore attends the Johnny Cash VIP party at the new Johnny Cash Museum on May 29, 2013
Rick Diamond/Getty Images

This is possibly the most irresponsible piece of budget reporting I've ever seen. And that's saying something (two other candidates: here and here). I am (almost) at a loss for words to describe my reaction to this piece. On the one hand, the piece illustrates the realities of the federal budget in an appropriately detailed way.  But it illustrates just as clearly a willful blindness to the politics---and the social science---of how the federal budget is made.

On accounting and statutory terms, this piece admirably gets the facts right.  Social Security and Medicare are "paid for" by trust funds.  In other words, Social Security and Medicare (i.e., "payroll") taxes taken from your paycheck are deposited into trust funds (Al Gore's "lockbox").  Social Security and Medicare payments are "paid from" these trust funds.

What does this mean?

In a simplistic telling, the idea is that Social Security and Medicare are self-financing: they don't affect the national debt or deficit. This is a simplistic telling because both Social Security and Medicare have already affected the deficit and debt...but only in a positive way.

Social Security trust funds receipts are required to be "invested" in federal debt. Thus, they both lower the interest rate the federal government has to pay on its debt, and are effectively and immediately used by the government to finance deficit spending. More subtly, these trust funds are simply accounting devices. (Sadly, there is no "lockbox.") That is, these monies are "commingled" with other federal monies: all your taxes are thrown into a single pot.

To break the false equivalence between "trust fund" and "federal trust fund", see this quote from this report:

Federal trust funds bear little resemblance to their private-sector counterparts. In private-sector trust funds, receipts are deposited and assets are held and invested by trustees on behalf of the stated beneficiaries. In federal trust funds, the federal government does not set aside the receipts or invest them in private assets. Rather, the receipts are recorded as accounting credits in the trust funds, and the receipts themselves are comingled with other receipts that Treasury collects and spends. Further, the federal government owns the accounts and can, by changing the law, unilaterally alter the purposes of the accounts and raise or lower collections and expenditures.

There are two points here. Each of these points is very real and neither of them is "good" or "bad."

First, the money you pay to the federal government, regardless of how it is depicted, is simply revenue and can be used however the federal government wants. The government is sovereign.

Second, the government is not required to limit expenditures on (say) Social Security or Medicare to the amounts that are "in" the trust funds. To wit, consider this Congressional Research Service report, which points out on page 2:

While the two trust funds are legally distinct and do not have authority to borrow from each other, Congress has authorized the shifting of funds between OASI and DI in the past to address shortfalls.

What that means, in practice, is that Congress, like everybody else, treats money as money. Sometimes, when money is short, one hand does (and should) in fact pay the other.

But Congress surely follows old laws, right?  Right?

I will pause here to take specific aim at the following concluding statement by Henry Aaron:

"Slashing spending because a thirty-year old law requires CBO to assume that Congress will do something it has shown no sign of doing—overturn decades of bipartisan prudence requiring that the major social insurance programs spend only money specifically earmarked for them, and not a penny more—would impose enormous hardship on vulnerable populations in the name of a fiscal fantasy."

Oh, really?  Congress has shown no sign of "overturning decades of bipartisan prudence"? Really? REALLY?

Actually, quite the opposite. As pages 36-40 of this report from the House Rules Committee detail: the bipartisan prudence of the 1974 Budget Act was specifically waived by the House of Representatives in the previous (113th) Congress on more than 20 spending bills. Congress tries to limit itself (ironically) precisely because it can't limit itself. It's only because I love gambling that I "impose a limit" on myself while in Vegas. Put another way, I have never needed to impose a "must stay in bed until at least 5:30 am" rule on myself.

As a more specific and germane example, consider the "doc fix," described here, which regularly raised (or, equivalently, postponed cuts in) the Medicare payment "schedule." That is, Congress on an annual basis---just recently making this permanent---would amend statute to revise payments from trust funds so as to exceed the limits imposed by earlier Congresses. That is, in spite of previous "bipartisan prudence," it is perfectly predictable that Congress will raise spending limits to accommodate political and economic realities.  The CBO, in its budget accounting, is merely accounting (rightly) for this regularity. It should be commended for doing so, not harangued.

Yeah, but what about my checks?

The simple fact is this: if and when (say) the Social Security Trust Fund "runs out of money," it is almost certain that Congress will pass legislation so as to authorize the trust fund to go into the red. That is, Congress will pay Social Security's deficit spending from "general revenues" (i.e., personal and corporate income taxes).  The reason for this is the same as why people don't go to the doctor on the first day they have a little pain in their stomach: it's easier to bear it for a day than to truly treat it. This is also why it is silly to think that Congress is likely to "fix" the coming deficits/insolvency of the "trust funds."  There's no real reason to fix it, because fixing it requires hard work toady that can be postponed until tomorrow.

More importantly, from my angle, this reminds us of what the trust funds are actually intended to provide. They provide (limited) protection of the surpluses from expropriation by today's Congresses.  These trust funds have been "raided" to the degree that they have been required to be invested in Federal government debt, but that's a dog with no bite: they have been saved and treated as "off-budget" in a way that has arguably limited deficit spending. If they had not been in trust funds, then the (accounting/statutory) "budget balance" would be much better and thereby lifted rules/scoring-based controls on deficit spending that have governed Congress for much of the past 30+ years. That said, while you can buy panna cotta in DC, there's still no reliable outlet for panaceas. Statutes and procedures are no exception to this axiom.

Should I move to Canada and buy a shovel and a satellite phone?

No. Yes, the US federal government is spending more than it takes in.  But...is the US budget depressing?  I'd argue "no."

While US politics can be (is) depressing, the simple reality is that everybody with money in the game suspects that we can easily pay back what we borrow. Markets rule in this realm: global markets that still loan the US money at essentially zero percent. Short term interest rate for the government last month? Less than 1/8th of 1%.)  To put that in perspective, the UK borrows at about 4 times that price, home mortgages are around 16 times that, and Greece currently borrows at almost 100 times that.

The budget is in bad taste, but not in crisis

So, should we keep borrowing?  I'd argue it doesn't matter.  It's transferring wealth from the young to the old. That is clear (i.e., tautological). But, to be honest, the old vote, and the young do (or can) not. Life's unfair. I'd like a balanced(-ish) budget because it comports with good taste and prudence on at least a superficial level. But to argue either that "we're going broke" or "the trust funds will save us" is to miss the social science---the reality---of the situation. In a nutshell, Congress will spend to cover (at least) the payments expected by the people and Congress is not spending anywhere close to what the world markets think the US can afford.

Budgeting is governing. And governing is complicated.

A concluding thought: there is no simple answer to budget politics.  The budget is the grist of governing. Simplistic readings of statistical and actuarial projections, statutes, and tea leaves are all equally misleading relative to clear thinking about politics. All of budget politics is political by definition. To understand the politics of your nation's budget, you need to understand the politics of your nation. My angle?  I focus on the career concerns of those who govern us first, and consider the more subtle and intriguing details of the policy second.  I like to get to the second concern. 

In any event, cries of "the budget is a disaster" or "the budget is all good, nothing to see here" are both wrongheaded and unhelpful in that regard.  Budgets are too important to be unnecessarily simplified by naïve readings of statutes without taking into account for the realities of budget politics.