[IP] Creative Accounting Only Goes So Far
Begin forwarded message:
From: EEkid@xxxxxxx
Date: September 8, 2004 8:39:01 PM EDT
To: dave@xxxxxxxxxx
Subject: Creative Accounting Only Goes So Far
Creative Accounting Only Goes So Far
Unsound transactions are going to catch up with the government.
A new report from the Congressional Budget Office explains that the
deficit is a virtually meaningless measure of the government’s
indebtedness. The main reason for this is that the federal government
uses cash accounting rather than accrual accounting. What this means is
that the government can acquire massive debts far into the future with
virtual impunity. The government can also, in effect, cosign for loans
and provide insurance that could potentially cost taxpayers hundreds of
billion of dollars without it ever showing up in the budget until a
check has to be written.
By the CBO’s reckoning, the federal government’s true debt last year
was $8.5 trillion — more than twice the debt held by the public, which
we generally think of as the national debt. That figure came to $4
trillion, only slightly more than the $3.9 trillion in future benefits
owed to government employees and veterans.
But even the $8.5 trillion figure is much too low because it excludes
the really big debts that are owed for Social Security and Medicare.
Since these obligations extend far into the future, the only way they
can realistically be quantified is by using a statistical method called
present value. This takes account of the fact that $1 fifty years from
now is worth much less than $1 today. Future debts need to be
discounted to put them into today’s dollars.
Even with discounting, however, the figures are massive. The CBO
estimates the unfunded liability for Social Security at $7.2 trillion.
But this is virtually nothing next to the $37.6 trillion cost of
Medicare. In short, we would need to have about $45 trillion in the
bank today earning interest in order to pay all the promises that have
been made for future Social Security and Medicare benefits — over and
above the future taxes and premiums that will be collected to fund
these programs.
To put these numbers into a form that is comprehensible, the CBO has
made a calculation of the future gross domestic product that will be
produced over the same time period. These are the actual resources from
which Social Security and Medicare benefits will be paid. The CBO
estimates that we would have to raise taxes by 6.5 percent of GDP
immediately and forever to maintain these programs in perpetuity. This
year alone, that would mean a tax increase of $800 billion.
This is why I believe it was utter insanity for the White House and
Congress to have enacted an expansion of Medicare for prescription
drugs last year. This one unconscionable action increased the long-term
liability of Medicare by 1 percent of GDP forever.
A key reason why they were able to get away with this idiotic action
was that all the costs come well in the future — the program doesn’t
even begin until 2006 and then phases-in for a few years before being
fully effective. Thus, for a time, Republicans were able to promise
something-for-nothing. It’s only a matter of time before taxes are
sharply increased so that the elderly can get for free what the rest of
us have to pay for ourselves.
It goes without saying that if any private corporation had behaved the
way the government has, it would soon find its executives being
sentenced by a federal judge. It is illegal for businesses to keep
their books the way the government does, hiding their long-term
liabilities from shareholders the way the government disguises its
indebtedness from voters.
Writing in the Nebraska Law Review last year, George Washington
University law professor Cheryl Block compared bookkeeping by the
federal government to bookkeeping by businesses involved in corporate
scandals. She found little difference. Congress, she wrote, “has been
guilty of using accounting devices remarkably similar to those used by
Enron, WorldCom and others to ‘cook the books’ and to mislead the
public with regard to government finances.”
At least when a corporation misbehaves, there is an ultimate market
check in the form of bankruptcy. Creative accounting can only go so far
in covering up transactions that are fundamentally unsound. But
national governments never go bankrupt and don’t have to worry about
customers buying their goods and services for revenue. They just raise
taxes or print money and keep on going. “As a result, temptations for
the government to engage in creative accounting may be even greater
than those in the private sector,” Block suggested.
It’s worth keeping this in mind the next time some congressional
demagogue denounces corporate dishonesty.
— Bruce Bartlett is senior fellow for the National Center for Policy
Analysis. Write to him here.
http://www.nationalreview.com/nrof_bartlett/bartlett200409080940.asp
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