Politics & Policy

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.


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