The Agenda

Deloitte Research on America’s Debt

Deloitte Research has just released a new report on “the untold story of America’s debt” which raises a number of interesting issues. One of the more striking findings is that if we measure the federal debt on an accrual rather than a cash basis, the size of the debt balloons:

America’s debt is traditionally measured on a cash basis, which values the current debt at $15.7 trillion. However, the government regularly releases a report called the Financial Report of the United States Government in which it gives an estimate of the U.S. budget picture on an accrual basis for individual programs. The inclusion of all of America’s long term unfunded liabilities into a single measure paints a far more difficult future picture for the U.S. over the longer term in which debt totals over $50 trillion dollars (see figure 1). As with most cost estimates, the primary culprit in these estimates is Medicare, which further highlights the criticality of addressing this mandatory spending program. However, the sheer magnitude of these estimates shows that many deficit reduction initiatives simply fail to move the needle when compared with the stark shortfalls outlined by both the cash and accrual methods of accounting.

Though most governments use cash-based accounting methods, a small handful of countries, including Australia and New Zealand, have shifted to accrual accounting. We discussed the virtues of accrual accounting in this space last month.

What I found most interesting, however, is that Deloitte avoided the question of loan guarantees, which my Economics 21 colleague Christopher Papagianis and the New America Foundation’s Jason Delisle have often discussed, e.g.:

According to the Federal Credit Reform Act of 1990, federal-budget analysts must strip out any costs that the government incurs when it bears market risk in guaranteeing loans, including mortgages. Market risk is the likelihood that loan defaults will be higher during times of economic stress and that those defaults will be more costly. Excluding costs for market risk is particularly irresponsible at a time when foreclosure rates are elevated and doubts remain over whether home prices will fall further.

If the rate of loss on the FHA’s new guarantees ends up higher than expected, that will probably be because the overall economic recovery has stalled. In such a scenario, any entity guaranteeing mortgages — be it the taxpayer-backed FHA or a private company — will suffer bigger-than-expected losses.

The FHA is obviously not alone in this regard.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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