Government accounting magic

Marketplace Staff Oct 12, 2006

KAI RYSSDAL: The federal government’s about 12 days into fiscal year 2007. The president took the opportunity yesterday to have a look at the books. He announced the budget deficit for the last fiscal year came in just shy of $250 billion. That’s a big number. But it’s still less red than there had been. And it had commentator and economist Austan Goolsbee feeling pretty good. Until he remembered the way the government does math.

AUSTAN GOOLSBEE: Turns out years ago the government decided that it didn’t like showing its spending habits. So regular ledger-keeping was dumped in favor of a more Washington-friendly way of bean counting.

In normal life, if you charge $5,000 on your credit card, you subtract it as an expense. But not in D.C. No, in D.C., if it’s not due today, it’s not a cost.

Take the Social Security system. It’s running a surplus this year because it is building up money it needs to pay for Baby Boom retirements.

The government counts that surplus as income. Presto! That income cut the deficit in half.

But anybody can see that’s nuts. You can’t call that income anymore than a cash advance on your credit card is income. If you have to pay it back, it ain’t income.

There is no difference between what the government is doing and what Enron and Worldcom did to land themselves in jail. It’s overstating earnings and hiding true costs.In fact, if you add up costs the way standard business accounting rules do, the deficit for this year alone would be more like $700 billion. Add in Social Security and Medicare promises and it would be over $3 trillion!

Now, that just couldn’t be right, could it?

So just to make myself feel better I contacted Larry Kotlikoff at Boston University, one of our leading budget experts, and I asked him.

Well, he told me that by the standards of business, the U.S. is actually bankrupt. The promises we’re on the hook for will cost $70 trillion more than the revenue we’re going to bring in. He figures to pay it off would take something like an 80 percent hike in all income taxes.

Whoah! Now, I really don’t feel any better. When all this goes down, you know somebody is going to be left holding the bag. Take a wild guess who.

RYSSDAL: Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business.

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