A new organization is seeking support for something we desperately need, but don’t have: a realistic accounting for the unfunded commitments our government has made. You can learn about it online at www.theinformact.org.
The idea is to pass a bipartisan initiative called ‘‘The Inform Act.’’ The bill would require the Congressional Budget Office (CBO), the General Accountability Office (GAO) and the Office of Management and Budget (OMB) to provide a fiscal gap accounting of our government on an annual basis. They would also evaluate major proposals using the same method.
The bill already has support from a dozen Nobel laureates in economics, a very rapidly growing list of economists, former government officials and others. (Full disclosure: I’m on the “others” list, and I hope you’ll join me.)
If your immediate reaction is that this is way too super-wonky, there is something you need to understand. Our government, the largest organization on earth, accounts for itself as though it were a lemonade stand that just happens to spend $3.7 trillion a year.
This is a problem because a lemonade stand is simple and can account for itself on a cash-in, cash-out basis. But an outfit that makes lifetime promises to all of its 316 million citizens and their unborn children really needs to be a bit more sophisticated in how it records its financial condition.
This isn’t an academic matter. Just as the collapse and bankruptcy of Enron had a profound effect on its employees and shareholders, the bankruptcy of the United States would have a profound effect on its citizens — people like you and me. And it turns out our government is in far worse financial condition than officially acknowledged, precisely because its overly simple accounting overlooks things like the unfunded promises in Social Security and Medicare.
The same information gap allows our politicians to hide the truth and look better.
You can understand this with an example. The most commonly referenced government accounting can be found in the monthly “Economic Indicators” produced by the President’s Council of Economic Advisers. Like a lemonade stand, it shows current revenue and spending for the entire federal budget. It shows figures for the “unified budget” and its two components, the “on-budget” (which is most government operations) and the “off-budget” (which is mostly Social Security).
Politicians talking about legislation, spending increases and tax increases often use this kind of budget summary. Such figures are simple, but they miss any implications beyond the current year. They also distort our real condition. Interest on the Social Security Trust fund, for example, is included in “revenues” when it is just a book entry, not actual revenue. Last year alone this caused the true federal deficit to be understated by a whopping $109.1 billion.
We can find more realistic figures that include unfunded liabilities in the Trustees reports for Social Security and Medicare. We could also check the lesser-known “Financial Report of the U.S. Government” produced by the Government Accountability Office. Unfortunately, the Social Security and Medicare reports use two different methods for their figuring, and the GAO does all its figuring with an abundance of footnotes. As a result, any discussion sounds like an exploration of the arcane and obscure and puts us back among the super-wonky.
The figures, however, are scary. According to the Trustee reports for Social Security and Medicare issued this spring, the unfunded liabilities of the two programs increased by $1.3 trillion over the preceding year. The lemonade-stand accounting missed those little items. Instead, it showed a cash deficit in fiscal 2012 of $1,087 billion. In other words, the real deficit is far greater — more than double — than the deficit commonly argued about by both parties.
The longer-term figures are much worse.
You should also know that presidents of both parties have cut generational accounting/fiscal gap information from presidential budget documents:
• A generational accounting was censored out of Bill Clinton’s 1994 budget when it revealed that unofficial debt, unlike official debt, was growing very rapidly, making President Clinton look less prudent than he wanted to look.
• A generational accounting was censored out of George W. Bush’s 2003 budget because it would have been difficult to promote the second round of tax cuts when the generational accounting showed rapidly growing unfunded liabilities.
Will The Inform Act make politicians honest? Don’t expect the impossible. It will, however, shine the light of day on our actual condition.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.