Saturday, August 05, 2006
Editorial: Smash the nation's rose-colored glasses
Analysis reveals the federal budget deficit is a lot worse when calculated by accounting standards. Americans deserve to know hard truths.
From the RoundTable blog
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Fate spared the late Jim Olin, a deficit hawk as a congressman, from reading USA Today's Aug. 3 cover story, headlined "What's the real federal deficit?" As previously reported, the federal deficit's deep hole is a whole lot deeper when reported as an audited financial statement under standard accounting rules.
That news is grim enough.
But analysis by USA Today suggests the red ink flows like blood from the jugular when government financial reporting abides by the stricter rules regulating corporations and includes Social Security, Medicare, government pensions and similar long-term obligations.
The newspaper examined figures from 2005 and cited three possible totals for the federal deficit. There's the "official" cash-based accounting version from Congress and the White House -- $318 billion. There's the version calculated by applying standard accounting rules -- $760 billion. And then there's the corporate version, which follows financial reporting rules corporations are obliged to use and includes long-term obligations -- a whopping deficit of $3.5 trillion.
Brian Riedl, a federal budget expert with the conservative Heritage Foundation, said Congress should use accrual accounting methods to calculate the country's bottom line instead of relying on cash-based accounting.
Accrual accounting recognizes expenses when obligations are incurred. Cash-based accounting recognizes revenues when cash is received and expenses when cash is paid out, a process akin to managing a checkbook. But cash-based accounting radically understates the nation's crisis.
Families and businesses applying for loans undergo credit checks, make down payments and must prove they can make monthly payments. "By contrast, in 2003, lawmakers created an $8 trillion Medicare drug entitlement with no credit check, no down payment and absolutely no plan to pay for it," said Riedl.
Perhaps Congress and President Bush believe, like Jack Nicholson's character in "A Few Good Men," that we can't handle the truth. At least during an election year.
Of course, former President Bill Clinton benefitted politically also from the government's cash-based accounting. According to USA Today, the Clinton administration's much touted budget surpluses turn into pumpkins when calculated as audited financial statements.
Let's smash the rose-colored glasses. The government's current financial reporting method obscures hard truths about an unsustainable path. We can handle the truth.
