2006 August 03 Thursday
Audited Financials Show Larger US Government Debt

A set of books maintained by the US federal government to more closely match how corporations are required to account for costs and liabilities shows a deficit twice as large as the more widely used deficit measure.

The federal government keeps two sets of books.

The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.

The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included as the board that sets accounting rules is considering the federal deficit would have been $3.5 trillion.

Congress has written its own accounting rules which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel.

Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household.

The unfunded liabilities are going to start showing up in cash flows as the baby boomers retire. In the 2010s and 2020s the US government will try to cut back on retirement benefits.

Federal law requires that companies and institutions that have revenue of $1 million or more use accrual accounting. Microsoft used accrual accounting when it reported $12 billion in net income last year. The American Red Cross used accrual accounting when it reported a $445 million net gain.

Congress used cash accounting when it reported the $318 billion deficit last year.

Social Security chief actuary Stephen Goss says it would be a mistake to apply accrual accounting to Social Security and Medicare. These programs are not pensions or legally binding federal obligations, although many people view them that way, he says.

It is only a mistake to apply accrual accounting if the government does not intend to fulfill the obligations it has taken on. If the government does not intend to deliver on its promises (and it can not do so) then Congress should start passing legislation to retract some of those promises. The big political battle for the 2010s and 2020s is going to be over how much of the unfunded liabilities will be paid for by tax increases versus by benefits cuts. I'm predicting a big rise in the age of eligibility for many retirement entitlement programs..

You can read the 2005 Financial Report of the United States Government if you want the bad news in detail.

Share |      By Randall Parker at 2006 August 03 09:41 PM  Economics Government Costs


Comments
John S Bolton said at August 4, 2006 12:45 AM:

They can also allow retirement chacks to wither by having the federal reserve underestimate the rate of inflation.
This could be underway already.
Explicit cuts are politically almost impossible, but a secretive nibbling at the margin, taking away only a little each year, is highly feasible.
The need to make cuts by such a means, is one factor pushing the government to maintain some inflation regardless.

Kurt said at August 4, 2006 10:44 AM:

Actually, this is the reason why we have unreported inflation. You see, Greenspan and Co. began fiddling with the CPI in the early 90's when Clinton became president by "adjusting" the CPI to account for the subsitution effect. This is where if steak become expensive, people start eating hamberger or start eating more at home when restaurants become expensive. Persummably, when all food becomes more expensive, people substitute by not eating.

The second "adjustment" was hedonics, which comes from hedonism. This is supposed to account for product quality improvements. For example, paying $10 for the cinema is supposed to not be inflation because they have padded seats and carpeted floors, whereas back when the cinema was $4, the seats were harder and the floor sticky with spilt pop, etc. etc.

So now, we have inflation, which is not call inflation (maybe we call it "non-inflation" inflation), to the tune of around 2-3% per year. Over a 20-30 period, this significant reduces the outlays necessary to pay those baby boomer social security benefits, like around 30-50% less than if we did not have "non-inflation" inflation. This is how the federal government is going to reduce retirement benefits to all of those baby boomers, not to mention all of the retire military and federal workers. The state and local governments are playing the same game as well.

So, you see, we will have 2-3% "non-inflation" inflation, with the attendent stagflation and deletarious effect on business planning and what not, for the next 20-30 years until all of those retirees are dead (or possibly rejuvenated by SENS, in which case, they all get to enter the workforce again).

Dale Miller said at August 4, 2006 1:29 PM:

Government has only three choices: tax, borrow, or inflate. Kurt is right about the government fiddling with the CPI numbers, but 2-3% difference is between the reported inflation rate and the actual rate, which is more like 5-6%. Greenspan's and Bernanke's mantra about the "core rate" is just more of this deception. By quoting year-over-year core inflation they have effectively ignored energy and food inflation. Years ago they created "rental equivalent" for housing costs, wiping out the 50-100% increase in house prices this decade. Now that rents are increasing and home prices flat, look for other "adjustments." However, don't worry. Chairman Ben "thinks" inflation rates are coming down. This is the largest fraud in history. For more see www.shadowstats.com.


Josh said at August 8, 2006 1:35 PM:

To say that substitution or hedonics are being used to underestimate inflation is to misunderstand how them as concepts completely. First of all, the items used in the CPI to calculate inflation are based upon phone surveys of households asking for information on recent expenditures, both in terms of the types of items being purchased, and the location of those purchases. When calculating inflation rates, we want it to be properly weighted to what people are actually consuming. This is one reason that we have six different main CPI inflation rates and hundreds of individual commodity inflation rates. The CPI-E is a perfect example as it allocates a higher weight to health care goods as it is meant to track inflation for the elderly which spend a higher proportion of their resources on health care. I'm not really sure what the complaint about substituting to what people are actually buying is, but you can get inflation statistics for typewriters if you want them, I just don't think it is particularly helpful to include those figures in any of the core inflation rates.

As to the issue of hedonics, if you honestly think that cars aren't any safer today or computers aren't any faster, then I'm not sure how to respond. Hedonics also works the other way in the statistics too though. For example, when book printers substitute to lower quality paper while leaving the price the same, this is calculated as inflation. Hedonics is not biased towards lowering the inflation rate, it is simply a method of making a product comparable across periods when the product has changed. Noone would argue that if a box of cookies goes from having 30 in it to having 20 while keeping the price the same that we should calculate that as inflation, so I'm not sure why anyone would argue that if the reverse were to happen that we shouldn't calculate that as well.

Randall Parker said at August 8, 2006 3:25 PM:

Josh,

Imagine that apples suddenly cost $50 per lb. Suppose that household surveys then showed very few people bought apples. The logic you lay out suggests then apples would be dropped from the typical basket of purchased goods. So the inflation in the cost of apples would just disappear. Never mind that people like apples. Since they wouldn't be part of the typical basket of goods their cost wouldn't show up in the inflation rate.

Does doing that really make sense to you?


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