We're Doing Fine, As Long As You Ignore the Liabilities

Jacob Sullum | February 8, 2007

In a New York Times op-ed piece, Steven Rattner, managing principal of a New York investment firm, asks what the federal budget would look like if the government were bound by accounting rules similar to those followed by private businesses. The short answer: a hell of a lot worse than President Bush's projections of red ink fading to black within a few years. For one thing, the government would not be allowed to use the current Social Security surplus to cover the general fund's gap between revenue and spending, a constraint that would raise the 2006 deficit by $185 billion. Accounting for pension obligations to federal workers would add another $200 billion. But that's small change compared to the government's long-term Medicare and Social Security obligations, which total something like $39 trillion but are not included in the government's rosy picture of its own financial condition.

Comments

kaptain kirk|2.8.07 @ 12:57PM|#

That's why any "solution" to the social security crises should not involve raising payroll taxes until at least when the system is running a deficit. The government has no real place to put the SS surplus funds, and sure as hell can't resist spending it. Raising taxes now to pay for benefits in the future was tried in the 80's, and all it did was lead to a giant expansion of the rest of the federal government, and no real solution to the problem. You've got to let people keep their own money, then it can go into stocks, bank deposits, OR govment bonds.

|2.8.07 @ 1:11PM|#

The government has been operating on a cash basis accounting that would be downright fraud in the private sector for years. Of course it is not the private sector. There is really no way around spending the Social Security Surplus. What is the government going to do, bury on the White House Lawn? The surplus is so much money; the government couldn't save it or invest it without essentially nationalizing a good portion of the economy through government sponsored investment. Certainly, the government could and probably should use that money to run an overall surplus and pay down the debt so that when social security goes into the red it is in a better position to borrow to cover it. Even if they did that, when social security does go in the red, it is still going to problematic to borrow that much money even if the debt is zero. This problem has nothing to do with any particular President and everything to with how the social security system is structured. One solution is to privatize the system or a good part of it and let individuals keep that surplus and invest it themselves. That of course is a non-starter in Washington right now and was proposed by Bush.

Either Sullum has been living under a rock for the last twenty years, knows absolutely nothing about the budgeting and entitle process, or put up a deliberately misleading post in order to score cheap points against Bush. What is the point of this post otherwise? Yeah, of course the current account deficit doesn't tell the whole story. Is hasn't for decades.

tros|2.8.07 @ 1:18PM|#

I know that Pinchbeck ruined this meme, but I think those headlines that said "Bush Budget Projects Surplus by 2012" were pretty fucking funny.

Damn, remember when there was a surplus? NO ALGORE! WE WILL NOT LET YOU SPEND OUR MONEY ON POOR BLACK PEOPLE HOW DARE YOU THERE ARE SO MANY BROWN PEOPLE IN THIS WORLD THAT NEED TO BE EXTERMINATED I JUST CAN"T LET THAT HAPPEN!

And then Bush got "elected". I really think they are going to have to impeach him otherwise people are gong to start taking shots at him. That is not a threat either, I feel that violence against a figurehead with whom the electorate is so emotionally involved would be disastrous for this country. Hence I advocate impeachment for his own safety.



ITMFA

|2.8.07 @ 1:27PM|#

For one thing, the government would not be allowed to use the current Social Security surplus to cover the general fund's gap between revenue and spending,...

But that's the purpose of the "Social Security surplus". I mean what are they supposed to do with it? Stuff Benjamins in the mattress?

It's not like they ever intended to "save" the "Social Security surplus" so that they could "withdraw" some funds to cover outlays for benefits in the future.

No, Social Security was always intended to be a tax scheme. The thing that made it palatable was the fiction that this tax was some kind of pension contribution and insurance premium.

If the government has to operate a pension scheme to keep seniors out of poverty (and I confess I am resigned to the fact that, politically, at any rate, it does) then in principle there is nothing wrong with a "pay-as-you-go" scheme. But to operate it honestly the payroll tax rate shoild be no higher than is necessary to meet current obligations. As the plan progresses raise taxes or cut benefits. That's what's going to have to happen anyway, so why not just do it in the open?*

The alternative would be for the govt to invest the Social Security surplus in actual marketable securities that can earn income and actually be sold to cover shortfalls. Since I believe the stock market is a real bad idea (for all kinds of obvious and otherwise reasons) the only other place would be state and local capital improvement bonds.

|2.8.07 @ 1:32PM|#

Isaac there are two options;

1. Create a system by which people are compelled to save for their retirement through private accounts linked to the individual, or

2. Admit that the program is a welfare program for seniors and seriously look at limiting the amount of benifits recieved bases on outside income.

I would greatly prefer number one because I think two will do nothing but create disincentives to save for retirement and just make the elderly equally poor.

|2.8.07 @ 1:51PM|#

John, you raving socialist! ;)

There's always option 3) Scrap the fucker and let people work out their own retirement plans.

In the past, one had charitable organizations, families, fraternal organizations doing what social security claims to do (but does badly).

Hell, my finances would be in much better shape if it weren't for the 12% tax I've paid all my life for the government granted privilege of working.

Incidentally, #1 would have the effect of nationalizing large parts of the economy. After all the government gets to pick who manages the private accounts. ;)

|2.8.07 @ 1:58PM|#

But that's small change compared to the government's long-term Medicare and Social Security obligations, which total something like $39 trillion...

This requires some explanaition that's not in the artcle.

...by some estimates, $39 trillion would have to be set aside now to pay for Social Security, Medicare and similar benefits that have already been promised.

Question 1: Who's estimates? The Heritage Foundation? The Cato Institute? The Pew Center? No offense but perspective would be nice.

Question 2: How LONG does that assume? 50 years? 100 years? Obviously that wouldn't be paid in 1 year or even 10. It seems a bit hystrionic to lump the total number of payments meant to be spread out over a long period of time into 1 lump sum and expect it to do anything but scare people.

Keep in mind, a starting defense budget of $500 billion and adjusted up 4% per year for the next 30 years is a total price tag of $28 trillion.

|2.8.07 @ 2:01PM|#

Terran,

I would go for it to except that every day I get older and there less time to save the 12% of my income I would like back. I am sure they will follow your advice when I am about 70 and completely screwed.

|2.8.07 @ 2:14PM|#

"The alternative would be for the govt to invest the Social Security surplus in actual marketable securities that can earn income and actually be sold to cover shortfalls."

Like, oh, I don't know... Treasury Bills?

Assumptions regarding future revenue are wonderfully handy. I, for instance, went to the bank and applied for a loan so I can buy that Ferrari I've had my eye on, based on my assumption that a distant relative, heretofore unknown to me, will expire and leave me ten million dollars at some point in the next two years. I keep checking the balance in my checking account, but they haven't transferred the funds yet. I guess I'm going to have to call the bank and ask what's taking so long.

|2.8.07 @ 2:17PM|#

I have reviewed my financial situation and I will be able to retire comfortably on my Retirement Savings and non-government pension without relying on the Canada Pension Plan or Old Age Pension.

At the age of 86.

|2.8.07 @ 2:29PM|#

If we started with a clean balance sheet, the assets of the federal government would eaisly be larger than the liabilities. Who owns more land than anyone else?

The Federal Government.

What is is worth? That is a harder question to answer, there is no developed market for parcels that are as large as counties, or in the case of some western states the Feds own parcels that are larger than some small States.

|2.8.07 @ 2:36PM|#

I hate to point this out, but these cutesy "well golly, I'm a biz accountant and I can clean up the government right quick" balance sheets have any number of fatal flaws. The largest is simply the government's ability to raise whatever funds it wants via taxation. Any business able to do anything comparable to that?

In other words, while the spirit of the article is good, the basic idea is just stupid. "What if the government were like a business" is about as relevant a question as "what your grandmother had testicles!?"

And yes, it's a bad and scary thing that the government can tax. But we don't need to stupid our way out the problem.

KipEsquire|2.8.07 @ 2:37PM|#

"But that's small change compared to the government's long-term Medicare and Social Security obligations, which total something like $39 trillion but are not included in the government's rosy picture of its own financial condition."

But those obligations are discretionary as a matter of law (if not of politics). The government can renege on "promised" Social Security benefits any time it wants -- see Flemming v. Nestor. Presumably the same is true for Medicare. A private firm, meanwhile, cannot simply say "we may or may not pay what we say we're going to pay." So the analogy, while valid in spirit, actually misrepresents the true nature of the issue.

Since entitlements are not "contracts" in the private sense of the word, why should the government account for them as if they were?

Incidentally, as the Times article notes, the federal government does indeed provide reconciliations of the federal budget to U.S. GAAP.

|2.8.07 @ 2:41PM|#

Damn, remember when there was a surplus?

Yup - of course, the "surplus" only existed because Clinton counted the Social Security surplus against the deficit that year.

And then Bush got "elected".

And when he tried to pull the same accounting trick, Team Blue started screaming about robbing Social Security - and that the money should be in a "lockbox" - something that hadn't seemed to concern them when Clinton did it.

It was of course an early sign of Bush's lameness that he let Team Blue savage him on that detail in 2001.

|2.8.07 @ 2:42PM|#

Like, oh, I don't know... Treasury Bills?

Try writing an IOU to yourself and see how marketable it is.

The point is that if in order to redeem the paper you've aquired you have to raise taxes or borrow money, why create the paper in the first place?

Graphite|2.8.07 @ 2:44PM|#

God I hate it when people pretend that the government selling itself T-Bills is the same as if it purchased private or municipal stocks and bonds. It's just belligerent stupidity.

SJE|2.8.07 @ 3:04PM|#

Re: The government's ability to raise whatever funds it wants via taxation.

True, texes are a major distinction between the government and private sectors. However, it is equally wrong to assume that the government can merely raise whatever funds it wants via taxation.
1. Politics: people will object (surprise!). We can all think of nations that have allowed their economy to suffer rather than enact economically necessary, but politically unpalatable, reforms. See especially Argentina, sections of Continental Europe.

2. Economics: too much taxation damages the economy in ways that hurt the ability to raise money via taxes.

3. Mobility: the big assumption of governments seems to be that people, capital, industrial plant etc cannot move. This was perhaps approximately true in an era of controlled economies, heavy industry etc. It is increasingly less true as more and more of the economy moves to service industries and high tech. Businesses, money and people can relocate offshore with much greater ease.

4. Competitive advantage. If the taxes in A are much higher than B, A must have some other competitive advantage or lose industry, people, capital etc to B. Thus, there are limits to amount of taxes a nation can impose.

Brock|2.8.07 @ 3:06PM|#

"$39 trillion"

Actually, the GAO puts fiscal exposures at $50 trillion in their statement in the 2006 Financial Report of the United States Government.

http://fms.treas.gov/fr/index.html

Somebody smarter (KipEsquire) please make it clicky. Thanks.

Gilbert Martin|2.8.07 @ 3:10PM|#

"Try writing an IOU to yourself and see how marketable it is."

Exactly so.

There are no "special" principles of economics for the federal government. Just like any other economic entity, an IOU it has written to itself is no more of an "investment" than it would be if General Electric did it.

Lord Jubjub|2.8.07 @ 3:41PM|#

So the government lends money to states, cities, school districts and private corporations. Tax revenue to pay off those bonds goes to the feds.

Taken to its illogical extremes, the federal government will end up collecting all taxes and all investments for itself. . .

|2.8.07 @ 3:53PM|#

Lord Jubjub | February 8, 2007, 3:41pm | #

That's pretty much why I would prefer that the government end the fiction of "saving for the future" and simply set the payroll tax at a rate sufficient to meet current obligations.

Failing that put the surplus in public (other than the federal government) but not private bonds. I understand that this is what the Canadian government does with its pension funds.

What I would prefer to see is a means tested income supplement funded out of general revenues and to have the FICA tax ended once and for all. Well actually I would prefer that it be abolished all together but I realize their are political reasons that will never happen.

|2.8.07 @ 4:25PM|#

If we started with a clean balance sheet, the assets of the federal government would eaisly be larger than the liabilities. Who owns more land than anyone else?

The Federal Government.

What is is worth? That is a harder question to answer, there is no developed market for parcels that are as large as counties, or in the case of some western states the Feds own parcels that are larger than some small States.

Of course, under GAAP, the land would have to be valued at acquisition cost. Land in Alaska and under the Louisiana Purchase, $0.02/acre. Land stolen from Indians would cost the per acre of the amount it cost to move the Indians* (forcibly and peacefully), so spread the cost of all the military and support over that area. In other words, that asset side of the ledger isn't going to be that big.

* Think of it as costs necessary to make the land usable.

|2.8.07 @ 5:04PM|#

What is is worth? That is a harder question to answer, there is no developed market for parcels that are as large as counties,....

That's why practically every bit of land outside of The thirteen original colonies, Loisianna and Texas has been subdivided into one-mile squares or sections which are further easily subdividable into quarter-sections, quarter-quarter-sections etc etc etc.

Except for parts of Alaska (ie just about all of it) and a few remote places in the contiguous 48 (there are still some swamps in Florida eg that have only been surveyed down to Townships ie six miles square) there is no land that could not be described and conveyed in parcels as small as ten acres.

That's why the General Land Office (and its successor the Bureau of Land Mangement) did the public land survey.

|2.8.07 @ 5:21PM|#

What is it worth? That is a harder question to answer, there is no developed market for parcels that are as large as counties, or in the case of some western states the Feds own parcels that are larger than some small States.

Well, I remember reading back in the 80's that the Feds own 85% of Nevada, and seeing as how Nevada is about 110,000 square miles, that would make the Fed holdings more than 93,000 square miles. That makes those holdings larger than the following 39 states:

Minnesota, Idaho, Utah, Kansas, Nebraska, South Dakota, Washington, North Dakota, Oklahoma, Missouri, Florida, Wisconsin, Georgia, Illinois, Iowa, New York, North Carolina, Arkansas, Alabama, Louisiana, Mississippi, Pennsylvania, Ohio, Virginia, Tennessee, Kentucky, Indiana, Maine, South Carolina, West Virginia, Maryland, Hawaii, Massachusetts, Vermont, New Hampshire, New Jersey, Connecticut, Delaware, and Rhode Island.

Also, land near Las Vegas is currently going for $500,000+ per acre in BLM auctions. Land near Reno is probably more expensive, as there's less of it that's usable. Let's see--93,000 square miles times 640 acres per square mile times $500,000 per acre equals $29,760,000,000,000.00, or darn near 30 trillion dollars. That is, of course, an upper estimate, as some (probably a majority) of that land in NV is completely unusable because we were blowing up atomic bombs on it a few decades ago, or it's a mountain, or it's a lake.

Mo, would the 2 cents per acre be when the country was on the gold standard, and 2 cents (1 / 1000 ounce of gold) would be about 60 cents today? Also, the cost of acquisition of much of the desert southwest was the Mexican-American War. Any Fed holdings in the former Confederate states could reasonbably be said to have cost as much as the U.S. Civil War.

|2.8.07 @ 5:36PM|#

Moot

SJE|2.8.07 @ 5:38PM|#

re Lord Jubjub's comment on Feds lending, and then taking with taxes.

The current system of grants/loans and other accounting tricks hides the true cost of much of govt, and is more open to manipulation by politics. Here is an idea.

Abolish a lot of the Federal grants to States and Fed infrastructure development. The States/Municipalities could do all infrastructure developments, pay for them with muni bonds, and have the Fed govt as major or sole investor via the extra cash in social security.

Thus, (a) better allocation: no bridges to nowhere and endless Byrd highways in WVa. If WVa wants to build another Hwy, fine, it has to pay the Feds later
(b) better transparency
(c) the Fed's self IOU problem is removed, at least by making the states responsible for paying back any cash they borrow.

|2.8.07 @ 6:13PM|#

Madpad,

You're implying that this $39T estimate is the product of some libertarian think tank. It's the number produced by the GAO in their official Annual Report of the U.S., and it was last year's number. As Brock points out, the number is now closer to $50T. It's calculated like a standard, present value liability by the government's own accountants. our nation's chief accountant, by the way, in that report calls the government's fiscal management a "broken model."

|2.8.07 @ 6:19PM|#

*"The alternative would be for the govt to invest the Social Security surplus in actual marketable securities that can earn income and actually be sold to cover shortfalls."

Like, oh, I don't know... Treasury Bills?*

comment by: me

The unspoken implication of my comment was this: buying T-Bills (for cash) on the open market with "social security surplus" would be the same as retiring debt. I do not expect to see that any time soon.

--------

"God I hate it when people pretend that the government selling itself T-Bills is the same as if it purchased private or municipal stocks and bonds. It's just belligerent stupidity."

See above- pay closer attention, next time.

Graphite|2.8.07 @ 6:34PM|#

Or you could make your comments less oblique, thereby rendering them less easily confused with the typical lefty claptrap on this issue.

When you referred to T-Bills as securities that--when purchased by the federal government--can earn income and be sold to cover shortfalls, I don't feel too bad for thinking this was the Kos line that Social Security will be just fine because it has so much government debt socked away that it can supposedly redeem, at a later date, to cover Soc. Security payouts.

|2.8.07 @ 7:11PM|#

Shawn,
Fair point on former Confederate states (though I think old Louisiana Purchase land in the Confederacy would remain the same). Also, there is no inflation adjustment for GAAP. It doesn't matter if the currency was gold backed or not. It's not like long term debt that spanned periods before and after the standard were adjusted accordingly.

|2.8.07 @ 9:24PM|#

The unspoken implication of my comment was this: buying T-Bills (for cash) on the open market with "social security surplus" would be the same as retiring debt. I do not expect to see that any time soon.

I realized that you might have meant something like that.

However the very point of "social security surplus" and the special T-bills it buys is to maintain an illusion that somehow the money is going into a "savings account" (ie: creating assets) for the future. Sorry, but paying off debts is not the same thing as saving for the future. It may be a precondition but it is not the same thing.

If we are to pay off the National Debt it must be from general revenues, every good Keynesian knows that.

Of course, every Post-Keynesian knows that the National Debt is a permanent and growing feature of contemporary life.

But we owe it to ourselves! :)

Gilbert Martin|2.8.07 @ 10:52PM|#

"But we owe it to ourselves! :)"

Yeah.

Our Chinese "selves" and Japanese "selves" and Saudi "selves"

LOL

|2.9.07 @ 12:37AM|#

Also, land near Las Vegas is currently going for $500,000+ per acre in BLM auctions. Land near Reno is probably more expensive, as there's less of it that's usable. Let's see--93,000 square miles times 640 acres per square mile times $500,000 per acre equals $29,760,000,000,000.00, or darn near 30 trillion dollars.

I think the problem with this line of thinking, is that land in the west is so valuable, partly because the gov't makes it (or its developibility) scarce. The minute a whole lot of it becomes more available, it's per acre value will plummet. There's A LOT of empty space available. It's just empty space near desirable cities/national parks that's so valuable.