Dicey deficit algorithms

So far this campaign season, the national debt has not been a major issue. But it is inevitable this will change one of these days. Sooner or later, interest rates will rise to the point where everyone recognizes deficit reduction is an immediate necessity. When that occurs, members of Congress will regret not paying closer attention to the debt sooner.

A new report from the Congressional Budget Office explains the deficit is a virtually meaningless measure of the government’s indebtedness. The main reason for this is the federal government uses cash accounting rather than accrual accounting. What this means is the government can acquire massive debts far into the future with virtual impunity.

The government can also, in effect, cosign for loans and provide insurance that could potentially cost taxpayers hundreds of billions of dollars without it ever showing up in the budget until a check has to be written.

By CBO reckoning, the federal government’s true debt last year was $8.5 trillion — more than twice the debt held by the public, which we generally think of as the national debt. That figure was $4 trillion, only slightly more than the $3.9 trillion in future benefits owed to federal employees and veterans.

But even the $8.5 trillion figure is much too low because it excludes the really big debts that are owed for Social Security and Medicare. Since these obligations extend far into the future, the only way they can realistically be quantified is by using a statistical method called present value. This takes into account that a dollar 50 years from now is worth much less than $1 today. Future debts need to be discounted to put them into today’s dollars.

Even with discounting, however, the figures are massive. CBO estimates the unfunded liability for Social Security at $7.2 trillion. But this is virtually nothing next to the $37.6 trillion cost of Medicare. In short, we would need about $45 trillion in the bank today earning interest to pay all the promises made for future Social Security and Medicare benefits, over and above the future taxes and premiums that will be collected to fund these programs.

To put these numbers into a comprehensible form, CBO has also calculated the future gross domestic product over the same time period. These are the actual resources from which Social Security and Medicare benefits will be paid.

CBO estimates we would have to raise taxes 6.5 percent of GDP immediately and forever to maintain these programs. This year alone, that would mean a tax increase of $800 billion.

This is why I believe it was utter insanity for the White House and Congress to have enacted an unconscionable expansion of Medicare for prescription drugs last year. This one act raised the long-term liability of Medicare by 1 percent of GDP forever.

A key reason they were able to get away with this idiotic action was that all the costs come well in the future — the program doesn’t even begin until 2006 and then phases in for a few years before being fully effective.

Thus, for a time, Republicans were able to promise something for nothing. It’s only a matter of time before taxes are sharply increased so the elderly can get for free what the rest of us have to pay for ourselves.

It goes without saying any private corporation that behaved as the government does would soon find its executives being sentenced by a federal judge. It is illegal for businesses to keep their books the way the government does, hiding their long-term liabilities from shareholders the way the government disguises its indebtedness from voters.

In the Nebraska Law Review last year, George Washington University Law Professor Cheryl Block compared the federal government’s bookkeeping to those involved in corporate scandals and finds not much difference.

Congress, she said, “has been guilty of using accounting devices remarkably similar to those used by Enron, WorldCom and others to ‘cook the books’ and to mislead the public with regard to government finances.”

At least when a corporation misbehaves, there is an ultimate market check in the form of bankruptcy. Creative accounting can only go so far in covering up fundamentally unsound transactions. But national governments never go bankrupt and don’t have to worry about customers buying their goods and services for revenue. They just raise taxes or print money and keep on going. “As a result, temptations for the government to engage in creative accounting may be even greater than those in the private sector,” Miss Block suggests.

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