Blue Dog snarls at federal figures

Rep. Jim Cooper, the fiscally conservative Blue Dog Democrat from Tennessee, doesn’t mince words when describing his reaction to official government budget figures.

Federal government accounting “would be a criminal offense in the private sector,” Mr. Cooper declared June 18 at a Capitol Hill budget seminar sponsored by the Brookings Institution.

“The federal government is the only large entity in America allowed to use simplistic ‘cash’ accounting,” he said. In his PowerPoint presentation, Mr. Cooper included an image of a McDonald’s restaurant and the Pentagon.

“Which should have stricter accounting standards?” the slide asked, eliciting laughter from the audience. Mr. Cooper, who has proposed establishing a bipartisan commission to address the nation’s long-term fiscal problems, wasn’t laughing.

The official federal budget deficit for fiscal 2007 was $162 billion, which amounted to 1.2 percent of gross domestic product (GDP), or total economic output. In reality, the $162 billion figure accounted for less than 6 percent of the nation’s 2007 “fiscal gap,” which easily exceeded $2.5 trillion, Mr. Cooper said.

In its budget-accounting methods, “the federal government ignores the largest credit card in history,” Mr. Cooper said. The government borrows hundreds of billions of dollars every year from Social Security and other trust funds. It spends that money on day-to-day government operations, precluding the need to raise taxes or borrow more money in the credit markets.

By ignoring this credit card and pursuing other accounting shenanigans, the government runs its budget and accounting operations on a “cash” basis. Every other major enterprise in the nation must use the “accrual” method of accounting or face a stiff penalty, Mr. Cooper said.

“Accrual” accounting measures the performance and position of a company or enterprise by recognizing economic events when they occur regardless of when cash transactions are made. Thus, when the government incurs a financial obligation to provide a service in the future, whether it be a Social Security payment or Medicare health care, its accruement of that obligation ought to be formally recognized in its financial statements, Mr. Cooper said.

Drawing upon the work of former Comptroller General David Walker, Mr. Cooper reported that the 2007 cumulative “fiscal gap” amounts to $54 trillion. Mr. Walker has estimated that the “fiscal gap” has increased by more than 150 percent since 2000, rising from $20 billion to $54 billion. The entire net worth of all households and nonprofit organizations, according to the Federal Reserve, is less than $56 trillion.

The $54 trillion includes more than $10 trillion in “explicit liabilities” - like the government’s $5.3 trillion publicly held debt and the trillions for military and federal employee pensions and their post-retirement health care. Another $1 trillion involves commitments and contingencies. The bulk of the “fiscal gap” is composed of “implicit exposures” of $6.8 trillion for Social Security and $34.1 trillion for Medicare, including $8.4 trillion for the new prescription-drug program.

Isabel Sawhill, the Brookings scholar who introduced Mr. Cooper at the Capitol Hill seminar, lamented that “we haven’t heard much from the presidential campaigns” about how they would address this widening “fiscal gap.” In fact, the presidential candidates would “dig the hole deeper,” Ms. Sawhill said.

The $54 trillion “fiscal gap” excludes Medicaid, the government health care program for the poor. “We don’t even know how to measure Medicaid,” Mr. Cooper said, but he cited academic research putting Medicaid’s unfunded liability in the range of $30 trillion.