Did you know Congress writes its own accounting standards—standards that would be illegal for a business to use because they ignore important costs such as retirement benefits and other future obligations?
Using its own accounting standards, the government officially reported that its 2005 budget deficit was $318 billion. However, a document produced by government accountants using standard accounting rules showed that the government actually ran a huge $760 billion deficit for 2005. If the government accounted for future retirement promises (as the government legally requires businesses to do) such as Social Security and Medicare, the budget deficit would actually be a massive $3.5 trillion.
Since 1997 alone, the audited federal government’s figures reveal a $40 trillion deficit, when adjusted to include future retirement accruals.
America is heading for bankruptcy, says Professor Laurence Kotlikoff in a paper published by the Federal Reserve Bank of St. Louis (Telegraph, July 14). According to Kotlikoff, “The U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has … promised future net payments of various kinds.” He says the payment solutions—which he describes as “terrifying”—include an immediate and permanent “doubling of personal and corporate income taxes” or “two-thirds cut in Social Security and Medicare benefits,” or slashing of all “federal discretionary spending by 143 percent.”
Why haven’t more governmental leaders addressed the issue? For one, the government’s own accountants don’t really think the government will follow through with its promised retirement benefits. Social Security and Medicare do not “represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time,” wrote the acting director of the president’s Office of Management Budget last May (USA Today, July 14).
A second and probably more important reason that leaders fear drawing public attention to the government’s precarious financial condition is that it would hurt the dollar. Remember, confidence is the only thing backing the greenback’s value.
“The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century,” warns Kotlikoff (Telegraph, op. cit.). When you think hyperinflations, think of past Argentinean peso and Russian ruble crises.
Also, think about evaporating savings, soaring prices and escalating unemployment—all characteristics of inflationary environments.
The statistical manipulation surrounding the government’s massive deficits is delusional: Cooking the books may make things look better in the short term, but it only causes bigger problems later.
“[I]t is impossible to have effective monetary and economic policy when guided by faulty statistics,” says economist Jim Willie. “Effective policy demands accurate information, reliable future indicators and competent forecasts. This is indisputable. We do not have it” (Financial Sense Online, July 26). Reliance on bad statistics will result in economic debacles, Willie warns. He says people should prepare for “big [economic] accidents” in the near future.
Unfortunately for Americans, bad leadership and erroneous accounting are pointing to a future of broken promises and financial hardship.