a prediction unrevised

Byline: | Category: Uncategorized | Posted at: Tuesday, 22 August 2006

To the best of my recollection, I have voted for two Democrats in contested races in my lifetime.  The first one is the man who is currently my opponent in the 21st State Senate District, and the second is U.S. Representative Jim Cooper, whom I supported two years ago.  (Jim, don’t misconstrue this to mean that I’m coming after your seat next–you can keep your weekly commute to that city of northern charm and southern efficiency.)

I say this in order to point out that, though I’m a Republican, occasionally the Democratic candidate is the better person for the job.  And occasionally, the Democrat even more closely adheres to the traditionally Republican position than do some Republicans.  Yesterday I saw an example of that when Jim Cooper spoke at the American Legion Post 5 luncheon.

Rep. Cooper is on a book tour of sorts.  He has reprinted the Financial Report of the United States Government.  This is a free government document but was originally produced only in a limited supply, hence the reprint.  (It’s also available free in pdf format.)

This booklet is the official balance sheet for the United States government using accrual-based accounting.  Let me first offer a definition and some explanation.

From Wikipedia: 

In accrual basis accounting, accrued expense is a liability resulting from an expense for which no invoice or other official document is available yet. Similarly, accrued revenue is an asset resulting from a revenue for which no official document was issued yet. The other side of the entry will always be a profit and loss account – expense in the first case and revenue in the latter one.

Example

A company is making an accounting close on the last day of December. During the closing works, they realize that they still have not received an invoice for telephone calls made during December, as the invoice is usually issued several days after month-end. However, they are able to determine the expected amount which will be invoiced. Because the calls were made in that year, the liability exists already at the end of December. As such, the company needs to record an accrual – a liability that exists, but for which no official document is available yet.

In other words, accrual based accounting recognizes the present value of future expenses and revenues, and accounts for them in order to give a more accurate reflection of an organization’s fiscal position.

The other common accounting method is cash-based accounting, which only recognizes actual income and outlays, but ignores future debts.  The government requires most companies to use accrual-based accounting.  But which accounting method do you think the government requires for itself?  Obviously the one that ignores future debts.

It was not too long ago that it was my party that was hawkish on deficits.  In fact, President Bush made quite the point about the crippling effect of future Social Security outlays.  However, no one seemed willing to even acknowledge the pending problem, so the issue went away–for now.

According to the official government report our deficit in 2005 was not $319 billion as is commonly reported, but was $760 billion using accrual-based accounting.  (It’s actually about four times higher if you take into account social security and medicare.)

One of the reasons for the difference is that interest rates have gone up.  Think of it as if the government has an adjustable rate mortgage.  Another reason is that we have pushed expenses to the “out years” where possible, but we’ve incurred the obligations today.  Like paying only the minimum balance on your credit cards, you can only do that for so long, while adding more and more credit card debt, before it eventually catches up to you.

Unfortunately, neither party has an incentive to identify (much less, fix) the problem.  Republicans in Congress want to still claim the mantle of fiscal responsibility (even as they add more pork spending), while Democrats dare not address fundamental structural problems with social security and medicare that would risk alienating huge portions of their voter base.  So problems are pushed off in a bipartisan manner for as long as they can.  But a reckoning will come, and it will come while the Baby Boomers are drawing checks written by my generation and the generation after mine.

Rep. Cooper is one of the few elected officials who publicly recognizes the coming financial catastrophe, and that’s why I applaud him for at least ringing the bell.  Unfortunately, he’s not without his own difficulties when it comes to spending.  Remember the $3 million government grant to a private religious college to build a parking garage that was contained within the huge transportation bill last year?  (If I’m permitted to make an analogy between Congressmen addicted to pork and alcoholism, Jim Cooper is at step one of a 12-step program:  He at least acknowledges that he has a pork addiction.  But that puts him one step ahead of most of Congress, and unfortunately, even most Republicans.)

I recently re-read what I wrote a year ago last week about that pork-laden transportation bill:

National Republicans enter the next election cycle with two huge problems . . . Republican inability to control spending and borders.  These are two issues high on the list of base Republican voters.  Lose the base, and Republicans lose the election.

Unfortunately for national Republicans (and for those local Republicans, like myself, who are in down-ticket races), I have to stand by my earlier prediction.  National Republicans will likely lose the next election cycle.  Especially since there are Democrats like Jim Cooper who are sounding more traditionally Republican about deficits than even many Republicans.

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12 Responses to “a prediction unrevised”

  1. SayUncle Says:

    Sort of. The .gov uses cash basis for it’s budget reporting, which is why many reports refer to items like under budget or over collected. since they’re held to account for the budget, it makes sense to release some info that way.

    The .gov does issue accrual statements but, due to the size, the audit takes about, oh, 9 months. By the time you get it, it’s old info.

    The accrual statements aren’t a secret.

  2. bob Says:

    Unc,
    You’re correct that the accrual statements aren’t a secret. The Financial Report is easily found on the Treasury Department’s website. If you know where to look.

    However, the $760 billion number is never the one you hear. Instead the number more often used by both Congress and the Executive branch is the smaller deficit number from the cash-accounting report.

  3. SayUncle Says:

    (full disclosure: i’m a CPA who used to work on the audit of the fed.gov).

    ‘the $760 billion number is never the one you hear’

    The budget process is the one they use to hold various department’s accountable. It’s on the cash basis. hence it’s use. And the audited accrual statements often come well into the next fiscal year (like 9-10 months – mind you, yahoo! can close and issue statements in one day).

    Arguing which is more realistic is a superfluous academic exercise due to the sheer size of the fed.gov.

    After all, guesstimating the social security liability is largely closing your eyes and picking a number from a hat.

    Or estimating projected environmental clean up liability for the DOE (who used to rape the environment back in the day) is guess work. It also is a monstrously huge number. And, last I looked at it, actual $$ spent on it was minuscule compared to the actual accrual. The accrual keeps rising while the cash spent is dwindling.

    Both reports together, i think, provide a clearer picture. But each report in and of itself isn’t near as useful.

    A cash flow statement with the accrual statements would be useful too.

  4. Rick Forman Says:

    These masters of propoganda are gooooood. Page 6 begins the excuses of why things don’t add up.

    Then on page 28 out comes the hammer after most people have become bored and given up.

    the federal government’s fiscal exposures now total more
    than $46 trillion, up from about $20 trillion in 2000. This translates into a burden of about
    $156,000 per American or approximately $375,000 per full-time worker, up from
    $72,000 and $165,000 respectively, in 2000. These amounts do not include future costs
    resulting from Hurricane Katrina or the conflicts in Iraq and Afghanistan.

    I’ve read some estimates that place our “fiscal exposures” at more than $80 trillion so you can probably double the figures above.

    How can those potentates of doom in the District of Corruption look at their children every night knowing they are active participants in this debacle? Do they honestly believe that their memories will be long forgotten when the economic devil comes to claim the financial soul of this nation?

    They are not ignorant nor are they incompetent. After all most are attorneys. So one can only conclude their actions are deliberate.

  5. bob Says:

    Unc,
    “Guesstimating the social security liability” is actually an actuarial exercise. Thus the expected liability is fairly quantifiable. The only large unknown (besides the unknown of future governmental actions) is the interest rate, but even that can be estimated well using historical data. Insurance companies have been doing this for years. Yet if we measured SSA as an insurance company, I doubt its long term solvency.

  6. SayUncle Says:

    ‘actuarial exercise’

    Yeah, I said that when i said ‘guesstimating’ and ‘closing your eyes and picking a number from a hat.’ Those are synonyms ;)

    (i’ve dealt with a lot of actuaries and it’s about as ‘sciency’ as psychology)

    ‘if we measured SSA as an insurance company, I doubt its long term solvency.’

    If we measured SSA the same way we measured pension and defined contribution plans, many folks would be in jail.

    After all, can a company say ‘hey, our bonds/stocks are as good as cash, so we’ll take the cash out of this plan and replace it with our stock?’

  7. bob Says:

    “Hey, our bonds/stocks are as good as cash, so we’ll take the cash out of this plan and replace it with our stock”

    That’s a good summary of exactly what has happened with SSA over time–with or without a “lockbox”.

  8. George Rand Says:

    Unc, a CPA should Know that pension accruals are based on actuarial “guestimating”.

  9. Tom Says:

    Bob, The accrual method of accounting would also require all of the government assets be recorded at their cost(and their current value could be included in a note). These assets are the security behind the Treasury notes and bonds that are being bought in huge amounts by foreign governments,including China. They buy our bonds because someday they want our assets(all of our roads, public buildings,parks,etc). I seem to recall reading a couple of states have already sold their toll roads to foreign companies to help balance their cash accounting budget deficits. Today’s politicians should realize they are already selling the United States to foreign powers. Someday, a world court could rule that the debt holders can take possesion of the US properties.

  10. SayUncle Says:

    Well, that’s why i said ‘i’ve dealt with a lot of actuaries and it’s about as ’sciency’ as psychology’

  11. Farmer ‘06 » Blog Archive » Krumm’s On Fiscal Responsibility Says:

    [...] Krumm is my kind of Republican candidate. He simply calls it as he sees it. One of the reasons for the difference is that interest rates have gone up. Think of it as if the government has an adjustable rate mortgage. Another reason is that we have pushed expenses to the “out years” where possible, but we’ve incurred the obligations today. Like paying only the minimum balance on your credit cards, you can only do that for so long, while adding more and more credit card debt, before it eventually catches up to you. [...]

  12. Bob Krumm » Bob Corker’s not a porker Says:

    [...] want the anti-pork Jim Cooper [...]