Friday, September 10, 2004

Governments as "Enrons"

Apparently, Creative Accounting is not limited to just the corporates - even the governments do it, as this article shows:

"A new report from the Congressional Budget Office explains that the deficit is a virtually meaningless measure of the government’s indebtedness. The main reason for this is that the federal government uses cash accounting rather than accrual accounting. What this means is that 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 billion of dollars without it ever showing up in the budget until a check has to be written.

By the CBO’s 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 came to $4 trillion, only slightly more than the $3.9 trillion in future benefits owed to government 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 account of the fact that $1 fifty 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. The 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 to have about $45 trillion in the bank today earning interest in order to pay all the promises that have been made for future Social Security and Medicare benefits — over and above the future taxes and premiums that will be collected to fund these programs....

...Writing in the Nebraska Law Review last year, George Washington University law professor Cheryl Block compared bookkeeping by the federal government to bookkeeping by businesses involved in corporate scandals. She found little difference. Congress, she wrote, “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.”

A friend later pointed out that even in India, we have a similar accounting system, though there is a move to change it

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