The White House Is No Place for Voodoo Accounting
By Laura D'Andrea Tyson
In August, the chief executives of America's corporations were required by the new corporate responsibility law to sign documents attesting to the veracity of their company accounts. Widespread media predictions that many of these companies would be forced to restate earnings or admit to various forms of accounting legerdemain proved false. In contrast to the hysteria, the evidence suggests that the accounting rules and principles that constrain American businesses are basically sound and generally applied. The same unfortunately cannot be said of the accounting rules and practices that guide the federal budget process and its CEO, George W. Bush, the first U.S. President with an MBA.
When Bush became President, he trumpeted a 10-year budget surplus of $5.6 trillion, more than enough, he argued, to fund his ambitious tax cut, revitalize education, add a prescription drug benefit to Medicare, and privatize a portion of Social Security. Yet when the Congressional Budget Office released its latest forecasts, on Aug. 27, most of the 10-year surplus had vanished before any of these goals, with the notable exception of the tax cut, had been realized. The CBO's latest 10-year surplus estimate is a trifling $336 billion. The Office of Management & Budget of the Bush Administration issued markedly cheerier projections in July. But the Administration's official figures rely on overly optimistic economic assumptions--promptly discredited. The Administration has chosen not to dispute the more conservative CBO numbers.
Moreover, the actual long-term budget outlook is far less rosy than even the CBO projections portray. The MBA President has neglected to tell the American people that official budget projections rest on unrealistic projections of future revenues, underestimates of future spending, and obfuscation of future pension liabilities.
These are exactly the kinds of accounting tricks that have gotten CEOs into trouble and are now the focus of accounting reform in Corporate America. Both CBO and OMB estimates assume that real discretionary spending will remain constant over the next 10 years. The implication is that spending on such things as the military, education, homeland security, and the Securities & Exchange Commission will fall by 20% relative to the size of the economy and by about 9% in real per-capita terms by 2011. Such a huge decline is neither economically desirable nor politically possible. It would be far more reasonable to assume that real discretionary spending will grow at least as fast as population growth, thus increasing the projected deficit by about $400 billion over the next decade.
On the revenue side, official budget projections assume that the Bush tax cuts will be repealed at the end of 2010. So the Bush Administration is issuing budget projections that fly in the face of the President's stated goal of making his tax cuts permanent. If the President achieves his goal, that would mean an additional $400 billion in lost revenue between 2003 and 2012.
Then there's the biggest deception of all in the official 10-year budget projections: the use of cash-flow accounting for government retirement programs including Social Security, Medicare Part A, and pensions for federal employees. All of these programs will run substantial cash-flow surpluses over the next decade, but big deficits over longer horizons as the boomers retire. Cash-flow accounting over 10 years shows only the surpluses accruing to these programs, not their long-term liabilities. Extending the long-term budgetary horizon to include the years when program liabilities come due would be one way to address this problem. Excluding retirement program surpluses because they are already claimed for long-term liabilities would be another.
Before the MBA President came to town, Congress had reluctantly decided that Social Security surpluses were off-limits for financing other government spending, and it was considering similar treatment for Medicare surpluses. But the President led the charge to free these surpluses to pay for his tax cuts, and Congress caved. Responsible accounting to exclude the surpluses of these programs and government pension programs from 10-year budget projections would add about $2.5 billion to the government's operating deficit, changing the 10-year outlook from one of a small and disappearing surplus to one of a substantial and growing deficit. And that's before the costs of a protracted regime-changing effort in Iraq.
President Bush did not invent the flawed accounting practices behind misleading official long-term budget projections. But he has attested to the veracity of such projections. Indeed, he championed his tax cut on the grounds that large projected surpluses were "the people's money," neglecting to remind them about the large projected liabilities that were also their responsibility. President Bush has called for honest accounting in Corporate America but has championed dishonest accounting by the federal government. This is not responsible leadership by the first MBA President.
Laura D'Andrea Tyson is dean of London Business School.