Threat of Jail Would End U.S. Budget Gimmicks: Stephen L. Carter

July 21 (Bloomberg) -- It is obviously good news, if true, that Republicans and Democrats may be approaching compromise in the negotiations over raising the federal debt ceiling.

Yet one has to wonder whether the so-called Gang of Six’s proposed $3.7 trillion in long-term debt reductions will ever come to pass, or is even an accurate, well-vetted figure. Or is it, as usual, the federal government plans to thrill us with numbers so artificial that they might land a company president in prison?

The central problem with the federal budgeting process -- and with the way it is reported by a complaisant media -- is its thorough lack of transparency. When officials announce, with great drama, that they have developed a “plan” to reduce the “deficit,” they are usually sincere, but rarely accurate.

The plan is almost always a piece of paper -- the Gang of Six’s struggles to fill five pages -- without any means of enforcement, based on guesses, often poor ones, about the future. Meanwhile, the budgetary process continues to chug along, impenetrable to the mind of man.

Remember the Budget Enforcement Act, adopted in 1990 to limit discretionary spending, while ensuring that Congress adopted no new tax cuts or entitlements without future revenues to pay for them? You don’t? Of course not: Congress gutted the thing once it began to get in the way of distributing benefits without regard to cost.

Balance Sheet Wonders

How about the government’s balance sheet? You know, the sort of thing that corporations have to issue every year, calculating assets and liabilities using generally accepted accounting principles? Haven’t seen it? Small wonder. Congress, in its wisdom, believes that only the troglodytes of the private sector should be burdened by such nonsense, lest their foolish and unsophisticated clients at the banks of Wall Street be deceived.

When you are carrying trillions of future liabilities, you might want your investors -- the voting public, say -- to get a peek now and then at the total financial picture. Or you would if you were interested in transparency. But the federal government is determined that its processes remain as opaque as possible.

Experts have long catalogued the accounting tricks Congress uses -- some would have been prohibited to private firms even before the changes under the 2002 Sarbanes-Oxley law, others are unique to the public sphere.

Hard to Resist

For instance, public companies, required to use “accrual method” accounting, must book future liabilities as they accrue rather than when they are paid. Not Congress. As the legal scholar Cheryl Block pointed out in a law-review essay, Congress, by using “cash method” accounting, can easily “manipulate the timing of receipts and expenses,” thus making the financial picture look rosier than it really is. Alas, says Block, “budget gimmicks are often simply too difficult for legislators to resist.”

As former Commerce Secretary Pete Peterson pointed out in his book “Running on Empty,” a private enterprise that behaved this way “stands in contempt of the law and is shunned by Wall Street.”

Block’s article and Peterson’s book appeared during the George W. Bush administration, but the trends they discuss are not improving. A notorious recent example is the way the budget scoring of last year’s health-care reform act was improved by booking tax receipts in the short term while pushing many liabilities beyond the 10-year horizon examined by the Congressional Budget Office, as well as by including some $50 billion in Social Security taxes that will actually be needed to support Social Security. A public company that did the same might face prosecution.

By the Numbers

The Congress that passed Sarbanes-Oxley concluded that the only way to ensure transparency in corporate numbers was to require corporate officers to certify that their numbers were correct. The penalties for falsely certifying are substantial -- fines of as much as $5 million, and up to 20 years in prison -- on the theory that the fear of personal liability will reduce the incentive to exaggerate future revenue or conceal future liabilities.

By contrast, congressional appropriators and federal agency heads, are under no similar constraints. True, the government does have its own accounting principles. But nobody faces liability if the numbers are off. Nobody has skin in the game.

Consequently, if we need Sarbanes-Oxley (as its supporters still insist) to give us reassurance that we can believe corporate America’s numbers, ought we not to have something similar (as Peterson among others has argued) to reassure us that we can believe the numbers coming out of Washington?

Two Proposals

After all, if federal officials really intend to create a plan to reduce the nation’s debt, the least they can do is stand behind it.

This leads to two concrete proposals:

First, the budget act should be amended to require that Congress adopt every year a complete financial statement, including an explicit plan for retiring the nation’s long-term debt. The statement should be vetted, prior to passage, by an independent agency. If the CBO is the agency, it should use generally accepted accounting principles.

Second, the chairmen of the authorization and appropriations panels, along with the heads of all federal agencies, should be required to certify, under the same penalties as in Sarbanes-Oxley, the accuracy of the numbers in their budgets. (OK, the speech or debate clause of the Constitution might cause problems with applying such a law to committee chairs, but you get the idea.)

No Justification

Yes, there are important differences between public and private accounting, and there is a vast literature on how to tweak the rules to reflect those distinctions. But none of the literature suggests that these differences justify the budgetary practice of treating future liabilities as if they don’t exist. Unless we develop a system in which federal officials personally have skin in the game, no plan is likely to succeed.

What’s that you say? These requirements would be unduly burdensome, creating enormous compliance costs and chilling frank discussion of possible courses of action due to a fear of personal liability? Well, sauce for the goose....

In the Congressional debate, you might believe that the Republicans have the better of the argument or you might think the Democrats are right. Either way, until your side produces a set of actual numbers, clear and concise and susceptible to analysis, it isn’t really trying to produce a budget. Rather, both are engaging in the peculiarly childish form of wishful thinking that our politics has become.

(Stephen L. Carter, a novelist, professor of law at Yale and the author of “The Violence of Peace: America’s Wars in the Age of Obama,” is a Bloomberg View columnist. The opinions expressed are his own.)

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