Greenspan admits surplus is phony?

Factual Questions
1

I read this in the local paper yesterday:

http://www.argus-ang.com/default.asp?puid=18&spuid=18&indx=699130&article=on

So, Alan Greenspan says that if the federal budget were reckoned using “Generally Accepted Accounting Principles”, there would be no surplus. Is this true? I guess I understand the author’s argument about the government borrowing money from various trust funds to cover its deficits, but is this cause for alarm? Under what conditions is the government bound to pay back the borrowed amount? Is the borrowed amount likely to threaten the solvency of any of the trust funds?

I am just full of questions today.

2

“but is this cause for alarm”

Why would it be cause for alarm ? It won’t come due until long after the current administration is history. That means that when the piper comes to call everyone involved in the scam will have long retired from public life and their ideological inheritors will be able to cloak themselves in the mantle of “plausible deniability”.

3

No disrespect, City Gent, but everyone on Earth knows this–or at least they should. Both parties have been running a back alley shell game for years. It’s all blue smoke and mirrors. A house of cards. Cold fusion.

There is no surplus, never has been. This is the resurrection of the 80s. Lord knows the Democrats can’t stop spending, but the Republicans, once so obsessed with the national deficit and paying down the debt, are now revisiting supply side economics and giving everyone huge tax breaks. (Bush did this before the economy slowed.) Both parties are controlled by huge spenders. Bush is promising all things to all people. This is Voodoo II.

4

Now, bear with me because I read this a few years ago and it was shortly before we suddenly had a budget surplus, but it not only made a lot of sense to me, but made my jaw drop in surprise at government stupidity.

It seems the government keeps two sets of books on expenditures. The example that was given in the article was about a reinforced military building being constructed. The original estimate was, lets say, 26 million. Well, the first contractor runs out of bucks halfway through the construction and looses the job. So, the building sits while others bid to finish it. Another contractor decides that the building can be finished for 10 million and gets the bid. The previous subcontractor got 20 million done on it before quitting.

Now, in one set of books the building shows being worth 26 million. In the second set it shows that the building cost 30 million. To make things even more confusing, they show a completion cost of 56 million! Budget over run!

See how they did it? 26 and 10? Instead of just the actual 30 million, they combined costs to get 56 million. Clinton supposedly stopped the double booking, which after the dust settled, showed a budget surplus in comparison to previously inflated figures.

Now, another cute and nasty little trick they have is the budget penalty. I guess, over the years, wastrels in congress who constantly squandered their budgets got mad at those who not only handled them well, but actually had money left over at the end of the year!

Now, we all know showing a residual in a money hungry congress is not a good idea. Heavens! Other congressmen might have to stop financing homes, vacations, investments, friends and kickbacks if their budget handling gets too closely investigated to find out why they are not saving any cash. So, sometime in the 70s, congress quietly passed legislation stating that if you fail to use up your allotted budget, then next year not only will you be docked the surplus, but you might not get the budget amount you need.

So, places like the military, which require huge budgets, not only over-apply, but squander money in order to keep from being cut back beyond safe operating finances.

All of that because some congressmen got mad at the few who saved money and made them look bad. Now, budgets must be used up to the last penny because saving it will cause you to be penalized.

That contributes also to the national deficit.

The double set of books though, just was absolutely astounding.

5

I’ll answer the question, rather than spew my opinion on politics.

If you read the article it is clear that Greenspan agrees that using GAAP would show the US budget in deficit. However he defended the use of non-GAAP figures. In other words conventions appropriate to general accounting are not appropriate for government accounting. Notice that the article does not specify what Greenspan’s defence was or make any argument in favour of the use of GAAP for government. Combined with the fact that the author appears not to know the difference between deficit and debt (4th paragraph) this casts some doubt on his expertise.

I’m not going to get into whether the US fiscal position is better or worse than it appears here; or what the correct treatment of unfunded liabilities might be (let alone the Great Debate issue of what debt should be), but I will offer a couple of remarks about the inappropriateness of using for government accounting principles for developed for business.

First: business wants to maximise incomings and minimise outgoings. A project is worthwhile if it creates a difference between them. This is not the case for government. Cost-benefit analysis is designed to calculate whether an investment in (say) a bridge is socially profitable even though the government will never reap the return from the investment. The entire assumption underlying a private sector set of accounts – that more for the business is better – is false for governments (whatever you believe they do or ought to do, maximise profit isn’t it).

Secondly, the status of income flows and liabilites for governments is rather different than for private business. A private business cannot decrease its spending by its own will – most business outgoings are contractual. Governments on the other hand have large amounts of expenditure which are not contractual. Social security eligiblity can be changed by government fiat. Private insurers cannot do this sort of thing.

The same thing goes for revenue. The power to tax is something that means that the government could increase its revenue at some time if it “needed” to. Private firms cannot turn around and make their customers pay more.

So principles for evaluating the financial position of private firms are not appropriate for evaluating the financial position of government. So no, Greenspan did not admit the surplus is phony.

6

Thanks for the explanation. I suspected it was something along these lines, but I don’t have the economics background to fill in all the blanks.

You ought to have a talk with the finance department at my company :smiley:

7

I don’t think Greenspan deserves all the credit he gets for knowing what will happen. It seemed to me he was still raising rates when the Dot Coms had already started to die off.

He’s a banker. What he does is always good for rich people, but not necessarily the rest of us.