Government Grossly Understates Deficit

Government Grossly Understates Deficit
"The typical American household would have paid nearly all of its income in taxes last year to balance the budget if the government used standard accounting rules to compute the deficit, a USA TODAY analysis finds. Under those accounting practices, the government ran red ink last year equal to $42,054 per household­nearly four times the official number reported under unique rules set by Congress…. The big difference between the official deficit and standard accounting: Congress exempts itself from including the cost of promised retirement benefits." ( USA Today)

"It's a good thing we don't get all the government we pay for." –Will Rogers

Political Accounting
There Are Human Costs to Every Government Snafu
James Bovard
September 1999 • Volume: 49 • Issue: 9 •

Why does the federal government, according to its own auditors, squander tens of billions of tax dollars year after year? Attempts to understand the actions of politicians and bureaucrats on the basis of private-sector decision-making are doomed to failure. Efforts to "fix" government by ending specific boondoggles are quixotic crusades. Government will continue to be profoundly wasteful because that is how politicians maximize their power -- a subject that interests politicians far more than do General Accounting Office reports.

"Political language . . . is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind," observed George Orwell.^{[1 ]} Ruth Grant wrote that "hypocrisy and politics are inextricably connected on account of the peculiar character of political relationships."^{[ 2]}

Since government is coercion, politics is largely the exercise of deception regarding the intended use of coercion.

The benevolence of government rarely transcends the venality of politics. Paternalism seeks to generate mass happiness by forcibly sacrificing as many people and groups as necessary to the Greater Good. And who defines the Greater Good? The same people who benefit from maximizing the sacrifices.

The amount of power a politician can seize over other people is inversely related to the politician's honesty. If the politician openly tells people how much more coercive power he seeks and how he intends to use it, there will likely be strong opposition to the expansion of government. Politicians rarely wish to admit that they are pursuing a larger "market share" in the life of the average citizen. Because politicians and government officials often seek more power than they publicly admit, many, if not most, of their analyses of government policies are skewed.


The Social Security Model

If a politician camouflages his plans, people may fail to resist the increased power until it is too late. This is the thumbnail history of Social Security, a program that illustrates the natural combination of paternalism and political fraud. As the Brookings Institution's Martha Derthick observed, "In the mythic construction begun in 1935 and elaborated thereafter on the basis of the payroll tax, Social Security was a vast enterprise of self-help in which government participation was almost incidental."^{[3 ]} The Social Security Administration for decades told people that their payroll taxes were being held for each citizen in individual accounts; in reality, as soon as the money came in, politicians found ways to spend it.^[4]

Social Security Commissioner Stanford Ross, after he announced his resignation, conceded in 1979 that "the mythology of Social Security contributed greatly to its success. . . . Strictly speaking, the system was never intended to return to individuals what they paid."^[5] Ross said that Americans should forget the "myth" that Social Security is a pension plan and accept it as a tax on workers to provide for the "vulnerable of our society." But Senator Daniel Patrick Moynihan of New York accurately characterized Social Security taxes as "outright thievery" from young working people.^[6]

American citizens now shoulder over $17 trillion in unfunded liabilities.^{[7 ]} The General Accounting Office issued the first comprehensive report on government assets and liabilities in 1998 -- and curiously left Social Security obligations out of the liability column. A New York Times article noted,

A footnote in a draft portion of the report released Monday notes that after 2029, the Social Security trust fund will be "totally exhausted" and "current tax income will be sufficient to pay approximately 75 percent of the benefits due." But that is not really a liability, the administration's accounting experts explained Monday, because technically the government owes the money to itself, not the pensioners, and because Congress is free to change the amount paid Social Security recipients. After thinking about the political implications of that statement, however, more politically sensitive administration officials called reporters late Monday to stress that the government did not really have plans to cut back on Social Security payments. "It's an accounting device," one official said. "That's all it is."[8]

If the defenders of Social Security insist that the fraud was justified because otherwise the American people would not have accepted the coercive redistribution scheme, the question arises: What future limits should there be on government's prerogative to deceive the people? If Social Security is an acceptable fraud, what would government have to do before it was considered to have gone too far? Social Security is a perfect symbol of political generosity: it robs scores of millions of young people, it halves the national savings rate, and thereby sabotages investment and productivity increases,[9] and it maximizes bureaucratic and political discretion over people's fortunes. If the average worker had a dollar for every time a congressman lied about Social Security, his retirement would be safe. There is no "Honesty in Intervention Act" governing new laws or political action. Current taxpayers are still paying for the lies that politicians told to get re-elected in 1936, 1938, 1940, ad nauseam. The fact that politicians replace old lies with new lies does not reduce the burden on citizens of laws that were enacted on false pretenses generations ago.


Business Accounting versus Government Accounting

Paternalism will always be based on political accounting, which is practically the opposite of private accounting. Businesses prosper by reducing costs, while politicians prosper by denying that costs exist. For politicians, it is more important that spending forecasts be popular than accurate. The more that politicians and bureaucrats underestimate the cost of their favored policies, the easier it becomes to hustle those policies to voters and other legislators. Medicare­one of the largest expansions of government power since the New Deal­steamrolled through Congress in 1965 in part because of a spending forecast that made the expansion of handouts seem easily affordable. By 1990, however, Medicare was costing almost ten times more per year than the 1965 forecast had predicted it would cost.[10]

The political concept of waste is almost diametrically opposed to the economic concept of waste. In economics if an activity produces something that other people value, it can be successful; in politics if a program garners votes, campaign contributions, or power, it is successful. Government programs are often effectively designed to waste money because politicians benefit from an inefficient, spendthrift program as much as or more than they would benefit from an efficient, well-targeted program. Congressmen brag about the amount of federal money spent in their districts, not about whether audit reports found minimal fraud.

Political accounting means that government leaders will be ignorant or misled or dishonest about the true cost of policies they impose. The GAO's financial report concluded: "Because of the government's serious systems, record-keeping, documentation, and control deficiencies, amounts reported in the consolidated financial statements and related notes do not provide a reliable source of information for decision-making by the government or the public."[11] GAO found that "significant financial systems weaknesses, problems with fundamental record keeping, incomplete documentation, and weak internal controls . . . prevent the government from accurately reporting a large portion of its assets, liabilities, and costs."[12] Senator Fred Thompson of Tennessee declared, "We are spending almost $2 trillion a year and managing a $850 billion loan portfolio based on erroneous or non-existent information. It means basically that we don't know what the government's assets are, we don't know what the government's liabilities are, we don't know what it costs to run government."[13 ]

After the audit was released, a senior Clinton administration official told the Associated Press: "This is an old closet that we haven't cleaned out in 200 years."[14] If politicians are going to have the closet cleaned out only once every couple centuries, maybe they have no right to control the house. A report that should have been proof of the political class's incompetence instead merely evokes another round of promises to try harder next time.


Cost Is No Object

Paternalism presumes that government agencies judiciously weigh costs and benefits before extending their power. However, many bureaucracies have little or no curiosity about the impact of agency actions on private citizens. The House Commerce Committee surveyed federal agencies and concluded in a 1997 report, "Where costs [of regulation to private companies] are addressed, they represent only the smallest and most insignificant portion of total costs. . . . With little or no documentation on the costs of regulation, agencies have no basis to judge whether any possible benefits from a new regulation would outweigh the possible costs of the regulation."[15 ] Because government agencies do not have to pay for the costs they impose, they have no incentive to track the burdens. The committee warned that "federal agencies may inadvertently be exposing our Nation to incalculable economic harms."[16] The only way such government ignorance could not be harmful is if it were true that government dictates are always superior to private decisions.

Efforts to evaluate government programs by private accounting standards are always contrary to how government agencies gauge their own successes. Government agencies measure their achievements by how much they prohibit; private companies gauge their accomplishments by how much they produce. Government bureaucracies brag about the number of fines they have imposed; private companies brag about the number of inventions they have created. Government bureaucrats pride themselves on forcing private citizens to obey orders; private companies pride themselves on discovering ways that help each person find his own path.

Governments do not squander money in a vacuum. The more of an economy that is subject to political command and control, the greater the opportunities and prosperity forgone. Wasteful government spending crowds out productive private investment; as a result, the entire society becomes increasingly impoverished compared to what people could have achieved.

The supposed benefits of the tradeoff between freedom and political control is based almost entirely on the bogus premise that politicians will provide more welfare (after seizing increased power over everyone else) than private citizens can generate through their voluntary agreements and hard work. A 1998 report by economist James Gwartney and colleagues for the congressional Joint Economic Committee found that since 1960, average government expenditures for the 23 major industrial countries had risen from 27 percent of GDP to 48 percent of GDP in 1996­while the average economic growth rate "fell from 5.5% in the 1960s to 1.9% in the 1990s." Gwartney observed: "While growth has declined in all [23] countries, those countries with the least growth of government have suffered the least."[17] Gwartney concluded: "If government expenditures as a share of GDP in the United States had remained at their 1960 level, real GDP in 1996 would have been $9.16 trillion instead of $7.64 trillion, and the average income for a family of four would have been $23,440 higher."


Squandering Lives

The failure of a government policy does not merely reduce the number of bureaucrats who receive "outstanding achievement" job evaluations. Governments cannot waste tax dollars without squandering part of the lives of the people who earned those dollars. There are human costs to every government snafu. A billion tax dollars wasted pre-empts 10,000 families from buying starter homes, or pre-empts 100,000 people from buying bottom-of-the-line new cars, or pre-empts a million people from taking a summer vacation, or pre-empts citizens from buying 40 million new books or 80 million cases of beer.

The value of liberty and personal independence is almost never factored into the calculus of paternalism. Social scientists, politicians, and bureaucrats consider the expected benefits of any proposed new rule and ignore the effect of its forcible imposition. Every government program, every government intervention, every government penalty carries a hidden cost of pre-emption. The fact that people prefer to live as they choose and not as others command never shows up on intellectual radar screens. If the costs do not show up in the official government budget, they do not officially exist. Any government cost-benefit analysis of a proposed new rule or regulation that disregards the value of individual freedom implicitly assumes that private freedom is a good at the disposal of the political class.

Since most politicians­simply by their career choice­indicate a desire for power, any measure that increases power will be considered a success. If a policy increases the number of people beholden to them, then it is good as an end in itself. The ultimate conflict of interest that subverts paternalism is that government officials want power and citizens want freedom.

There is no reason to expect contemporary Leviathans to become significantly more efficient in the future. The only way to fix most government programs is to repeal the underlying law and abolish the government agency. Anything less will be little more than a future full-employment program for investigative journalists.

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Notes

1. George Orwell, The Orwell Reader (New York: Harcourt Brace, 1956), p. 366.
2. Ruth W. Grant, Hypocrisy and Integrity (Chicago: University of Chicago Press, 1997), p. 2.
3. Martha Derthick, Policymaking for Social Security (Washington: Brookings Institution, 1979), p. 232.
4. Two classic books on this topic are Dillard Stokes, Social Security­Fact and Fancy (Chicago: Henry Regnery, 1956) and Abraham Ellis, The Social Security Fraud (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996 [1971]).
5. "Outgoing Social Security Head Assails 'Myths' of System and Says It Favors the Poor," New York Times, December 2, 1979.
6. Pat Wechsler, "Will Social Security Be There for You?" Newsday, January 14, 1990.
7. Daniel J. Mitchell and Gareth G. Davis, "Social Security Trust Fund Report Shows Need for Reform," Heritage Foundation Backgrounder #1176, May 4, 1998.
8. David Sanger, "Glitches Galore Pop Up in Full Audit of Government," New York Times, March 31, 1998.
9. Martin Feldstein, "Economics: His Defense," New York Times, October 5, 1980.
10. Jake Hansen, "Medicare's Dire Outlook," Washington Times, June 3, 1995.
11. Editorial, "What the GAO Found­or Didn't Find," Washington Times, April 3, 1998.
12. James Glassman, "No-Account Government," Washington Post, April 21, 1998.
13. "What the GAO Found or­Didn't Find."
14. "First Government Audit Completed," Associated Press, March 30, 1998.
15. House Commerce Committee, Survey of Federal Agencies on Costs of Federal Regulations, House Report 97-H-272-1, January 1997.
16. Ibid.
17. "On average, government expenditures in 1995 consumed only 20% of GDP in the five economies with the most rapid real economic growth rates during 1980–95: Hong Kong, Singapore, South Korea, Taiwan and Thailand. In these countries, the size of government in 1995 was virtually the same as in 1975." James Gwartney, "Less Government, More Growth," Wall Street Journal, April 10, 1998.