Mind the GAAP (or the Lack Thereof) — 3 December 2012

For most of the last four years, my feelings about President Obama have been marked by frustration and annoyance – that such a gifted politician could devote himself to such wrong-headed policies.  Recently, however, I have crossed a Rubicon of sorts.

I really don’t like the man at all.

This comes from his behavior in the nearly-stillborn “fiscal cliff” talks.  Despite all the honeyed words after the election about wanting to get a deal with Republicans, his “offer” last week was anything but good faith bargaining.  The GOP put forward a plan to raise revenue on the wealthy, mostly through tax reform and limiting deductions, placing a major concession on the table at the very start.  What they asked for in return was a similar concession: reform of entitlements.

The response from the White House was similar to the seller of a house who, once he realizes you’re willing to bargain, doubles his asking price.  Instead of the $800 billion in increased revenue that Obama campaigned on, his opening gambit asked for $1.6 trillion. And the tough talk on tax rates continues: they promise to veto any bill that does not take tax rates back up to Clinton-era levels on top earners, regardless of the revenue implications.

Previous talks had mentioned spending cut to revenue ratios of 3 to 1; Obama’s proposal reversed that: against the $1.6 trillion in new taxes, he’ll suggest $400 billion in spending cuts – 4 to 1 the other way.  But not really, because he also wants another $150 billion in new stimulus spending, starting with $50 billion next year.  So his deficit control plan is: taxing more and spending more.  Plus, he wants an extension of unemployment benefits (another $90 billion), and oh, by the way, how ’bout if we just do away with that troublesome debt ceiling thing?

This is his idea of balance.

I’m not going to discuss the politics of this except to suggest that he wants more than simply resolving the issue, more even than winning: he wants to crush the Republicans, and I believe he thinks he can do it because he can demagogue them as friends of the discredited rich.  But if he succeeds, it will be a Pyrrhic victory.  First, I’m sure that his policies will be catastrophic for the country, and in four years the dreadful economy will be his responsibility.  Secondly, if he disembowels the GOP in this way, he will poison the waters so much more than they already are, that the rest of his term will be a series of stalemates and crises.

This governing methodology marked his first term, and was the major reason I felt he did not deserve a second: this guy doesn’t seem to know how to deal.  Part of a president’s job is to lead the legislative response to issues of the day: to propose laws and to gain passage of his proposals.  You can’t do that if the other side doesn’t trust you and won’t deal with you.  As Peggy Noonan said, it’s always a crisis with this guy.  It’s nasty and vicious: politics as cage match.

But beyond the politics, and the Cliff, and the CBO scoring of this proposal or that, I want to call attention to how much of a side show this whole debate is.  In an important op-ed by Christopher Cox and Bill Archer, both former GOP Representatives in senior finance policy positions, they point out how dire our situation truly is; I commend it to your reading.

In essence, their message is that, as worrisome as our current $16 trillion dollar debt is, that figure is dwarfed by the unfunded benefits of our entitlement programs.  Indeed, our government should be setting aside $7 trillion every year to accumulate the necessary funds just to pay for our obligations to Social Security and Medicare.  Add that to our cash deficit, and we would need $8 trillion in higher taxes every year to keep from going deeper and deeper in debt.

And here’s the kicker: the total adjusted gross income of taxpaying Americans, and the total income of US corporations (in 2006, when the getting was good), amounts to $6.7 trillion.  If the government confiscated every dime of every taxpayer’s income and every corporation’s net profit, it would still be going deeper into debt every year, when the costs of our entitlements are properly factored in.

Corporations are duty-bound to prepare financial statements for their investors that properly indicate the financial state of affairs, according to Generally Accepted Accounting Principles (GAAP).  One of the fundamental aspects of GAAP is a fair and realistic indication of future liabilities for such things as pension obligations.  More than one major corporation has been brought to its knees because it could not afford the promises it made to its (usually unionized) workers.

But the US Government dispenses with GAAP.  There is no statement or report where the $87 trillion in future liabilities is itemized, detailed, or totaled, although Cox and Archer were able to piece it together from disparate official sources.  If a company were to handle its finances this way, its leadership would be in jail.

It is no secret that we are much deeper in hock than conventional wisdom suggests.  And yet, liberals insist that there is no problem.  The gaggle of labor leaders and liberal advocates that met with Obama just after the election were there to insist that no entitlement benefits be cut in the upcoming Cliff negotiations.  Nancy Pelosi is on the same page.

Similarly, the President’s people have unanimously said that Social Security benefits are not on the table, claiming that that program is solvent for the next few decades.  This, despite the fact that the famed “lock box” which Al Gore promised to protect is now filled with government IOU’s; and now that the money coming in is not enough to fund the payments going out, the Treasury has to make good on those IOU’s out of general revenue, that is to say, by borrowing from China.

Instead of even token efforts to control this Jupiter of hidden debt, Democrats are digging their heels in on tax rates – not revenue, mind you, but tax rates – that will do no more good in the scheme of things than using a teacup to drain the ocean.

If Government reporting conformed to GAAP and our parlous financial straits were widely known, perhaps there would be some constituency for reducing the promises that are bankrupting us.  As it is, we can’t even come to agreement on reforms to reduce the deficit in our cash budget, never mind bringing that budget into balance – and never mind the $7 trillion beyond that that we really need to address.

Against this, Obama’s non-offer of a “balanced” financial plan is frankly criminal.

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