Getting Real About Debt
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
He, a financial guy, pointed out that if the government followed its own accounting rules the deficit would be much larger.
I was aware of that, but for the sake of the column, the government debt numbers were appropriate because those are the numbers the government uses.
But, for the sake of honest debate, let’s look at the real deal.
The amount of government debt is calculated on a cash basis. That is, the government takes in x and spends y each year. The difference is either a surplus or a deficit. Each year, the difference is either added to or substracted from the total deficit.
On a cash basis, last year’s deficit was around $1.5 trillion, which pushed the total above $15 trillion.
But cash basis accounting isn’t a Generally Accepted Accounting Principle – by the government’s own standards.
All publicly traded companies have to follow those standard accounting rules. If you follow those rules it gives you a much more accurate picture of a company’s – or a government’s – financial health.
Under standard accounting rules, it’s not just what you make and what you spend, it’s also what you owe – your liabilities.
When it reports on deficits, the government conveniently exempts itself from including the cost of things like promised retirement benefits.
Remember when General Motors was fixing to go bankrupt? One of the big problems for that company was legacy costs. Those are costs incurred by retirees, things like pensions and health care.
The company was obligated to provide those costly benefits to people who no longer worked for the company. Published reports at the time indicated legacy costs added $1,500 to the price of each new car GM manufactured.
It was simply an unsustainable situation.
Under the government’s rules, none of those legacy costs would be considered, which, of course, is absurd.
Those costs helped drive GM into financial insolvency. Save for a government bailout, GM would have had to file for bankruptcy.
Earlier this week USA Today published an analysis of what the debt would be like if the government followed standard accounting procedures.
It’s not pretty.
According to USA Today’s analysis, the government ran red ink last year equal to $42,054 per household. That’s nearly four times the official number reported by the government under those bogus accounting rules they use.
The median income of a U.S. household is $49,445, by the way, the article pointed out.
Without shady accounting, the deficit last year was $5 trillion, even though the “official” number was a meager $1.3 trillion.
That’s because the tab for Social Security, Medicare and other government programs grew by $3.7 trillion. Those liabilities exist whether or not the government chooses to recognize them in their accounting.[[In-content Ad]]Here are some other “key findings” pointed out in the USA Today article:
• Social Security had the biggest financial slide. The government would need $22.2 trillion today, set aside and earning interest, to cover benefits promised to current workers and retirees beyond what taxes will cover. That's $9.5 trillion more than was needed in 2004.
• Deficits from 2004 to 2011 would be six times the official total of $5.6 trillion reported.
• Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.
These numbers are mindbogglingly large.
So what’s the total deficit? Remember, the “official” number from the government is $16 trillion.
Estimates vary, but there are plenty of think tanks out there that calculate it in a range of $65 to $76 trillion.
Let’s quantify that.
How much is $76 trillion?
Let’s say you won a contest. As the winner, you are given a credit card with a $76 trillion limit and sent on a worldwide Internet shopping spree. You are instructed you must spend $1,000 per minute until you max out the credit card.
Good luck.
It would take you 144,596 years, 7 months and 24 days – give or take a day or two – to reach your spending limit.
Really, people.
We need to get this insanity under some semblance of control.
He, a financial guy, pointed out that if the government followed its own accounting rules the deficit would be much larger.
I was aware of that, but for the sake of the column, the government debt numbers were appropriate because those are the numbers the government uses.
But, for the sake of honest debate, let’s look at the real deal.
The amount of government debt is calculated on a cash basis. That is, the government takes in x and spends y each year. The difference is either a surplus or a deficit. Each year, the difference is either added to or substracted from the total deficit.
On a cash basis, last year’s deficit was around $1.5 trillion, which pushed the total above $15 trillion.
But cash basis accounting isn’t a Generally Accepted Accounting Principle – by the government’s own standards.
All publicly traded companies have to follow those standard accounting rules. If you follow those rules it gives you a much more accurate picture of a company’s – or a government’s – financial health.
Under standard accounting rules, it’s not just what you make and what you spend, it’s also what you owe – your liabilities.
When it reports on deficits, the government conveniently exempts itself from including the cost of things like promised retirement benefits.
Remember when General Motors was fixing to go bankrupt? One of the big problems for that company was legacy costs. Those are costs incurred by retirees, things like pensions and health care.
The company was obligated to provide those costly benefits to people who no longer worked for the company. Published reports at the time indicated legacy costs added $1,500 to the price of each new car GM manufactured.
It was simply an unsustainable situation.
Under the government’s rules, none of those legacy costs would be considered, which, of course, is absurd.
Those costs helped drive GM into financial insolvency. Save for a government bailout, GM would have had to file for bankruptcy.
Earlier this week USA Today published an analysis of what the debt would be like if the government followed standard accounting procedures.
It’s not pretty.
According to USA Today’s analysis, the government ran red ink last year equal to $42,054 per household. That’s nearly four times the official number reported by the government under those bogus accounting rules they use.
The median income of a U.S. household is $49,445, by the way, the article pointed out.
Without shady accounting, the deficit last year was $5 trillion, even though the “official” number was a meager $1.3 trillion.
That’s because the tab for Social Security, Medicare and other government programs grew by $3.7 trillion. Those liabilities exist whether or not the government chooses to recognize them in their accounting.[[In-content Ad]]Here are some other “key findings” pointed out in the USA Today article:
• Social Security had the biggest financial slide. The government would need $22.2 trillion today, set aside and earning interest, to cover benefits promised to current workers and retirees beyond what taxes will cover. That's $9.5 trillion more than was needed in 2004.
• Deficits from 2004 to 2011 would be six times the official total of $5.6 trillion reported.
• Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.
These numbers are mindbogglingly large.
So what’s the total deficit? Remember, the “official” number from the government is $16 trillion.
Estimates vary, but there are plenty of think tanks out there that calculate it in a range of $65 to $76 trillion.
Let’s quantify that.
How much is $76 trillion?
Let’s say you won a contest. As the winner, you are given a credit card with a $76 trillion limit and sent on a worldwide Internet shopping spree. You are instructed you must spend $1,000 per minute until you max out the credit card.
Good luck.
It would take you 144,596 years, 7 months and 24 days – give or take a day or two – to reach your spending limit.
Really, people.
We need to get this insanity under some semblance of control.
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