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The Mechanics
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Federal Government Mon Jun 22 2009

Chicago group reveals the truth in government accounting

Earlier this month, Americans crossed a significant milestone.

The amount owed to the U.S. Federal government by each and every American citizen reached $200,000.

A Chicago-area non-profit organization called the Institute for Truth in Accounting wouldn't be surprised if you haven't heard this news, much less the news that the national debt is nearly $62 trillion, not the $11 trillion depicted on the national debt clock in Washington.

institute_for_truth_logo.jpgThe Institute's mission is to put a spotlight on the true national debt, and it does so by focusing on the way in which the government accounts its liabilities.

The government currently accounts its debts using the cash method, meaning it doesn't count expenses until the check has been written and is in the mail.

The fatal flaw with this method is it doesn't account for the literally trillions of dollars in liabilities owed to retirees, veterans and the elderly. You may have heard people say how Social Security is in rough shape and how, soon, two workers will be paying into the "trust fund" to cover the payout for a single retiree.

This is one reason why. And the recession hasn't made things any better.

The Institute recommends the government manage its books according to the method it requires of publicly-traded companies (like Apple or McDonald's). That accounting method is called accrual accounting, which counts expenses as expenses as soon as the service is promised.

This matters for a whole host of reasons, not least of which is a true awareness the national debt.

According to the Institute, federal government spending amounted to $2.9 trillion in 2008, while tax receipts were only $2.5 trillion. According to cash accounting methods, that left a $455 billion shortfall last year.

However, if you consider the liabilities the government has committed to for 2008, the numbers become much more daunting.

With Medicare, Social Security and veterans' benefits accounted the way a Fortune 500 business would calculate them, the federal government spent $7.6 trillion in 2008. Instead of a $455 billion shortfall, our government was in the red for $5.1 trillion last year alone.

This means total spending ($7.6 trillion) was just over half of the entire U.S. economy last year ($14.33 trillion).

At a time when politicians of all stripes are calling for more and greater government spending to bring us out of recession, you have to wonder how much more than 53 percent they suggest.

Certainly a dynamic, productive economy cannot be mostly government-based, but that's the direction we're headed.

With all sorts of new and popular taxpayer-funded programs and benefits in the offing, the Institute's message is clear: Making decisions without all the facts rarely works out.

To demonstrate that idea, the Institute recently unveiled the first of many short videos designed to communicate the seriousness not getting a full picture of the government's debt situation. Their first video is entitled "Roofing," and besides being relevant, it's pretty funny.

Expect to see a lot from the Institute for Truth in Accounting as the year continues. Besides promoting its recent report on debt in the 50 states--in which it documents over $20 billion in Illinois state government debt from fiscal year 2007 alone--and launching short web videos, the Institute wants to motivate people to demand solutions.

Should the U.S. government go back to selling "war bonds" like it did during World War II, or should we just reduce spending across the board by reforming Social Security and Medicare?

Whatever we decide, the first step is to demand truth in accounting.

Be sure to visit the Institute for Truth in Accounting's website at www.truthinaccounting.org, and follow them on Twitter!

 
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Kurt Hilgendorf / June 25, 2009 3:56 PM

Truth in accounting might better be understood if this story, and the organization it covers, were accurate with the figures, specifically regarding Gross Domestic Product. GDP is calculated as follows: GDP = C+I+G+X-M where C represents consumer spending, I represents business investment (including unsold inventory), G is government spending, X is exports and M represents imports. The logic employed in this article, where transfer payments like social security or medicare payments are included in government spending, artificially inflates the government's role in the economy. Those transfer payments are not counted in GDP, which measures a country's economic output, until recipients of those transfer payments spend the money on healthcare, groceries, clothing or other consumer goods. GDP is measured this way precisely to prevent the double-counting technique the article employs. As a practical matter, not only do the recipients of transfer payments benefit from, say, avoiding starvation and having healthcare access, but the recipients of that money, like hospitals and other businesses, benefit from an increased customer base. In other words, there is always a direct or indirect government role in the profits of any private business that takes money from a Social Security recipient.

That the article advocates changes in Social Security, Medicare and state budgets is not surprising. According to Truth in Accounting's website, the members of the Advisory Board, Advisory Panel and Experts are all bankers, consultants, lawyers or management professors, except the one who writes for a bankrupt newspaper.

A true accounting of the "national debt" would include an assessment of all the personal mortgage debt, credit card debt, car loans and other personal debt that exploded during the past 35 years as real income stagnated for the vast majority of American workers. My guess is that many, if not most, of the people on Truth in Accounting's various boards and committees supported the policies that made this debt expansion possible.

If we're going for the truth, then we need to actually be honest, not just feign it. But what do I know? I'm just an economics teacher.

Mark Thoman / June 30, 2009 9:28 AM

So it's bad when lawyers, bankers, consultants, and management professors question the government, but good when lawyers, bankers, consultants, and management professors are the government?

Guessing that the folks involved in the website were also involved in creating the current mess is just that, another guess, this time designed to cast aspersions on a CPA who has been involved in advocating responsible government accounting for over 15 years.

Sheila Wienberg's background can be found here:
http://truthinaccounting.blogs.com/about.html
At some point even economists might fact check before making conclusive pronouncements.

Rich Evans CPA / July 16, 2009 2:41 PM

deficit spending and soending way more than is prudent will sink this country.
Savings rate is increasing currently, and we will need some good projects that will be jobs for our kids.

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