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The phrase, “fiscal irresponsibility” does not even begin to describe our government’s stewardship of taxpayer money. Here’s why:
Citizens know the importance of fiscal responsibility and are rightfully concerned about the nation’s finances. Government debt is higher than ever. Every day the government spends money it doesn’t have at a rate unparalleled in human history. As the $16 trillion national debt continues to grow, the nation’s debt-to-GDP ratio creeps above an already unstable ratio of 100%. Because of smoke-and-mirrors accounting, the government debt and debt-to-to-GDP ratio is actually much larger than it appears to be.
When the national debt is calculated using the same procedures that every man, woman, family and company in America must adhere to, the national debt becomes much greater. Without the use of special accounting rules, the national debt rises to a mind-numbing and unconscionable $87 trillion (or $85.4 trillion depending who you ask). To get a sense of how deep we are in debt, consider total world GDP. Last year, the total value of all the things produced on the world was $83.2 trillion according to the CIA World Fact Book.
Our federal government’s debt to world GDP ratio is 102.6%, the debt to US GDP ratio is 543.7%.
Now for the dry stuff: why do I call the $16 trillion debt number a result of “smoke-and-mirrors” accounting? It’s because government accountants get to write their own special and unique accounting standards. Here is how they depart from the normal standards that everyone else must adhere to.
When you calculate your financial net worth, you take into account your current total assets and liabilities. Mortgages, car payments and credit card debt are liabilities that Americans must disclose when calculating financial statements. The same goes for businesses, non-profit organizations, and many other entities. All these things are calculated according to Generally Accepted Accounting Principles (GAAP), a near-universal set of accounting principles formalized by the Government Accounting Standards Board.
For companies, GAAP is a generalized way to determine profits and losses that assures everyone’s calculation method is uniform. Since everyone’s account statements are uniform, we can make meaningful profit/loss comparisons between different companies and different individuals. For example, we can confidently say statements like,” Apple is more profitable than Nintendo” or “Warren Buffet has more money than his secretary”.
The federal debt is not calculated like debt of private companies or individuals. While you use GAAP, the federal government uses its own Government Auditing Standards (GAS) compiled by the Government Accountability Office. There are many differences between GAAP and GAS, such as GAS’ use of budgetary basis accounting.
Budgetary basis accounting allows for gaps between accounting periods where the accounting equation can remain unbalanced, where current debits don’t have to equal current credits. Expected revenues can be projected into the future and then be assumed to cover existing and ongoing costs. Under GAAP, credits and debits must equate at all times. Expenditures are recorded when paid as opposed to expenditures being recorded when the related liability is incurred.
More importantly, the government’s many continuing resolutions (long-term ongoing obligations) are always reported with the same bundle of financial resources that were used to determine the costs. Originally calculated budget surpluses/deficits just roll over year by year, even if actual costs change. Under GAAP, continued resolutions are reported as reserved fund balances that can increase or decrease as the cost of fulfilling the continued resolution changes.
We tend to focus on the debt of Washington, but the federal government isn’t the only entity that taxpayers must support. State and local governments deserve scrutiny as well. Built-in wage increases for public sector workers and unconscionable union pensions are pushing many states and municipalities to the brink of bankruptcy. These liabilities are accounted for using GAS, and are significantly underestimated relative to the GAAP standards that many people are intuitively familiar with. Total unfunded liabilities of state governments sit at $2.8 trillion while net state debt obligations sit at a much higher $4.2trillion.