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Press Release

    There’s No Accounting for Big Government

    07/02/2002

    The latest revelations about WorldCom have Washington posturing to exploit the tragedy for political gain. President Bush has issued a stern warning and veiled threat about increased government regulation of markets, and Democrats see the collapse as an opportunity to hammer Republicans in the coming elections. True, the current wave of financial mismanagement has taken a real human toll on the nation. But there are laws in place to address these problems, and any criminal or fraudulent behavior should be prosecuted to the maximum extent of the law. There is little role for politicians in this process. If Washington is truly concerned about financial mismanagement, they should turn their attention to the federal government, where the magnitude of financial improprieties dwarfs any problems Wall Street may be facing.

    At WorldCom, the alarm bells starting ringing when it came to light that $3.8 billion in expenses were incorrectly listed as capital expenditures. Yet in Washington, such budgetary exploits are almost commonplace. Congress has failed to produce a budget resolution to establish guidelines for over $2 trillion in spending, exposing taxpayers to higher deficit spending and the threat of more taxes down the road.

    In fact, President Bush’s annual budget submission identified financial mismanagement as a serious concern throughout the federal government. In an assessment of the entire government, the National Science Foundation stood alone as the sole government agency with sound financial practices. And as far as misappropriating funds, the budget notes, “federal agencies have identified almost $20 billion in annual erroneous benefit and assistance payments in just 13 federal programs” (emphasis added).

    The problem in Washington is not new and it is not just the Bush administration that has raised concerns. The General Accounting Office, Congress’s own watchdog, has been tracking the problem for years. In fact, a report by the GAO earlier this year stated, in essence, that the financial statements of the federal government were too ill-prepared to provide any pertinent information. The report noted, “The underlying causes of these issues are significant management system weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal control” (p. 25).

    These perennial problems make an interesting contrast to improprieties on Wall Street, where the politicians are demanding swift justice. Unlike the federal government, where the GAO has kept a running list of “High Risk” programs and agencies for years, the markets response to WorldCom was quick and substantial: stock prices plummeted 77 percent, with shares now selling at 6 cents, with the company facing the specter of bankruptcy.

    The federal government, on the other hand, continues to misappropriate taxpayer dollars on a grand scale. The GAO notes that federal agencies rely on costly “adjustments” and after the fact finagling to balance their books: “Many agencies have been able to obtain unqualified audit opinions only by expending significant resources to use extensive ad hoc procedures and making billions of dollars in adjustments to derive financial statements months after the end of a fiscal year.” While this may bring the books into balance, it does little to improve the spending practices of the federal government.

    Government financial mismanagement can take just as an exacting human toll as market abuses. The Department of Interior, for example, has lost more than $3 billion held in trust for American Indians. Other federal agencies and programs, from the Department of Housing to Medicare and Medicaid have squandered billions of dollars, which harms both program recipients who cannot be served and taxpayers who are forced to pay billions in taxes that are subsequently wasted.

    But perhaps the biggest concern facing taxpayers is Congress’s unwillingness to address Social Security and Medicare. Everybody—from the administration, to the GAO, to outside analysts—has acknowledged that both systems are going broke and will fail without fundamental reforms. The longer reform is delayed, the more costly it will be. Social Security alone has a cumulative cash shortfall of $24 trillion (in today’s dollars) over the next 75 years. And Medicare, with rising health care costs and a retiring baby boom generation, faces significant cost increases within a system that wastes $12 billion a year. The Congressional Budget Office estimates that without reform, the cost of Social Security, Medicare and Medicaid will double by the year 2030, bringing federal spending on these programs to 14 percent of GDP. By way of comparison, total federal spending today is around 20 percent of GDP. With Congress refusing to address fundamental reform, taxpayers are in for a costly surprise.

    In the end, there is an important difference between corporate malfeasance and Washington’s financial mismanagement. In the marketplace, consumers and shareholders have a choice. Bad actors are dealt with harshly on the trading floor. There may be a high cost to pay, but the issue is addressed swiftly. When it comes to government, taxpayers have little choice over the management of federal programs. Problems continue for years, imposing billions of dollars of costs on taxpayers. Washington collects our tax dollars and is responsible for spending them wisely. If financial mismanagement is the new cause celebre, Washington could do no better than clean its own house.