October 19, 2009

Year-end Deficit Report, Part 1: AP’s Crutsinger Ignores Effect of Accounting Change, Growth in National Debt

ObamaAndRedInkTownhall0309Though its $1.4 trillion red-ink result was mostly known well ahead of its final issuance, the Treasury Department either conveniently got its year-end accounting work done in time for a Friday afternoon release of the final Monthly Treasury Statement, or held it until that time. Last year’s report was released on Wednesday, October 15.

The final statement shows receipts of $2.105 trillion, “outlays” of $3.522 trillion, and a “deficit” of $1.417 trillion. That is $962 billion higher that last year’s “deficit” of $455 billion.

The terms “outlays” and “deficit” are in quotes for reasons I will explain in this post.

There is good news and bad news about the reporting on the results by the Associated Press’s Martin Crutsinger. The good news is that after at least three months of obsessing over how the wars in Iraq and Afghanistan were contributing to the massive increase in this year’s “deficit” compared to fiscal 2008 when they have been almost completely if not totally irrelevant (here, here, and here at NewsBusters; here, here, and here at BizzyBlog), Crutsinger correctly dropped them from the discussion. Of course, that means he was repeatedly wrong to cite those wars or even defense spending as a whole as a contributing factor in the first place. But don’t wait by the phone for Martin’s apology.

The bad news follows.

First, Crutsinger didn’t explain that an accounting change having nothing to do with fiscal frugality was probably the major reason why the “deficit” came in lower than the $1.75 trillion he cited as the administration’s February prediction. Additionally, though it was an ideal opportunity to do so, he didn’t inform readers that the reported “deficit” is nowhere near the amount by which the national debt increased during the fiscal year.

Here are key paragraphs from Crutsinger’s report that apparently go final until Saturday morning:

The federal budget deficit has surged to an all-time high of $1.42 trillion as the recession caused tax revenues to plunge while the government was spending massive amounts to stabilize the financial system and jump-start the economy.

The imbalance for the budget year ended Sept. 30, more than tripled last year’s record. The Obama administration projects deficits will total $9.1 trillion over the next decade unless corrective action is taken.

As a portion of the economy, the budget deficit stood at 10 percent, the highest since World War II, according to government data released Friday.

President Barack Obama has pledged to reduce the deficit once the Great Recession ends and the unemployment rate starts falling. But economists worry the government lacks the will to make the hard political choices to cut spending and raise taxes to get control of the imbalances.

Administration officials noted that as large as the $1.42 trillion deficit was, it had been projected to be even higher. The administration forecast a $1.75 trillion deficit when Obama sent his first budget proposal to Congress in February, a figure that had been trimmed to $1.58 trillion in an administration update issued in August.

The lower figures reflected in large part the fact that spending from the $700 billion bailout package turned out to lower than originally anticipated.

…. Failure to curb runaway deficits could trigger a financial train wreck that would push interest rates and inflation higher, and send the dollar crashing if foreigners suddenly started dumping their holdings of Treasury securities.

I must cite a few things before getting to Crutsinger’s key omissions:

  • Crutsinger’s first sentence acts as if the government really has given the economy a “jump-start.” American workers who have continued to lose jobs to the tune of hundreds of thousands per month are surely wondering where the evidence of a jump-start is.
  • Note the reference to “the Great Recession,” capitalized, in the fourth paragraph. Though I have seen usage of the term pick up elsewhere since early this year, I believe this is the first use of the term at AP, and it certainly is by Crutsinger when covering Treasury’s monthly report. I believe this is an attempt to establish a historical marker, in the optimistic hope that it will be understood as the Great Bush Recession, especially if it is ultimately declared to have ended during the third quarter. Readers at BizzyBlog know that pinning the recession solely, or even mostly, on George W. Bush, who nonetheless contributed to it, is absurd. I have been saying so since July 2008.
  • Also note the reference to “hard political choices” and “raising taxes” that same paragraph. I sense that the press is getting ready to tell us, “Oh gosh, he really hates to do it, but Dear Leader is going to have to raise taxes on everyone.”
  • His opening mention of the year-over year decline in receipts understates its significance and incorrectly blames it entirely on the recession. Part 2 will deal with that matter separately.

Now to Crutsinger’s two big omissions.

The “deficit” is as “low” as it is because effective with April’s Monthly Treasury Statement, the government began accounting for its “investments” in financial institutions, General Motors, Chrysler, and other entities on a “net present value” (NPV) basis. In other words, even though lots of money has been laid out, that money is not part of “outlays.” At the time of the change, the impact was to reduce “outlays” through March 2009 by over $175 billion.

Since then, the government has laid out additional billions first to get GM and Chrysler to limp into bankruptcy, followed by even more billions to help the companies emerge from it. NPV accounting requires you to write down such “investments” to their realizable value. I haven’t seen any evidence that any such writedowns, which would serve to increase the reported deficit, have occurred, even though almost no one believes that Uncle Sam will ever see a full return of all of the money has thrown at the two companies. If someone is aware of a writedown, I’d like to know about it.

The bottom line is that, even after considering repayments of TARP funds made by some banks, the reported “deficit” would have been a lot higher than $1.42 trillion had the government not moved to NPV accounting. Though NPV has its place, it never belongs in what it supposed to be a cash flow statement.

The second omission has to do with a problem that I have begun calling the “unreported deficit.” It has admittedly been present for years, but it has ballooned to gigantic levels during the past two fiscal years.

In normal bookkeeping, you would expect the change in the national debt net of cash assets to be equal to the amount of surplus or deficit reported. But the U.S. government doesn’t do things the normal way, and hasn’t been since LBJ made Social Security part of a “unitary” budget in the 1960s. For the past 20-plus years, the reported “deficits” were lower than the increase in the national debt largely because the rest of the government has raided Social Security surpluses and spent the money on other things. This year, though, the Troubled Asset Recovery Program (TARP) and other items were added into the “off-budget” mix.

The past two years’ unreported deficits have been bigger than the reported “deficits” by stunning amounts (go here to verify the numbers that follow):

  • During fiscal 2008, the reported “deficit” was $455 billion, while the national debt increased by $1.017 trillion ($10.025 trillion minus $9.008 trillion) — a $562 billion difference between reported and actual.
  • During fiscal 2009, the reported “deficit” was $1.417 trillion, while the national debt increased by $1.885 trillion ($11.910 trillion minus $10.025 trillion)– a $468 billion difference between reported and actual.

These differences are now so big that they really shouldn’t be ignored by reporters genuinely interested in informing readers and viewers about Uncle Sam’s true fiscal situation.

Crutsinger, of course, did ignore it. I expect that he and the vast majority of his establishment media colleagues will continue to do the same. From this point on, I don’t plan to, especially given that even the reported national debt doesn’t fully reveal the true extent of this nation’s financial peril.

Cross-posted at NewsBusters.org.

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12 Comments

  1. Excellent job in ferreting out the real deficit numbers!

    Nevertheless, this “reporter” didn’t just ingnore these facts. He purposefully obsfucated them to slant the report in favor of this administration. He did the opposite to the past administration. One that doesn’t align with his political ideology.

    Comment by Fashion — October 20, 2009 @ 2:43 am

  2. [...] think. People watching the election results in Athens, Greece No other world leaders come close. Year-end Deficit Report, Part 1: AP’s Crutsinger Ignores Effect of Accounting Change, Growth in Na… – bizzyblog.com 10/20/2009 Though its $1.4 trillion red-ink result was mostly known well ahead of [...]

    Pingback by COACHEP » Blog Archive » Posts about Obama Surrenders Afghanistan as of October 20, 2009 — October 20, 2009 @ 4:08 am

  3. About the so-called “Bush recession”, a lot of people say that the mortgage bust is what initially caused the current climate, right? Well, I recall numerous times Bush tried to introduce legislation reform Fannie and Freddie and was shot down by the democrats in congress both when they had and didn’t have control. (Remember, even when the Repubs had a majority the dems could still override things because a slim or weak majority does not give you control, laws are passed via 2/3rds not purely on numerical party majorities and the dems still had the numbers to impact the “Republican controlled congress”.)

    So Tom, I think you have it right on the head, it’s the POR Recession, not Bushs. Whatever Bush may or may not blamed for in regards to “helping” the recession, it was but a small pebble creating a tiny inconsequential ripple in a vast Democrat pond. People say, “well, Bush raised the housing quotas” but the problem was not the amount of the quotas but their existence in the first place, even if he had lowered them the collapse still would have happened as the perverse incentives supplied by quotas were already deeply entrenched and there was pressure to lend to risky homeowners even above any official quotas. I’ve also heard some folks say, “well, couldn’t he abolish Fannie and Freddie?” Unfortunately, a president has to enforce legislation that is passed whether he likes the law or not. Once his or her veto is overruled, the hands are tied. F and F were entrenched in law. It’s part of the separation of powers. Unfortunately in some cases a POUTUS power to dictate to individual government agencies/institutions is not absolute. (Well, used to be.) They are supposed to have a degree of independence. Bush could not have told those two GSE’s “you’re going to wreck the economy, stop what you’re doing, I demand it.” It don’t work that way. (Or at least it didn’t before Obama.) Hence why the Bush admin had to go through the legislative route to get anything done. But I’m not sure even that would have worked as the two GSE’s were so powerful and corrupt by then.

    Sorry for rambling, I tend to do it sometimes.

    P.S. This is not really relevant and may be somewhat inappropriate, but do you know, Tom, when Michelle Malkins site and Hot Air were be open to registration again? I’m not sure how deep your connection to those sites are (they are both under the MM banner for those who don’t know) but do know the two of you are linked and she has cited you from time to time. So I wonder if you would know? I’d e-mail those two sites but I think e-mails sent there filter through several people and not directly to the site runners themselves (correct me if I’m wrong.)

    I saw numerous dumb things said on those sites by lib trolls today that I could easily have destroyed by was dismayed that registrations to make comments are closed on both sites. It’s so frustrating to know that you can easily pop some lefties bubble but are physically prevented from doing it. Agh. They seem to have been closed forever now, too many users perhaps?

    Also, what’s wrong with AllahPundit these days? He seems to be stuck in RINO-land anymore. Today he was covering for Dunn s statements stating that the Obama admins wants to control the media and does not what them (media) to ask why about things only about what. According to him, those statements are not sinister and then launches into a twisty word-mincing explanation as to why not. Yikes! I hope AP is not heading toward LGF territory. He does cover for Obama quite a bit. When will people learn that lefties aren’t fair and balanced and you can’t treat them that way and giving credence to their spin won’t earn you any congratulations from them on your supposed “balance” and ‘moderation.’

    Comment by zf — October 20, 2009 @ 5:31 am

  4. #2, I don’t know when registrations reopen. It seems random. They let you know and they you have about 12-24 hours.

    I am very fortunate to have MM’s and HA’s attention from time to time.

    Allahpundit has always been a bit of a mixed bag, but no, I don’t see a trip to LGFland in their future.

    Comment by TBlumer — October 20, 2009 @ 7:47 am

  5. Wow, that last post I made was ridiculously long.

    Thanks for answering. I’ll guess I’ll check back there from time to time. The annoying comments will probably be old news by then but at least I’ll be set for the future.

    Comment by zf — October 20, 2009 @ 8:28 am

  6. Remember that Obama and the Dems voted for everything for which they blame Bush. In fact, the deficit was dropping precipitously until the Dems took over Congress in ’07.

    In addition, BHO stood in the well of the Senate and spoke in favor of TARP I, which according to John Kerry, the whole thing was Doh!-bama’s idea!

    Comment by Joe C. — October 20, 2009 @ 12:00 pm

  7. #5, that’s a useful reminder. It’s very easy to overlook and/or downplay.

    Comment by TBlumer — October 20, 2009 @ 12:02 pm

  8. Ehem, ehem… How many people took advantage of the $8k first time home owners refundable tax credit? I’m hearing figures in the 300k level. errrr, 300k x $8k = $2.4 billion. I know it’s chump change but has this been noted in the upcoming reduction in net government revenues by April 15th, 2010? With 300k+ individuals taking an $8k refundable tax credit, the IRS will be taking in a significant amount LESS. Is anyone at this point saying revenues will be up next year? So what happens if Congress gets serious about the $15k credit for everyone? Is that even sustainable?

    Comment by dscott — October 20, 2009 @ 2:17 pm

  9. The analysis here is informative and helpful to those of us taking time to debate the “the government had to do something” crowd. The massive government spending is simply gross.

    Comment by Michael — October 20, 2009 @ 2:21 pm

  10. #8, there are other similar examples (30% credit for energy-related stuff like furnaces, to name just one), which will not have a full impact until 2010.

    #9, thanks.

    Comment by TBlumer — October 20, 2009 @ 3:50 pm

  11. I know I have presented the premise that tax revenue is proportional to economic activity. It’s simply too hard to believe tax collections are down but the economy is up, it just doesn’t intuitively jibe.

    I forgot if I asked this question before: Can you do a chart comparing historic tax collections versus the GDP? Is there a relationship and if so, is there a time lag or is it contemporaneous/instantaneous? This would go a long way of blowing up the propaganda that the recession is over when it it NOT.

    Comment by dscott — October 24, 2009 @ 10:03 am

  12. #11, part of the conundrum is solved by looking at the BEA’s various versions of the GPD report. What you find is that government was the only sector where GDP grew. If it weren’t for government, it would have contracted by 2% last quarter instead of 0.7% (see here).

    The Dems and Obama would say this proves the govt “stimulus” was needed. I say it made investment decisions that could have been left in better hands with targeted and general tax cuts.

    If GDP is positive this quarter, the thing to look for is what it would have been without government to get a fix on sustainable reality.

    Comment by TBlumer — October 24, 2009 @ 6:28 pm

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