September 3, 2010

It’s the Spending, Stupid (or ‘How a $115 Billion Accounting Entry Is Misleading the Nation About the Deficit’)

Filed under: Economy,Taxes & Government — Tom @ 1:08 pm

Federal spending is out of control. Even the nominal spending and deficit reductions claimed by the Congressional Budget Office aren’t real.


Note: This column went up at Pajamas Media and was teased here at BizzyBlog on Wednesday.

Thanks to Real Clear Politics for linking to the PJM column.


If the ad agency that produces those MasterCard “Priceless” commercials ever wrote a commercial that critiqued government spending, it would go something like this:

  • Annual salary and benefits of Bell, California’s former city manager: Over $1.5 million.
  • New 4,200 K-12 school complex in Los Angeles for 4,200 students: $578 million.
  • One earmark for a “near-zero emissions coal power plant in Illinois that the (U.S.) Dept. of Energy (had previously) defunded because the project was inefficient”: $2 billion.
  • Spending appetite of government at all levels: Bottomless.

The above recitation illustrates that as bad as the Bell and LA examples are, it’s the federal government that can waste money like no other entity ever seen on Planet Earth. Fiscal restraint has of course been a problem for decades, but the spending that has occurred under congresses controlled by Democrats since 2007 has taken this country to the edge of a fiscal and economic precipice.

A little-known fact is that federal spending rose by only 2.8% during fiscal 2007 under the final budget passed by a Republican Congress. I know, 0% would have been preferable, and it was way too little and too late for a bunch that had let spending grow way too quickly during the previous five years.

Then came the Democrats. Spending during the fiscal year that ended in September 2008, the first full budget year under the control of Nancy Pelosi and Harry Reid, increased by 9.1% to almost $3 trillion. That percentage increase was greater than any Republican Congress under George W. Bush.

They were just warming up. Fiscal 2009 brought the beginning of the $787 billion (before interest) “economic stimulus plan.” All but those in serious denial acknowledge that it has failed to revive the economy, which economist David Rosenberg described on August 25 as already being in a depression. Despite representations to the contrary, the stimulus plan had 9,000 earmarks, including that $2 billion Illinois energy debacle. More generally, entitlement and other spending went into overdrive. Fiscal 2009 ended with a reported deficit of $1.416 trillion.

Recently, the Congressional Budget Office estimated that the deficit for fiscal 2010 will be a bit lower, predicting a figure of $1.342 trillion (see page three at this large-PDF report) after the dust settles. Wowee zowee.

The problem is that both last year’s and this year’s numbers are fudged. Even before considering the off-budget baloney and the Fed’s massive “quantitative easing,” each of which would require at least an additional column to treat properly, Uncle Sam’s real 2009 deficit was $115 billion lower than reported, while the 2010 deficit, assuming no additional non-cash adjustments, will be higher by the same amount.

This situation is not the CBO’s fault, as it follows the accounting rules implemented by the administration. The problem is with one of those accounting rules.

Beginning in April 2009, the Treasury Department began reporting its “investments” under the Troubled Asset Relief Program (TARP) using what is known as “Net Present Value” accounting. As I noted in a May 2009 column, this was a major departure from the cash-in, cash-out reporting people had come to previously expect, and which most believe still occurs.

Here in capsule form is how it works, and what occurred that has distorted reported results:

  • The government no longer treats the money “invested” in propping up banks, other financial institutions, car companies, and other businesses as “outlays.” Similarly, it doesn’t recognize principal repayments as receipts.
  • If (more like when) it becomes clear that the government isn’t going to get all of its money back, Treasury estimates how much those losses will be, and includes that estimate in “outlays.” This is a highly judgmental calculation that is vulnerable to political manipulation. During fiscal 2009, Treasury write-downs amounted to hundreds of billions of dollars.
  • But in March 2010 (shazam!), Treasury decided that it had overestimated its fiscal 2009 TARP losses. It arbitrary revalued its TARP investments upward by $115 billion, thereby reducing reported 2010 “outlays” by the same amount.

Here was my plain-English summary of that $115 billion adjustment when it occurred:

… the administration pushed as much “bad news” (asset writedowns) as it could into last year’s financial reporting, since last year was going to be a disaster no matter what. But since they overdid it with the writedowns last year (“Gosh, how did that happen?”), they can make this year look better than it really has been.

After adjusting for the $115 billion non-cash item just noted (and wryly noting that TARP somehow is treated as “mandatory spending”), and assuming that there are no more surprise TARP writedowns or writeups before the end of the current year, here’s how things really turned out last year, and how they will end up this year if the CBO’s estimates are otherwise accurate (all figures are in billions; numbers that changed from CBO’s original are highlighted):


Well, well. While the administration and CBO will claim that spending and the deficit started to head downward in fiscal 2010, the reality is that fiscal 2010 will be significantly worse on both fronts.

One look at Table 3 in the July 2010 Monthly Treasury Statement confirms that there has been no letup in spending in most areas of the government. There’s a lot of competition for the most offensive increase, but my nominee would be the Department of Education, which through July had spent almost $81 billion compared to “only” $42 billion as of the same time last year. It would be nice to think that nearly doubling federal spending and building Taj Mahal schools with local tax dollars have made American students twice as smart. Dream on.

The administration’s accounting shift cleverly masks what it has really been up to during its nineteen months in office: Creating a permanently high spending structure that will become ever more difficult to reduce to a decent size when (or if) sanity finally prevails. A year ago, Victor Davis Hanson called this the “Gorge the Beast” strategy. Its aim is to justify tax increases and enhance the power of the ruling class over everyone else.

It must be stopped. A massive change in Congressional representation in Washington is a prerequisite, but it will only be a start.



  1. You know Tom, the central justification by liberals for this out of control deficit spending under these current circumstances is the (risible) claim that IF they didn’t spend the money MORE jobs would have been lost, thus the “Saved or Created” meme.

    It seems to me while Americans intuitively know via a subconscious level that this wild spending is bad, they haven’t been adequately given the conscious explanation OR example that debunks the fallacy Obama and the liberals are operating under. There are actually two main fallacies the liberals are foisting here, the broken window fallacy and what I would call the Shackley Fallacy OR what us old timers call so un-PC, robbing Peter to pay Paul.

    Many people are aquainted with the direct sales companies, Amway, Shackley and MaryKay (many others) where consumers are sales people who recruit other sales people to essentially work for them by being a distributor to them. Some consider this a special type of pyramid scheme. One of the perks of being a distributor, especially a 2nd or 3rd tier distributor with high sales volume is that you get a company perk like a car (pink high end car for MaryKay). As long as the sales volume stays up, you keep the use of the car. If your sales volume drops below the cut off point you lose the car. It has happened to many a high tier distributor over time they lose key sales people down stream and thus loose their sales volume threatening their company perk, the car. In desperation, these high end distributors rationalize their downward sales trend as a temporary one time event and what they do is personally invest their assets in buying enough product for inventory to maintain the minimum sales volume to keep that car. What unfortunately happens to some is that downward trend is not temporary but prolonged. Because they are so fixated on the car, there have been cases of people mortgaging their homes, emptying their savings accounts just to keep up the sales volume until at some point the whole effort collapses when they reach the end of their credit limits. In the end, they lose the car. Its a sad personal tragedy for these people.

    Obama with his deficit spending is the high end distributor borrowing against his credit limits, mortgaging the home and for personal reasons we don’t understand and can only speculate on is unable or unwilling to face reality that the car isn’t worth going into bankruptcy for since in the end you lose the car.

    Going back to the broken window fallacy, every dollar of borrowed money and tax revenue is money that is taken from the private sector for government spending. There can be no such thing as government spending $1 to get back a $1.50 in economic activity since the $1 was taken from economic activity in the first place. When you rob Peter to pay Paul there is zero net economic activity and the only way to show more is to NOT count the dollar you borrowed as the dollar you spent which is the central fallacy of Keynes. Thus in the real world, the net is NOT a 50 cent gain but a 50 cent LOSS. Cuba is the example of this fallacy, as 95% of all workers are employed by the government. Any income tax revenue collected for a government worker is merely a repayment to the government, not an increase in economic activity. Hence Cuba’s only net economic activity is the sugar it exports and tourism dollars injected from foreigners entering the country minus the oil they are forced to import. Because these two activities are down, Cuba is now ready to LAYOFF government paid workers because they can’t borrow to subsidize them, the oil must flow otherwise everything comes to a standstill.

    Tom, this is the message we need to convey in a concise manner that is quickly recognizible by the average person. Only then will Obama and the liberals be totally discredited by the exposure of their flim-flam.

    Comment by dscott — September 4, 2010 @ 7:43 pm

  2. #1, I don’t follow the car example, unless it’s a perk that you only get to keep as long as you keep up the sales volume. That seems odd; I thought the car was a flat-out award that you kept regardless. It seems like it would be lot of trouble for the company to get it back. But assuming you’re right, that can be a real trap.

    As to concise message, I sort of like “If you like the POR (Pelosi-Obama-Reid) Economy, keep voting for Democrats.”

    Comment by TBlumer — September 6, 2010 @ 8:52 am

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