Federal Budget Needs Accrual Accounting Methods

Wednesday, 03 Apr 2013 07:39 AM

By Gary Jakacky

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Why does the largest economic entity in world history keep track of its finances using bookkeeping records that would embarrass an accounting freshman? In more layman terms, why does Washington have only an income statement and not also a balance sheet?

While the effort to produce such books would be a challenge — more about this in a minute — it would be one huge step in trying to explain contradictory events such as record low interest rates and inflation, at the same time we have record high budget deficits and unfunded mandates such as Social Security and Medicare.

If these large and growing liabilities are being offset by swelling government assets — our national forests, interstate highways and so on — then the perplexing result largely disappears.

There is no reason why reasonably defensible estimates of the value of government assets could not be obtained. Consider the interstate highways. We have, in many areas of the east, toll roads, which generate income from those users willing to pay for the convenience of a limited-access facility. Here in Massachusetts, try driving from the Berkshires to Boston on Route 20 instead of the turnpike, and you'll quickly come up with a very good estimate of how much you'd be willing to pay in tolls.

Capitalizing the value of this income, a very reasonable guestimate of the value of our nation's highways could be obtained. And much like businesses, we could estimate these values conservatively.

Much the same could be done for everything from national parks and forests to airports and waterways. Enough parallel examples exist in the private sector (for example, aquaculture) that even "priceless" assets like freshwater lakes and scenic vistas can be reliably valued. The total value of such assets would easily be in the trillions: a map of the United States shows the vast majority of property west of the
100th meridian to be federal land.

From there it is a few short steps toward having both an income statement (tax revenues vs. expenditures) and a balance sheet (tangible and intangible assets on one side, liabilities and even capital on the other). No ridiculous anguish over ratios between gross domestic product (an income number) and our national debt (a balance sheet item).

Why has this not happened in the United States, as it has successfully been implemented in Australia and New Zealand? Since adoption in those countries, government spending has come under far more control than here in the United States.

One simple reason.

Spending on social programs, much like consumer purchases of candy and food, creates no lasting assets and no stream of income to pay off debt later.

In contrast, spending on items like highways, forests or even aircraft carriers does create tangible assets. It also creates income: the Forest Service loves to point out that $1 spent to plant a tree returns $6 to the U.S. treasury alone — above and beyond that generated in the private sector.

Even conjectural speculation is helpful. Here in western Massachusetts, the Quabbin reservoir, Boston's chief source of their water supply, boasts a capacity of 412 billion gallons. At $3 a gallon, the price Bay Staters pay for bottled water that has (presumably) less chlorination and trace minerals, Quabbin alone cashes in at a cool $1.2 trillion.

In contrast, under an accrual accounting system, social programs stand out as ineffective uses of government funds. Of course, it is not the accrual method that is to blame here: the accrual method is the messenger, not the message.

But you can be sure those dependent on federal government largesse through transfer payments and subsidies (Mitt Romney's 47 percent) are not about to support a bookkeeping system that reveals the bankruptcy of such programs.

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