Truth's Flashlight

Measured Properly, Things Are Much Worse Than You Are Being Told

from Economicnoise

Little the government does is efficient or effective. As this becomes more apparent to increasing numbers of people, government resorts to propaganda and lies to hide the true condition.

Nowhere is this duplicity more prevalent than in the reporting of economic information. Anyone with above a room temperature IQ marvels at the claims that employment is improving or that the unemployment rate is going down. Similar amazement occurs with other economic claims which contradict every day experience. Reported inflation statistics is just one example of the contradiction.

Statistical methodology is routinely changed to make numbers look better (or less worse). Collection techniques are changed for the same reason. None of this chicanery is new. It began with President Kennedy on a small scale and then accelerated under his successors. Sometimes the government outright lies in order to present things in a better light.

Two major areas, little understood by most in the public, are especially egregious:

Gross Domestic Product

Government accounting for GDP is filled with questionable practices to make the numbers look better. According to Shadowstats.com, GDP over the years has been the beneficiary of “Pollyanna Creep” which he describes as follows:

… where changes made to the series invariably have had the effect of upping near-term economic growth. Whether the change was to deflate GDP using “chain-weighted” instead of “fixed-weighted” inflation measures, to capitalize rather than expense computer software purchases, or to smooth away the economic impact of the September 11th terrorist attacks, upside growth biases have been built into reported GDP with increasing regularity since the mid-1980s.

The effect between government reported GDP and John Williams’ adjusted GDP “reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting” and have become substantial over the years. Graphically, the two measures are plotted below:

According to Mr. Williams, adjusted GDP has been stagnant or declining since late 1990, a period of over two decades. Can that be? Aren’t we always told that GDP grows except in a recession? That is what we are told, but our own eyes and pocketbooks tell us otherwise. Why has the middle class been losing ground over the last twenty or thirty years?

Government Deficits

Government accounting for its income and expense is likewise misleading but is so for another reason. Government measures deficits on a cash basis (and even that is subject to accounting gimmickry via classification games). Last fiscal year the government reported a deficit of $1.3 Trillion. The problem is that cash accounting grossly understates the seriousness of government’s condition.

At the risk of glazing your eyes over, let me try to explain. All major companies use GAAP, Generally Accepted Accounting Principles, to report income. The primary difference between cash basis and GAAP is the use of accruals which are used to match costs with revenues, regardless of whether they occur in the same time period. To illustrate the difference here is a simple example:

John Doe builds an airplane which costs $90,000. He sells the plane for $100,000. If the costs are paid and the revenues are received in the same year, John’s income would be $10,000. It would be so regardless of whether GAAP or cash basis accounting were used. But now, suppose John instead collects the revenue from the sale this year but doesn’t pay his suppliers until next year. On a GAAP basis, John would still show a profit of $10,000. On a cash basis, however, John would show a profit of $100,000 this year and a lost of $90,000 next year.

Government accounting has the same distortion. That is, revenues are recognized up front while incurred expenses are not. They are back-loaded primarily due to the costs incurred for social security and medicare promises which will not be paid out in cash until future periods. The revenues from these programs are being recognized today while the bulk of the expenses, which will have to be paid down the road, are not.

No big deal you might think. But what is the difference between what the government reports as their loss (deficit) for the year on a cash basis versus a GAAP basis? The government reported a deficit of $1.3 Trillion last year. Using GAAP, their real deficit wasalmost $6 Trillion. The difference between these numbers equals the amount of debt that Obama added in the last 3.5 years, although has nothing to do with Obama’s addition to the debt. The difference represents additional debt that must be funded down the road. This additional need is not a one-shot or one-year deal. It occurs every year but in increasing amounts. On a present value basis (the future shortfalls in Medicare and Social Security discounted back to the present) represent over $100 Trillion according to the trustees for these funds.

Are we talking semantics or accounting gimmickry here? No, GAAP recognizes costs as they are incurred, not when they are paid. That is proper accounting and produces a much more dismal picture of events than government wants you to know about. The only way that this shortfall is not real is if the promises made under Social Security and Medicare are reneged upon by the federal government.

In effect, government is incurring costs this period but not paying for them until next and other future periods. That raises their reported income (actually it reduces their reported deficit) now, with much higher future losses when the incurred expenses are actually paid (as in the simple airplane example above).

The following article is from Dennis Cauchon and appeared in USA TODAY. He discusses where the differences occur:

The typical American household would have paid nearly all of its income in taxes last year to balance the budget if the government used standard accounting rules to compute the deficit, a USA TODAY analysis finds.

Congress exempts itself from including the cost of promised retirement benefits.

Under those accounting practices, the government ran red ink last year equal to $42,054 per household — nearly four times the official number reported under unique rules set by Congress.

A U.S. household’s median income is $49,445, the Census reports.

The big difference between the official deficit and standard accounting: Congress exempts itself from including the cost of promised retirement benefits. Yet companies, states and local governments must include retirement commitments in financial statements, as required by federal law and private boards that set accounting rules.

The deficit was $5 trillion last year under those rules. The official number was $1.3 trillion. Liabilities for Social Security, Medicare and other retirement programs rose by $3.7 trillion in 2011, according to government actuaries, but the amount was not registered on the government’s books.

Contrasting deficits

The federal government calculates the deficit in a way that makes the number smaller than if standard accounting rules were followed (in trillions).

Deficits are a major issue in this year’s presidential campaign, but USA TODAY has calculated federal finances under accounting rules since 2004 and found no correlation between fluctuations in the deficit and which party ran Congress or the White House.

Key findings:

•Social Security had the biggest financial slide. The government would need $22.2 trillion today, set aside and earning interest, to cover benefits promised to current workers and retirees beyond what taxes will cover. That’s $9.5 trillion more than was needed in 2004.

•Deficits from 2004 to 2011 would be six times the official total of $5.6 trillion reported.

•Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.

“By law, the federal government can’t tell the truth,” says accountant Sheila Weinberg of the Chicago-based Institute for Truth in Accounting.

Jim Horney, a former Senate budget staff expert now at the liberal Center on Budget and Policy Priorities, says retirement programs should not count as part of the deficit because, unlike a business, Congress can change what it owes by cutting benefits or lifting taxes.

“It’s not easy, but it can be done. Retirement programs are not legal obligations,” he says.

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