Economy Watch

Q&A with Hon. Joseph J. DioGuardi

July 6, 2011

Is the current US monetary system Constitutional?  Is it corrupt?  What can be done to make it more honest or effective?

Constitutional or not, from a technical legal point of view, the question should be, “Is it working?”  Let me begin by saying that I do not believe that the Federal Reserve is corrupt, but I do believe that it can be made more effective.  I am neither a lawyer nor an expert on our Constitution, but I do have a perspective on this.  One of the most important aspects of our democratic system of governance is the separation of powers and the “checks and balances” that go with it.  For those who feel strongly that the Federal Reserve should not be an independent part of government, where would they suggest that the important function of monetary policy dealing with interest rates, inflation, and the money supply be placed?  As part of the Executive branch?

I think that from a practical and common-sense point of view, the answer is obvious.  The public’s perception right now is that government is not working for the public benefit.  Our budget policy, which deals with taxing, spending, and borrowing, is a mess due to political gridlock and partisan bickering, primarily motivated by reelection.  As an independent “agency,” the Fed is not subject to our electoral system, answering directly to the public through Congressional hearings and its own public pronouncements.  What needs to be done is to make the Fed more transparent through independent audits and annually published financial statements so that the public knows the size of its balance sheet, which is approaching $3 trillion dollars as of this writing.  Other important aspects of its operations and policy making activities can be disclosed through public press conferences from time to time.

How could Congress be held more accountable?  Who would regulate and what would stop a regulatory body from becoming corrupt?

Congressional accountability begins with transparency and better information, when it comes to public policy and government finances.  Thomas Jefferson once said that, “Information is the currency of democracy.”  So good information—the truth—that is easily accessed by the public is the best way to strengthen our system of representative government today.  One of the ways to make Congress more accountable is to reform the budget process so that the highest professional standards of accounting are used to calculate (and publicize) our real annual deficits and the national debt (for which numbers ranging from almost $15 trillion to over $60 trillion have been calculated and made public by the Treasury Department and various public interest groups).

As for who would regulate our federal departments and agencies, the Executive branch already does this through its law enforcement agencies such as the International Revenue Service, the Securities and Exchange Commission, a cadre of Inspectors General, and the Immigration and Naturalization Service, to name just a few.  The Legislative branch enhances the regulatory process by exercising Congressional oversight through House and Senate hearings, audits by the Government Accountability Office, and budget forecasts by the Congressional Budget Office.

The only way to effectively stop members of the Executive and Legislative branches from becoming corrupt is by making sure that we have a transparent and fair process of elections and appointments to attract the most honest and competent public servants to begin with.  This will require more independent electoral redistricting panels every ten years and a system of campaign financing that levels the playing field between incumbents and challengers.  After that, we need an independent ethics committee over each branch of government to investigate individuals and recommend for prosecution those who abuse the public trust for their own benefit.  I introduced legislation to implement such a process with a prominent member of the Democratic Party in the House of Representatives in August 1988, but to no avail.

What is the worst that could happen to the US dollar and global markets if the federal government continues to exhaust the ability to borrow?

The US dollar today is a worldwide reserve currency because of the traditional strength of the US economy and the triple-A rating that US Treasury-issued debt obligations enjoy.  But, today we face at least three major emerging challenges that could reduce the global primacy of the US dollar in years to come if effective action is not taken now.  For one, the US economy has been in the doldrums since the current financial crisis began in September 2008 and has not created the job growth necessary to maintain necessary levels of tax revenues and spending (without borrowing) to sustain its globally sound economic footing over the long run.

Secondly, the political establishment in Washington and in the States has not shown the ability to live within their means.  They have continued to spend money they do not have, adding huge amounts to already massive federal and state debt obligations and by not funding entitlements and other retirement obligations that must be paid in the future.

Lastly, countries like China and Saudi Arabia do not share American, democratic values, and yet we find ourselves hostage to their money and oil as we consume more and more than we produce.  China estimates annual economic growth of more than 8 percent, while the United States had reduced its estimate for 2011 to under 3 percent.  China has an annual trade surplus with the United States of approximately half a trillion dollars, sucking more manufacturing jobs away from us every year.  And China is owed well over $1 trillion, which we have borrowed to fund our annual operating deficits and the wars in Afghanistan and Iraq—not to rebuild our infrastructure.

The interest alone on Chinese debt could surpass $100 billion in the not too distant future as interest rates rise over the next ten years to compensate for the higher levels of inflation that many economists are already predicting because of the massive expansion of the money supply by the Fed to keep interest rates artificially low in an attempt to spur growth.  This dangerous combination of challenges could easily result in the downfall of the US dollar as the world’s reserve currency if action is not taken now to balance our annual expenditures with our revenues, without further borrowing.

What is the biggest concern facing America today?

We are spending money that we do not have, borrowing from countries, like China, that we do not really trust, and in the process putting the American dream of economic and social opportunity, self development and prosperity, and our national security and individual liberty in jeopardy for the first time since we declared independence from England.  Have we survived a civil war, a Great Depression, and two world wars, only to succumb to fiscal profligacy, political inertia, a lack of leadership, and economic incompetence?  I think not—but bold action and leadership are needed now before it is too late.

Joseph J. DioGuardi, a CPA and former Congressman who represented Westchester County, New York, for two terms (1985-1989), is a public advocate for fiscal responsibility as the leader of Truth In Government (www.truthingovernment.org), a nonpartisan, nonprofit organization.  The second edition of his Unaccountable Congress:  It Doesn’t Add Up was published in August 2010.

Dear Friend,

Public concerns over our annual runaway federal deficits and our huge national debt now equal concerns over our failing economy.  In 1980 our national debt stood at about $800 billion—an amount accumulated over 200 years.  In just three decades, that debt has increased almost twenty times over.  The national debt, excluding unrecorded and unfunded liabilities for Social Security and Medicare (estimated at $50 trillion dollars), will exceed $15 trillion by the end of this fiscal year, September 30, 2011.  By 2017 it is projected to exceed $20 trillion.  Even if rising interest rates remain at around 5 percent, the interest on the national debt alone will reach well over $1 trillion in ten years.

And who benefits from interest on our national debt?  Not the impoverished, the unemployed, or even the States (which are collectively in terrible fiscal shape), but investors in America and abroad who have sought the financial safety of US Treasury bonds, bills, and notes.  That includes countries like China, which currently is owed the largest portion of our debt to foreign nations.  Worse still, we are being held hostage to countries that clearly do not share American values—in particular, China for money and Saudi Arabia for oil.

When you examine the real numbers, not the numbers that our Treasury Department focuses on each year, the reality is direr.  At the federal level, there are myriad off-budget gimmicks, unrecorded liabilities, and financial management manipulations on a scale that would put many executives of publicly traded companies in prison for securities fraud.  The bottom line is that our budget process has been broken for years, and the accounting system used by the federal government in the budget process is a fraud by Securities and Exchange Commission (SEC) standards.

Deficit reduction and effective financial management require a sound budget process, including fair and objective accounting standards.  But, most of all, they require political will.  Congress, driven by its primary motivation for reelection, makes the situation worse by deferring meaningful reforms.  Everyone in Washington decries the ballooning federal deficit, but no federal officials seem to have any real plan or intention to solve the problem.  What is lacking is the leadership of those with the financial expertise to rise up as informed citizens to lead America in a new revolution to straighten out our government’s budget process and financial records.  Only in this way can America look forward to an economically sustainable future.

I tried to lead the way in 1992 as chairman of a Blue Ribbon Task Force on Truth in Budgeting and Accounting, sponsored by the Association of Government Accountants.  In setting the stage for our Committee’s recommendations, our final report said that, “Weak government-wide budgeting and accounting systems produce insufficiently

reliable information about how the government spends its funds and how decisions made today will affect tomorrow’s taxpayers.”  An even worse indictment of the Congressional

budgeting process followed in the report language, which said that the budget process “commonly relies upon imaginary revenues, ignores unfunded obligations, and makes use of numerous other practices lacking economic and accounting reality.”

The Task Force, which was made up of some of the country’s top government accountants, went on to recommend six reforms, three of which cry out for action today—

1. The adoption of sound accounting and budgeting principles, including the need to use “generally accepted accounting principles” (GAAP), which will require the use of an accrual basis of accounting—not the current cash basis used in the budget process—to realistically capture and recognize all unrecorded, contingent, and unfunded liabilities and obligations.  Also recommended was the integration of budgeting and accounting standards, since budget formulation begins as much as 18 months before the onset of a fiscal year, whereas final accounting and financial reporting occur far too late to have any impact on misleading budget practices or spending estimates.
2. The adoption of separate budgets for general funds, trust funds, and Government Sponsored Enterprises (GSEs).  This was recommended by the Comptroller General in October 1989 to avoid treating the three areas as economically equivalent.  Under this reform, trust fund surpluses could no longer be used to reduce the general and GSE parts of the budget, giving the public a far more accurate picture of the federal government’s spending activities.
3. The adoption of a capital budget to plan and control long-term asset expenditures such as buildings, space satellites, expensive weapon systems, and other capital items with a useful life longer than one year.  Right now capital expenditures are shown as part of the annual deficit, which treats infrastructure expenditures as a current expense, not as an asset that can help the future through jobs and other long-term benefits.

The big debate taking place today in America is about the current fiscal crisis and the fast-growing national debt.  The United States is spending huge sums of money that it does not have, forcing us to borrow from foreign countries that do not share our commitment to democracy and human rights, and passing on trillions of dollars of unfunded debt obligations to future generations.  As a result, we are threatening the very foundation of our democracy and the prospects of the next generation to achieve the American dream of self-development and prosperity.  Estimates of our debt range from $15 trillion (100 percent of our Gross Domestic Product) to well over $60 trillion (over 400 percent of our GDP).  Without proper accounting and budgeting, our elected officials will continue to give us the numbers that they want us to hear, not the numbers we need to know to wake up America before it is too late.

Hon. Joseph J. DioGuardi

Our National Debt Is a Ticking Time Bomb

by Hon. Joseph J. DioGuardi

On April 20, 1997, I published an article in The Washington Post, entitled “Debt is Making Us Poor.”  As a Certified Public Accountant (CPA) and former Member of Congress, I said that every citizen has the right to know the real cost of government, and I converted the annual budget of the U.S. government into an easy to read and understandable credit card statement.  I wanted to make the point, loud and clear, that we are living on borrowed money and on borrowed time.  The last line in that “Taxpayer Credit Card Statement” showed that all U.S. taxpayers collectively owed $4.5 trillion at the end of 1996 and that each taxpayer owed $45,433.  Incredibly, the national debt, subject to the statutory debt ceiling, has since skyrocketed to $14.3 trillion, and so today each taxpayer owes $143,000.

But, even worse, that number is actually inaccurate.  Politicians do not want you to know that there is another $40-to-$50 trillion in unfunded liabilities (depending on how you measure the projected shortfall in Medicare) that would bring each taxpayer’s share of US total debt obligations and liabilities to well over $500,000.

For those of us who are professional accountants, the real numbers are hiding in plain sight—much like Osama bin Laden in Pakistan until he was killed this month by U.S. forces.  The real national debt can be found in the “2010 Financial Report of the U.S. Government.”  Just visit the website of the U.S. Department of the Treasury and click on FMS under “Bureaus” and then go to “Publications.”  There you will find the following information for the U.S. fiscal year ended September 30, 2010:

Publicly held and intra-governmental debt represented by

Treasury bills, bonds, and notes                                                              $ 13,637 T

Medicare, Parts A, B, and D                                                                          22,813 T *

Social Security                                                                                                 7,947 T

Federal Employee Pensions and VA Benefits                                                 5,720 T

Other                                                                                                             1,673 T

$ 51,790 T

Gross Domestic Product (GDP) for FY 2010                                             $ 15 T

Debt and liabilities as % of GDP                                                                351%

* This number was actually $15.3 trillion greater in FY 2009, but was reduced by questionable savings projections under the healthcare reform act passed in 2010.

While the United States has been able to sell huge sums of debt because the market for our Treasury obligations is the largest and is considered safe, Brian Coulton of Fitch Ratings in London warned in a February 8, 2010 article in Forbes that “once rock-solid economies like the U.S. and the U.K. could join shakier nations like Japan and Ireland in losing their AAA ratings if they don’t get their bad habits under control.”  He said further that “very high and rising government debt-to-GDP ratios are ultimately not consistent with AAA status.”

The basic issue today is the unsustainability of the United States as a financially viable entity.  Federal fiscal practices are grossly inadequate and even dangerous to American economic sustainability now and in the future.  Most notable for addressing this issue is the National Commission on Fiscal Responsibility and Reform appointed by President Obama.  The Commission’s formal report recommended changes in government policies that will have the most impact on future deficits and our national debt, including discretionary spending cuts, tax reform, healthcare, and Social Security.  The Commission warned that unless we stabilize and reduce the national debt, we could spend $1 trillion a year in interest payments alone by 2020, when our national debt subject to the statutory debt ceiling is projected to be well over $20 trillion at current spending levels.

The debate on spending and entitlement reform is getting even more politically heated as we contend with raising the current federal debt limit of $14.3 trillion, the budget for fiscal year 2012, and the impending Presidential election.  But, lost in all of the outrage over the huge federal deficit and national debt is something that every CPA knows and virtually all politicians in Washington, DC, do not want to acknowledge.  The budget and accounting shambles of the US government flow from many budget gimmicks, unrecorded (“off budget”) liabilities, and financial manipulations on a scale that would put many executives of publicly traded companies in prison for securities fraud.  Sadly, at the heart of America’s fiscal fiasco is a double standard that enables the Congress and the President to fudge the real numbers, thereby collectively misrepresenting the dire financial condition of the U.S. government until it may be too late to take corrective action.

Joseph J. DioGuardi represented Westchester County, New York, in the U.S. House of Representatives for two terms (1985-1989).  He is a public advocate for fiscal responsibility as the leader of Truth In Government, a nonpartisan, nonprofit organization (www.truthingovernment.org).