2010 Foreword for Unaccountable Congress: It Doesn't Add Up

Friday, January 1, 2010

When Unaccountable Congress: It Doesn’t Add Up was first published in 1992, the Chief Financial Officers Act that I authored as a New York Congressman had been signed by President George H.W. Bush just two years earlier. It seemed like the government’s standards for financial reporting might be improving, and that we were headed for real reform. The bill had been watered down some, but it still created a chief financial officer for each of the federal departments and agencies, and gave the Office of Management and Budget more control. The future had the potential to be brighter and the taxpayers more informed about where our money was going.

 

Now, at the 20th anniversary of the Chief Financial Officers Act, our government continues to operate behind closed doors regarding its budgeting process, the national debt is skyrocketing out of control into the trillions, and we recently witnessed a near collapse of the entire U.S. economy—thanks to the same old shell games in Congress. We still haven’t learned the lessons of the past regarding accountability in federal budgeting, and as a result we continue to stare into the heart of a “gathering storm” (to use the prophetic words of Winston Churchill). But most important, we aren’t addressing the root cause of our massive debt: bloated government, which, if the current Congress has its way, will only expand more. In the absence of sound accounting and sound budgeting, we lack information for decision-making and invite gimmickry and half-measures, rather than leadership.

 

We must act now to keep our country solvent. The situation is urgent. The President, his cabinet, the members of the House and Senate can pretend in front of TV cameras that we have the luxury of time and that we need only increase our debt ceiling by another trillion or two, and the country will be fine—but they know that our economy is literally living on borrowed time and borrowed money. The big spenders in Congress believe that bigger government is the answer, and they keep pushing up the ceiling on the national debt.

 

Now the good news: the American people are smart. They know that smaller government is the answer, and they are willing to get off the couch and get involved to create the government they want.

 

 

THE SCOTT HEARD ‘ROUND THE WORLD

 

As of this writing, the biggest surprise in the Obama-era political arena has been the January 2010 election in Massachusetts of Scott Brown to the Senate seat previously occupied the late Edward Kennedy for more than 45 years. The moderate Republican ran a positive campaign based not only on defeating the healthcare bill, but also on accountability and reform. The voters of Massachusetts who sent Brown to the Senate signaled the seismic shift in the U.S. political atmosphere at that moment; more citizens, particularly independent-minded people in all political parties, are finding constructive ways to express their anger at the unaccountable Congress and the Obama administration’s agenda of more intrusive government.

 

 The surge in citizen activism is personified by the Tea Party movement, which started primarily as a reaction to healthcare reform legislation. When the Obama administration and Congressional representatives dismissed the first Tea Party march in April 2009, the activists’ resolve only strengthened and their numbers grew. The mission expanded from exercising First Amendment rights to making Congress more responsive to their electorate. The Tea Party movement attracted and energized the fiscal conservatives in Massachusetts to secure a shock victory for Brown in the U.S. Senate race.

 

While Brown’s victory is certainly a significant example of the kind of grassroots activism needed to push the government to act in the nation’s best interests, many of these citizen activists may not be completely informed as to why the national debt is ballooning out of control, or the specific actions that need to be taken to ensure government accountability with their tax dollars.

 

The best way to understand how our national debt affects you as a taxpayer is to think about it in simple terms. If you or your family need to spend more in a month than your actual income, you might borrow money that you will have to repay at a certain interest rate. If you keep doing this, or do not make full and timely payments, your interest costs will rise and eventually exceed anything else in your budget. This is what is happening to the United States; President Obama admitted as much to Steve Scully on C-SPAN in May 2009 when he said, “We are out of money now.”

 

 

IN WASHINGTON, NOTHING IS CERTAIN BUT DEBT & TAXES

 

 Our reported national debt has grown from around $800 billion in 1980—which took two centuries to accumulate—to just over $12 trillion as of September 30, 2009, less than 30 years later. The Obama administration freely admits that it will rise to $20 trillion by 2020—unless we act now. It’s been a mind-boggling increase, fueled by the ever burgeoning size of the U.S. government and the even more staggering amount owed for entitlement programs such as Social Security and Medicare. Do we really need 16 intelligence agencies, especially when their combined efforts couldn’t keep the Christmas Day terrorist off the plane to Detroit? To repeat what I said originally in Chapter 4 of this book, the spiraling deficit will render the United States economy unsustainable and in need of a bailout itself.

 

Why? Because the interest alone on a $20 trillion debt will be more than $1 trillion per year at current interest rates, and these rates will almost certainly rise. Then we’ll have the problem of unrecorded and unfunded liabilities such as Social Security and Medicare, currently estimated at $45 trillion. These programs tend to disappear from the discussion because they are effectively kept off the government’s books and annual financial reports. Worse yet, “baby boomers” in the process of retiring are beginning to receive their benefits now. As of this writing, Social Security will—for the first time, and six years earlier than expected—pay out more in Social Security benefits than it receives in payments. And since we still don’t have outside auditors coming in to oversee government budgeting, spending, and reporting, it’s hard to tell whether future retirees will receive all of the money promised them.

 

Every year since 1969, Congress has spent more than the revenue it has brought in and the number of government agencies and programs has expanded, creatine a mountain of debt on which the Treasury Department must pay interest. The budget “surpluses” claimed by the Clinton administration weren’t surpluses at all—Clinton used the “unified budget approach” started originally by President Lyndon Johnson for the purpose of concealing the real cost of the Vietnam War. Johnson offset the surpluses in the Social Security Trust Fund against the deficit from U.S. government operations in order to show a better result. The same shell game is at work today, but now the Medicare Trust Fund surpluses are also being used to reduce the size of the budget deficit. In the fiscal year 2009, the Treasury spent $383 billion of your tax dollars on interest to holders such as China and Japan. And you wonder why social services or crucial infrastructures such as our roads are in dire need of help? Compare that $383 billion in interest to the paltry $73 billion for the entire Department of Transportation last year; we’re already paying a disproportionate amount for interest and receive no service for the expense.

 

In order for businesses to hire new workers, they need tax breaks and consumer spending—not more tax increases, which are inevitable as interest on the debt grows to become the biggest item in the federal budget. These tax increases will also cause the inflation of consumer goods as corporations pass cost increases on to the consumer. This is the last thing a country struggling with high unemployment needs. To sum things up, the size of the national debt affects the interest rates for borrowing and investing, the federal income tax paid, the price each of us pays for groceries and other goods, as well as the unemployment rate. For all intents and purposes, the national debt is the 800-pound gorilla in the room.

 

 U.S. Senator Sam Brownback from Kansas recently pointed out an important new study presented at the American Economic Association (“Growth in a Time of Debt”) that shows how high national debt bodes poorly for any country’s economic growth. He concluded that annual growth in U.S. gross domestic product (GDP) has averaged considerably less than 4% over the past 10 years, and that “carrying a high national debt could mean the difference between a growing economy and a contracting economy.” Our national debt is expected to exceed 90 percent of GDP this year, and 100 percent within the next decade—that’s not even considering the huge liabilities for Social Security and Medicare.

 

 

ASK AN ACCOUNTANT

 

As the first practicing Certified Public Accountant (CPA) elected to Congress, I have long tried to call attention to our inadequate federal budgeting, accounting, and reporting practices. While in Congress during the late 1980s, I served on both the House Government Operations and Banking Committees, where I learned firsthand that government entities use gimmicky shell games similar to those special purpose entities employed by Enron—a disgraced company that used blatant subterfuges to hide its growing losses and debt. In Washington, these special purpose entities are called Government Sponsored Enterprises (GSEs), and include companies such as the Resolution Trust Corporation, which was used to implement the massive off-budget bailout during the Savings and Loan scandal of the late 1980s. More recently, two other GSEs—Fannie Mae and Freddie Mac—were used to fuel the subprime mortgage and toxic securities scandals, leading to massive amounts of government bailout money in the form of federal guarantees of their bonds.

 

In a Washington Times op-ed piece published on August 24,2009, I wrote that “the financial management failures of U.S. corporations cannot come close to rivaling the budget and bookkeeping shambles of the U.S. government.” I went on to explain that the hole in our nation’s finances is really $56 trillion once the unrecorded liabilities of about $45 trillion from Medicare and Social Security are factored into the equation. This number is a far cry from the $12 trillion national debt publicized by the government’s balance sheets, which leave off financial manipulations on a scale that dwarfs those of the Enron scandal.

 

America has a national debt of gargantuan proportions because of the unaccountability of Congress, unbridled deregulation during the Bush-Cheney administration, and accelerated spending of both political parties. The debt situation is even worse when you consider the operating deficits of GSEs whose debt is backed by the full faith and credit of the U.S. Treasury.

 

 

IT’S DEREGULATION TIME, SO WHO’S MINDING THE STORE?

 

 Just what has happened in the fiscal realm since I left Congress in 1989? A chronology of important events following this foreword illustrates my point: Congress has continued to spend as if there is no tomorrow, and our Congressional representatives use their plastic voting cards as a collective “credit card” to provide the juice—like illegal steroid use in professional sports—that keeps their jobs in Washington, while taxpayers remain in the dark about what is really going on.

 

In 1999, we saw the repeal of the Glass-Steagall Act, created in the wake of the Great Depression to separate investment and commercial banks. Once repealed, there was effective deregulation of the banking, insurance, and securities industries, which allowed financial institutions to become “too big to fail.”

 

 Writers and opinion-makers have said that the highest impact financial event during the crisis of the past few years was the subprime mortgage crisis, which began in 2007. Stock markets plunged and credit froze in September 2008. As a remedy, U.S. Treasury Secretary Henry Paulson proposed a sweeping $700 billion dollar bailout of our financial institutions: The Troubled Asset Relief Program (TARP).

 

Struggling Americans who had to give up their homes didn’t enjoy learning that huge banks were being bailed out, but Federal Reserve Chairman Ben Bernanke claimed at the time that we might have been only three days away from our entire economy collapsing. Of course, this would have had disastrous ripple effects around the world. Something had to be done, and so Congress, along with the American people, held its collective nose and approved the massive bailouts without any due diligence.

 

There’s a common thread here that I began to unwind in the original printing of this book and it’s still unraveling today. Former government interventions (the S&L bailout of 1987, the Farm Aid crises in the early 1980s, and the New York City bailout in 1975) used the “full faith and credit” of the federal government to float bonds backed by the U.S. Treasury. We have continued this tradition by bailing out “too big to fail” companies without passing legislation to prevent similar catastrophes in the future. Worse still, we have not properly accounted for the cost of these bailouts, leaving the next generation to figure out how to pay for our profligacy.

 

 

HOW MUCH ARE BAILOUTS REALLY COSTING US?

 

Regarding the subprime mess, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters, and other lenders. Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance lenders, had to be essentially nationalized—placed under the conservatorship of the Federal Housing Finance Agency with money authorized by the Housing and Economic Recovery Act of 2008. Accountants and Congressional oversight forces were not doing then-jobs. They allowed huge loans to be written without the proper reserves and adequate accounting, which led to the biggest banking crisis debacle since the Great Depression.

 

The price tag for the widespread bailouts has been an ongoing source of consternation, if not real outrage, from the public. One problem seldom discussed in the press is that no one knows the real size of the bailout. Estimates vary depending on who is reporting. (The New York Times reported in September 2009 that the government has “rolled out more than a dozen programs and made commitments of about $12.5 trillion to protect the economy from crisis.”)

Economist and journalist Nomi Prins found that, after crunching the hidden numbers, the size of the bailout was $14.4 trillion and counting. In her most recent book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, Prins presents charts that show $7.2 trillion flowing through the Treasury Department (mostly to Money Market Mutual and Public-Private Investment Funds) and $7.2 trillion through the Federal Reserve (mostly for Commercial Paper Funding Facility, mortgage-backed securities purchase, and Term Asset-Backed Securities Loan Facility).

 

 What’s a few trillion here or there? Well, it’s a lot for the taxpayer, and it’s something that shouldn’t be difficult for citizens to trace and account for. As columnist George Will said, “The essence of this crisis is lack of knowledge, including the inability to know who owes what to whom, and where risk resides.” Americans demand the most from their favorite contestants on hit shows like American Idol; shouldn’t we demand the most from politicians saddling our children’s future with enormous debt?

 

 The risk issue George Will mentioned is just as critical to U.S. financial sustainability as the need for accurate reports of the monies loaned, monies printed, assets purchased, and liabilities backed by the U.S. government. The truth is that the bailouts are transfers of wealth from the government (all citizens) to a particular industry (namely, the banking industry) and its backers. The long-term effects of transfers of wealth need to be understood before they occur. Columnist Gretchen Morgenson stated (New York Times, April 26, 2010), “A major factor missing from Treasury’s math is the vast transfer of wealth to banks from investors resulting from the Fed’s near-zero interest-rate policy.” The Fed’s stimulus policy allows banks to borrow at ridiculously low interest rates (.25 percent) in order to encourage the banks to lend money to businesses and consumers at affordable rates. But the banks aren’t doing it! Instead, they’re lending the money BACK to the U.S. government by purchasing Treasury bills at 3 percent and making money on the point spread. They’re charging consumers an average of 14 percent interest on credit cards, and making even more money on this point spread. The economic impact is, according to Andrew Haldane, Executive Director of Financial Stability at the Bank of England, a long-term, significant reduction in the U.S. GDP. In March 2010 at the Institute of Regulation & Risk, Haldane dubbed these results “banking pollution.” Congress must take into account the long-term economic impact and take steps to reduce this pollution, but will it? Let’s take a look at what Congress and the Obama Administration are doing to respond to public anger and concern. Congress established a Financial Crisis Inquiry Commission chaired by Phil Angelides, a former state treasurer of California, where unemployment and foreclosure rates are among the highest in the nation. The commission has been grilling the heads of the financial companies who benefited from the bailouts, even though many have repaid (with interest) the funds they received. President Obama appears to be catering to public anger by conjuring up a “revenge tax” on banks. Neither one of these approaches will yield a constructive solution to our current situation. The President has also proposed establishing a new agency to protect consumers—spending even more taxpayer money and creating more debt.

 

We have built an economic “house of cards” on negative personal savings rates, excessive consumption, spending beyond our means—both individually and as a nation—and now that house is falling in every direction. It’s not a matter of opinion—even the International Monetary Fund has warned about the threat to the global financial system because of the reliance on debt. The U.S. has hard work to do to clean up the mess, but if we start now, we can succeed.

 

 

CONGRESS: BREEDING GROUND OF THE DOUBLE STANDARD

 

Are you surprised that Congress won’t live by the same budgeting, accounting, and reporting standards that it requires of everyone else? I discovered this during my years in Congress and wrote about it in the original book.

As far back as 1956, the second Hoover Commission foresaw the problem, and actually did something about it that could have worked. It pushed Congress to amend the 1950 Budget and Accounting Procedures Act to require all government agencies to maintain their accounts on the “accrual basis” to record commitments to spend in the future, as well as current spending. The Securities and Exchange Commission imposes this method, known as “generally accepted accounting principles” (GAAP), on publicly traded companies. Congress never implemented this important amendment, and as a result we have had a double standard between private sector and government budgeting, accounting, and reporting for more than 50 years.

 

 The accounting system we have failed to rectify has, in effect, created what I call a “subprime national debt,” and a good deal of the money you pay in taxes goes toward paying interest on that debt. When Republicans took over the House of Representatives in 1994, they voted on the first day to have Price Waterhouse conduct an audit of House finances. In its first audit report, Price Waterhouse found that the House “lacks the organization and structure to periodically prepare financial statements that…are accurate and reliable” and that financial management information was “simplistic and ill-suited” for an organization with a billion dollar budget, and that it could not be audited.

 I called it a “smoking gun” when the late Robert Novak interviewed me for his 1995 documentary film, America the Bankrupt. Nothing has changed since then. This double standard and the problems it creates for the American people were so disturbing that I founded Truth In Government, a non-profit organization dedicated to bringing appropriate accounting standards in Congress. Over the past two decades I have traveled the country, revealing what Congress really does and really spends, and demanding that business and civic groups pay attention to the need for change.

My message has not changed: It is crucial for us to restore integrity to the budgeting process and provide financial accountability to the taxpayers. The challenges that we face are so great, that only a shared commitment will make it happen. These are perilous times that require unified effort and leadership, but today’s politicians cannot muster the political will to confront the nation’s financial problems.

 

 

SEND CONGRESS TO ACCOUNTING REFORM SCHOOL

 

 Congressional budgeting, accounting, and reporting practices must be changed. I’ve been saying this since I learned what Congress was actually doing when I served there. In 1993 I chaired a Task Force on Emerging Issues, sponsored by the Association of Government Accountants. Here’s my statement in the report:

At a time when Congress must make important decisions on future budget priorities and commitments, the information necessary to make those decisions is woefully defective. Weak government-wide budgeting and accounting systems produce insufficient reliable information about how the government spends its funds and how decisions made today will affect tomorrow’s taxpayers. Further, the Congressional budgeting process commonly relies upon imaginary revenues, ignores unfunded obligations, and makes use of numerous other practices lacking economic and accounting reality. The Federal government badly needs major budgeting reforms.

The task force recommended the six reforms listed below, none of which have been adopted more than 17 years later. If we had adopted even some of these reforms, we could have prevented the mess in which we find ourselves today:

 

•   Employ generally accepted accounting principles (GAAP), beginning with the budget process, before money is committed or spent.

 

•   Adopt separate budgets for general funds, trust funds, and GSEs. (Overall, such tripartite reporting would give Congress and the public a far more accurate picture of the federal government’s spending activities.)

 

•   Adopt effective capital budgeting, which is a financial process used to plan, control, record, and report long-term capital expenditures.

 

•   Adopt biennial budget cycles corresponding to a Congressional term of office. (This would require Congress to authorize spending only once in two years and allow more time for needed oversight.)

 

•   Maintain the Budget Enforcement Act of 1990. (If discretionary spending in any of three categories—defense, international, domestic—exceeds the Act’s target as of the beginning of a fiscal year, an automatic sequester is applied to that category to stop spending from other federal sources to cover it.)  

 

•   Publicize the true financial condition of the federal government and an accurate report of the results of all the operations of the federal government each year.

 

In order to stop the games Congress plays to minimize the real financial impact of its legislation, we need to have the President’s budgetary proposals and Congressional bills evaluated for their financial impact by the Government Accountability Office, an independent agency headed by the non-political Comptroller General of the United States. We absolutely need a concise, GAAP-consistent report on the operation and financial condition of the U.S. government, including all its revenues, expenditures, assets, and liabilities, that would be made readily available to the public and news media shortly after each September 30, the end of the federal government’s fiscal year.

 

 

WISDOM OF THE FOUNDERS: LIMIT GOVERNMENT

 

During the first year of the Obama Administration, we watched a messy political drama unfold over healthcare reform. Congressional representatives didn’t listen (and still aren’t listening) to their constituents who want smaller government and less intrusion. They argued about how to fund this largely unpopular initiative more than whether we could or should pay for it. They ignored major vehicles for lowering health care costs: tort reform and reducing defensive medicine practices. The members of Congress who voted for the recently enacted healthcare law knew that its purported savings were not likely to be realized. Less than one month after the President signed the healthcare bill into law, the government’s own Centers for Medicare and Medicaid Services announced that the costs of the bill will exceed Congress’ projections by $311 billion over the first nine years. No matter what the people want, Congress continues to raise taxes and mislead the American people they are supposed to represent.

 

In 2010, many Americans are hurting—especially the middle class and the poor. Housing has not fully recovered, our commercial real estate market is starting to feel the pain in big cities, and we have an unemployment level at 10 percent and growing—the highest since 1982, according to recent Bureau of Labor Statistics data. (The unemployment number is actually higher, considering how many people are now working part-time or have stopped searching out of frustration or hopelessness.) Ironically, we still haven’t seen fit to look at our financial problems with transparency and accountability, utilizing the finest financial management practices and principles of accounting. We have not addressed redundancies in government programs—one of the first strategies businesses use when they reduce costs.

 

One of the greatest lessons I learned while in Congress was that our founding fathers, the framers of the U.S. Constitution, got it right. They deliberately limited the power of the federal government in order to preserve freedom and limit the burden of paying taxes, which had been a major source of discontent before The Revolution. Limiting federal government power means limiting its size—an idea that has been forgotten or systematically rejected in the past 100 years. The healthcare reform issue jolted many Americans out of the big government mindset, and now we need to chart a new course for prosperity.

 

The elections of fiscal conservatives in the 2009 New Jersey and Virginia gubernatorial races and in the 2010 Senate race in Massachusetts serve as a bellwether for our future. Other positive signs indicate that we are beginning to reject huge deficit spending and limit the size of government. Emerging leaders such as Rep. Paul Ryan of Wisconsin have proposed solutions for balancing the budget and reducing Medicare costs. Rep. Frank Wolf and Rep. Jim Cooper have jointly proposed forming a bipartisan panel to address the budget crisis and “put all options on the table.” Truth In Government will contribute to this new, positive direction by creating a plan for job growth and fiscal sustainability.

 

For the past 20 years, I’ve been beating the drum for greatly needed reform, and now America is waking up. We the people can be a force for America’s sustainable future, if we demand that Congress make the changes Truth In Government has identified, balance the budget, and generate real jobs.

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