Monday, May 19, 2008

Who Will Bail Out The U. S. Government?

My “stimulus” payment from the federal government arrived on the same day that a front-page article in USA Today reported that federal deficit is far greater than the government admits. While the politicians struggle to bailout the housing crisis and head off a recession, they are also rigging the budget numbers to hide the fact that there is no money to give away.

The reported deficits of hundreds of billions of dollars sound bad. But, USA Today found that federal deficits would be trillions of dollars if the government used the accounting rules that are required of corporations when issuing financial reports to shareholders. The reason for the discrepancy is that trillions of dollars in unfunded liabilities to Medicare and Social Security do not show up on the government’s balance sheet. A corporation would have to report future financial obligations as a liability unless it had the funds set aside to make the payments.

But the federal government avoids reporting unfunded liabilities. It collects Social Security and Medicare taxes to supposedly set aside in trust funds to pay for future financial obligations. That allows the government to claim its future obligations are funded. The ruse is that the money never remains in the trust funds. Instead money is “borrowed” from the trust funds to pay for present day obligations. Because the money is “borrowed” from funds the government controls, it never reports that obligation as part of the deficit.

What the practice means is that a mathematically equivalent expression for “borrowed from the trust fund” would be “spent the trust fund.” But the government never admits that it has spent the trust funds because that would undermine the entire rationale for collecting separate Social Security and Medicare taxes.

None of this is a secret. When I wrote The Two Headed Quarter I included a chart that showed that projected indebtedness to the Social Security trust fund was expected to increase from $1.5 trillion to $4.0 trillion between the years 2003 to 2014. The Congressional Budget Office (CBO) made the projection. I simply made a chart of data taken off the CBO Website. The chart makes clear that the government has no plans to every pay back the money it is “borrowing” from the trust fund.

Even though these trust funds exist on paper, the fact is money is not in them.

Joseph Ganem is a physicist and author of The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

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