Part 1: Measuring Our Nation's Debt

 

Takeaway

  • The federal budget uses the shortest yardstick for measuring the nation's debt, but according to McCombs professors, that's not necessarily the most accurate way to measure it

Sometime this May, America will max out its credit card. That's when the national debt is projected to hit the $14.3 trillion allowed under current law. Unlike you and me, the federal government gets to raise its own credit limit, and Congress has been playing a high-stakes game of chicken over whether to allow it.

But to Michael Granof, accounting professor at the McCombs School of Business, that $14.3 trillion is just a drop in a bucket of red ink. “The real debt," Granof said, "is that number on the balance sheet — plus $43 trillion.”

How big are our federal deficit and our national debt, really? Economists use more than one yardstick to measure them. The federal budget uses the shortest yardstick, but to Granof, it’s not necessarily the most accurate one.

The U.S. Government, he explains, keeps two sets of books. One is set up like a family budget, while the other mimics the financial statements of a business.

The federal budget uses cash accounting. Like a family doing its taxes, Uncle Sam tallies up what he earns in a calendar year and subtracts what he pays out. In fiscal 2010, his income was $2.2 trillion, while his expenses were $3.5 trillion. The difference was the $1.3 trillion federal deficit.

Cash accounting sounds straightforward, in theory. In practice, says Granof, “a budget can be manipulated.” Put off paying some bills, and your net income looks higher than it really is.

As an example of what he calls “stupid budget tricks,” the State of Texas once balanced its budget by delaying a month’s worth of paydays — by a single day. That day moved them into the next year’s budget, for the next legislature to fund.

Most businesses use a different form of accounting: accrual. To give investors a truer financial picture, a firm records an expense as soon as it’s accrued, regardless of how long the firm waits to cut the checks. An example is a pension, a present-day legal obligation to pay out money years in the future.

Michael Granof

“...current fiscal policies are unsustainable in the long run.”

 - Michael Granof, accounting professor
at the McCombs School of Business

Like a business, the U.S. government publishes an annual financial report. Granof helps set the guidelines for it, as a member of the Federal Accounting Standards Advisory Board.

The federal financial report adds in accrued expenses, like benefits for veterans and federal employees. The result is a 2010 net operating cost of $2.1 trillion — 61 percent higher than the 2010 budget deficit. “The real deficit is the Net Operating Cost,” says Granof, “because it’s based on generally accepted accounting principles, which better capture economic reality than a cash basis.”

Tucked away in the report is another, much larger number. It’s $43 trillion — the net cost, over the next 75 years, of providing Social Security and Medicare to citizens who are currently receiving them. Add that accrued expense to Uncle Sam’s liabilities, says Granof, and he’s really $57 trillion in the hole.

“That, to me, is the real negative net position,” he says. “It means current fiscal policies are unsustainable in the long run.”

Not all economists agree. James Galbraith, chair in government/business relations at the Lyndon B. Johnson School of Public Affairs, notes the $43 trillion is a projection, based on a long list of actuarial assumptions about the future. “You can make the notion of unfunded liabilities as large as you like, pushing out the date to an infinite horizon. The reality is that all the resources to support the elderly in any year will be produced in that year.”

But McCombs senior lecturer Sandy Leeds believes those estimates have a place in the federal budget. “If we measured our deficit on an accrual basis,” he says, “we would have had larger deficits along the way, and we would have recognized our problems earlier.”

Leaving those expenses off the balance sheet, he says, “has allowed us over the years to imagine that our budget is much closer to being balanced than it really is. It’s permitted these politicians to overspend and go back to their constituents and lie about it. It’s been a fraud.”

 

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Faculty in this Article

James K. Galbraith

Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government LBJ School of Public Affairs, The University of Texas at Austin

James K. Galbraith teaches at the LBJ School. He holds degrees from Harvard and Yale (Ph.D. in economics, 1981). He studied as a Marshall Scholar at...

Michael Granof

Professor of Accounting McCombs School of Business

Michael Granof received an A.B from Hamilton College, an MBA from Columbia University, and a Ph.D. from the University of Michigan. His research...

Sandy Leeds

Distinguished Senior Lecturer, Department of Finance McCombs School of Business, The University of Texas at Austin

Sandy Leeds, CFA is a Distinguished Senior Lecturer at The University of Texas at Austin. He teaches graduate level classes in the MBA program and...

About The Author

Steve Brooks

Writer,

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

Comments

#1 If the $14.3 trillion debt

If the $14.3 trillion debt ceiling doesn't rise by Tues, August 2, the Treasury Department will have to decide who earns money and who doesn't. The proof is here: Debt limit failure; Treasury must decide which bills to pay . Need to balance government spending in consideration of the Credit limit.

#2 Of course, this series is

Of course, this series is made even more timely by this morning's news that Standard & Poor's issued a warning about U.S. government debt, saying "the U.S. has yet to come up with a credible long-term plan to tame fast-rising deficits" and that "there's a one-in-three chance it will lower the federal government's top credit rating within the next two years." Story from NPR's Morning Edition: http://www.npr.org/2011/04/19/135533884/high-deficit-could-hinder-u-s-credit-rating

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