Why the federal deficit reminds me of Enron.

Commentary about business and finance.
Nov. 23 2010 2:11 PM

Unbudging Budget

Why the federal deficit reminds me of Enron.

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As Enron's business problems mounted in the mid-to-late 1990s, the company could have dealt with them honestly. The stock price would have plunged, analysts would have dropped their "buy" ratings, and the top executives at the time—Ken Lay and Jeff Skilling—might have been booted out. But the good parts of the company wouldn't have been taken down with the bad, and employees would have kept their pensions and their lives intact. But Enron's top executives didn't want to deal with the short-term pain, and so they found ways to paint a prettier picture.

The government's problems are mounting, too. In mid-November, the Government Accountability Office released an update on the long-term fiscal outlook. It noted that if we continue on our current fiscal path, then by 2020, 92 cents of every dollar of federal revenue will be spent on net interest, Medicare, Medicaid, and Social Security. By 2030, net-interest payments will exceed 8 percent of GDP and become the single largest component of federal spending. Politicians don't want to make hard choices now, because just like Enron's executives they don't want to face the wrath of their stockholders (i.e., their constituents).

The counterargument is that all of this is just fear mongering. Huge cost savings will be realized as the government acquires greater leverage over medical inflation. The U.S. economy is remarkably resilient, and another technology boom may be right around the corner. But Enron had lots of promising businesses that were supposed to produce enough profits to cover up the losses elsewhere. Most notably, the company planned to make a fortune trading broadband. (It sounded good during the tech bubble.) It didn't happen, at least not in time. In a research piece entitled "Delusions," Dylan Grice of the French financial-services giant Societe Generale argues that "we convince ourselves that since we'll be strong in the future, we can still indulge today." Exactly.

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In Enron's heyday, CEO Jeff Skilling was a master of intellectual intimidation. People were afraid to ask questions for fear they'd look stupid. There's a form of intimidation that emanates from Washington, too, thanks to the rancorous tone there. In some circles, you can't say you're in favor of raising the retirement age for Social Security, or raising taxes, lest you be branded a heartless brute or a economic nitwit.

As the year 2001 began, Enron's stock reached $82 a share—off its high of almost $90, but nothing that indicated that disaster was imminent. It never occurred to anyone in the company that they were running out of time. But in short order, investors began to ask questions about the company's true profitability; Jeff Skilling suddenly resigned; details emerged about that off-balance-sheet debt; and poof! The company was gone.

Right now, the United States seems to have plenty of time to get its financial house in order. But we're living in a world where money panics easily, and the bond market passes judgment with astonishing speed. Look no further than Greece and Ireland. If investors get sufficiently worried about a country's problems, then a sell-off becomes inevitable, even if sane minds can argue that the numbers don't yet justify panic. If Enron's shareholders had stopped pretending they understood and started asking the right questions, executives would have been forced to answer them while there was still time. It's not too late for U.S. citizens to do the same.

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