Erskine Bowles and Alan Simpson, co-chairmen of the bipartisan National Commission on Fiscal Responsibility and Reform, got a chilly reception to their draft proposal on how to fix our deficit. House Democratic leader Nancy Pelosi, D-Calif., said the plan's proposed budget cuts were "simply unacceptable," while the right-leaning nonprofit Americans for Prosperity said that the plan's proposed tax increases were not "prudent or reasonable." The Wall Street Journal reported Nov. 19 that the commission had ended three days of closed door meetings without an agreement among its 18 members; several panel members told the Journal that time was running out before the Dec. 1 deadline to submit a final plan.
I don't know whether Bowles and Simpson have arrived at the right solution. But Washington's failure to arrive at any solution as the deficit problem gets worse and worse reminds me of Enron, the much-admired Houston-based energy giant that crashed and burned nine years ago, uncovering the gaudiest business scandal of the aughts. The United States isn't going to disappear like Enron, of course. But it's not inconceivable that global investors who hold our debt could lose their faith, and begin dumping Treasury bonds, or refuse to buy new ones, thereby sending our interest costs sharply higher and our economy into shock.
Start with the most basic problem: accounting. At the heart of Enron's artifice were accounting tricks that served to mask the true amount of debt the company had by keeping it off the company's financial statements. This had the effect of making Enron look far healthier than it was. At the time Enron went bankrupt, it had $38 billion in debt—only about $12 billion of which was reflected on its balance sheet.
The federal government is similarly able to keep its biggest debt liabilities off the books: Social Security and Medicare. The vast payouts these two programs will need to make in coming years aren't reflected on the government's balance sheet. The government argues that's proper because the terms of the payout can be changed. (Really? See paragraph one.) David Walker, who served as comptroller general from 1998 to 2008, puts the liability at $45 trillion to $50 trillion. "They don't combine them, they don't add them up to show how serious the problem is," he said on TheDaily Show. John Williams of the Web site Shadow Stats said that if you added up the present value of all the government's liabilities, the annual deficit in 2008 was $5.1 trillion, versus the official number of $455 billion.
Granted, in Enron's case much of the debt was quite well hidden; the U.S.'s extra debt can be calculated based on publicly available documents. And intelligent people can certainly differ on what the true numbers are.
But keeping Social Security and Medicare off the books isn't the only way the government games the system. The Consumer Price Index, which serves as chief bellwether of inflation; the Gross Domestic Product, which tracks overall growth; and the unemployment rate are all calculations vulnerable to manipulation, as well. That's important, because revisions in these numbers can reverberate through the budget. At the state level, government-employee pensions assume a higher return on investment than corporate plans are allowed to do, so they, too, may be wildly understating their true liability. Fannie Mae and Freddie Mac … how about a drink right about now?
The rating agencies still say U.S. debt is a triple A, meaning it is as safe as it gets. But Moody's and Standard and Poor's rated Enron's debt "investment grade," meaning safe enough for widows and orphans, until a few days before the company's bankruptcy. And even Moody's has said that the U.S.'s triple-A rating could be threatened if Medicare and Social Security aren't dealt with.
TODAY IN SLATE
One of the most amazing feats in chess history just happened, and no one noticed.
The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices
Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.
Do the Celebrities Whose Nude Photos Were Stolen Have a Case Against Apple?
The NFL Explains How It Sees “the Role of the Female”
Amazon Is Now a Gadget Company
How to Order Chinese Food
First, stop thinking of it as “Chinese food.”