The Mises Institute monthly, free with membership
April 2002; Volume 20, Number 4
Real Accounting Fraud
by Thomas J. DiLorenzo
If the Enron bankruptcy proves anything, it is that there are sinners in all walks of life, and that the market economy provides mechanisms for rooting out and punishing systematic liars. Those who clamor for Congress to “do something” to assure that this kind of thing will never happen again are delusional if they think Congress has the ability to legislate away sin or otherwise improve on the market system of profit and loss. Such delusions are a testament to the successful brainwashing of generations of public school students who have been taught to worship the “god” of the state and to look to it to solve all of life’s problems.
Accounting fraud at Enron is such a big story because it is so exceptional; only once in a blue moon does a major corporation destroy itself in this way. In contrast, “accounting” fraud is an inherent feature of government.
There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Conse-quently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it. All we know is that the budget grew by a certain amount, for some ostensible purpose. And government is constantly lying to the public about how much of the public’s money is being spent and what it is being spent on.
As Gene Epstein has reported in Barron’s, during the Clinton administration, vast sums were transferred from the Social Security and Federal Highway Trust Funds to the budget so that Clinton and the Republican Congress could take “credit” for balancing the budget. Any corporate CEO who raided his employees’ pension fund and put the money in the company coffers so that the bottom line would look good and he could earn himself a fat bonus would end up in prison.
The federal government practices what it calls “baseline budgeting,” whereby federal agencies announce that they wish to increase their budgets by, say, 10 percent a year, and if they only increase them by 5 percent that is called a 5 percent budget “cut.” There can be no better example of accounting fraud than calling a budget increase a cut.
The General Accounting Office, Congressional Budget Office, and other federal agencies also use “static analysis” when analyzing and reporting to the public on tax policy changes. That is, they assume that taxation has no effect whatsoever on economic behavior. So, if we have a $10 trillion economy, and impose a flat 75-percent income tax, these “authoritative” sources will announce that the IRS expects to collect $7.5 trillion in revenues, each year, ignoring several hundred years of economic theory and practice.
Perhaps the biggest accounting scam perpetrated by the state has to do with various governmental “off-budget enterprises.” As James Bennett and I wrote in our 1983 book, Underground Government: The Off-Budget Public Sector, for well over a century federal, state, and local governments have responded to citizen demands for tax, expenditure, and borrowing restraint by paying lip service to the demands while at the same time setting up the subterfuge of off-the-books government enterprises.
At the state and local levels of government, there are thousands of government boards, “authorities,” special districts, and other entities that issue non-voter-approved revenue bonds for everything from dormitory construction to small business loans. Taxpayers never get to vote on the issuance of this debt; the expenditures of these entities do not appear on governmental budgets; and their activities are largely shielded from the public.
Consequently, they are responsible for some of the most spectacular bankruptcies in state and local government history, such as the $2.5 billion default of the Washington [state] Public Power Supply System (“Whoops”) in 1983 and the near bankruptcy of New York, both city and state, in the 1970s.
At the federal level of government there is a shady operation known as the Federal Financing Bank (FFB), which operates out of a small room in the US Treasury Department. With the help of the Treasury’s printing presses, the FFB loans money to federal agencies but the loans do not appear on the budget lines of the agencies as increased spending. When the agencies pay back the loans (if they ever do), federal government “accountants” make it a point to count it as a reduction in spending. Thus, even though the existence of the FFB causes an increase in federal spending, what gets reported in the federal budget is a decrease in spending.
The federal government also reports a blizzard of confusing and intentionally deceptive information about myriad programs. For example, when publishing statistics on the number of poor people in the country, the federal government does not count the cash or in-kind welfare handouts that the poor receive, which allows it to exaggerate the true extent of poverty. Economist Edgar Browning calculated that if these funds were counted, as they should be, then the government’s “official” poverty rate would be closer to 3 percent than the 15 percent of the population that it claims.
To make matters worse, when the federal government publishes statistics on “income distribution,” it does not subtract out the taxes that are paid by working citizens, thereby inflating their true disposable income and making the “income distribution” look more unequal than it really is.
The federal government defines a “farmer” as anyone who sells at least $1,000 per year in commodities, including animals. With this definition the government claims there are about 2.5 million farms. But most of these “farms” consist of people who raise a few horses and sell them, or who have large gardens and earn well over 90 percent of their annual income in other occupations.
In The Farm Fiasco, James Bovard discovered that the number of real farmers who actually earn their livings as farmers is about 600,000, only about a fourth of the number the government puts forth.
The federal government exaggerates the number of farmers because that helps in the periodic propaganda campaigns in favor of ladling out more corporate farm welfare as part of the latest Farm Bill. The more farmers that the government claims are in a state of “crisis,” the more likely the public will acquiesce in the handouts.
James Bennett and I tell hundreds of similar stories in our book, Official Lies: How Washington Misleads Us. In light of its own culture of fraudulent budgeting, government has no moral authority at all to regulate private-sector accounting practices.
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Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland and author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War (New York:Forum/ Random House, 2002) (Tdilo@aol.com).