----- Original Message -----
From: "John Hermann" <[EMAIL PROTECTED]>
To: "John Hermann" <[EMAIL PROTECTED]>
Sent: Wednesday, 19 January 2000 6:05 PM
Subject: Preparing for the next financial bail-out
Economic Reform Australia
ERA EMAIL NETWORK
Subject: Preparing for the next financial bail-out
From: COMER <[EMAIL PROTECTED]>
Organization: Committee on Monetary and Economic Reform
"Could the semi-furtive introduction of capital accountancy
across the world have to do with the cleaning up of
governments' balance sheets in preparation for the next
bailout of our financial institutions?"
A New Methodology of Deceit?
by William Krehm
(Economic Reform, December 1999)
We have long warned against mistaking number-crunching for
precision or even relevance. What is basic in mathematics is
relationships, and if the relationship between two statistics has not
been grasped, refining them to umpteen decimal points will be of no
help.
Counterproductive number-crunching on a flawed base has been
taken so far by economists that the resulting statistics simply are
having to be amended. Invariably this is being done under pressure less
of economists than of some other professional group.
The first instance of this was the introduction of enough
"accrual accountancy" (also known as "capital budgeting") by the US
federal government to give the Clinton government the statistic for
national savings that it needed to keep interest rates low. Politicians
in power pushed this measure through so surreptitiously that it has
still not been picked up by the media. In this way the Clinton
government managed to produce a somewhat more truthful statistic without
arousing the ideological dogs of the right.
The problem arose from the established practice in most
governments to treat government investments in buildings and equipment
as a current expense. Written off in the year of acquisition as is done
with floor wax, their value is entered on the books at a token $1.00.
There is nothing more to offset the debt incurred to make the
acquisition.
The decade of the sixties was notable for the unprecedented
volume of public infrastructures created to accommodate an exploding
population in a rapidly urbanising, high-tech world. Writing off this
public investment in a single year added needlessly to the layer of
taxation in price and was accordingly a major factor in the beginning of
upward price ramp that was identified with "inflation," i.e. "too many
dollars chasing too few goods." Instead of disaggregating the price
surge into its market and non-market components, it was attacked with
high interest rates, "the one blunt tool" to which central banks had
stripped down their tool kits. This in turn, deflated the economy,
pushed up the costs of servicing the government debt, and gave rise to
growing deficits. These in turn were advanced as good reason for
devastating social programs and educational budgets.
Until January, 1996 Washington did not distinguish between
current and capital spending. Why was it carried through just then only
insofar as it affected the government savings statistic? Undoubtedly to
help Mr. Clinton win his re-election. And why was it slipped in so
quietly that even financial analysts overlooked it? Because the Clinton
team needed an improved statistic or two, not an ideological pitched
battle. Once the Department of Commerce had revised the government
savings figure the Federal Reserve Bulletin (table A-40) had no choice
but to take over that figure for their purposes. No other was available.
In just three years (1992-4) revision of previous figures for
the investment of the federal government resulted in a $618.5 billion
lower net debt figure. Carried forward to 1995 and backwards to 1959,
the change would exceed a trillion dollars. That, moreover, does not
take account of federal government investment in human
capital-education, health, welfare, that probably exceeds its physical
investment, especially if grants to other levels of governments for such
purposes are considered. No matter what jurisdiction the resulting
capital asset ends up in, it contributes to expand the tax base and
accordingly is relevant to the fiscal condition of the federal
government.
The second case of the phenomenon we are concerned with is the
adoption of capital budgeting by the Canadian Government as reported in
The National Post of 20/07/99 by Kathryn May. To the best of our
knowledge no other mention of it has been made by our media. Over a
two-year period accrual accountancy is to be introduced by the federal
government and as a result assets of an estimated $50 billion will
suddenly appear on its books. That is another way of saying that $50
billion of assets were systematically left unreported in its ledgers
over the years. In actual fact we believe that the estimate is at least
50% lower than it should be, even if the adjustment is confined to
physical investments without bringing in the outlay for human capital.
The driving force here were the accountants represented by the
Auditor General Denis Desautels and some of their trade publications. In
its issue of 14/05 last The Bottom Line, a journal for accountants, gave
us the background: "After qualifying his opinion of the federal
government's accounts for the past two years, a more conciliatory
Auditor General has hinted that he has buried the hatches with the
Finance Department and will likely approve the books for the 1998-9
fiscal year." One of the issues involved was "accrual accountancy," and
the nature of the compromise reached appeared clearly in the National
Post article. This quoted Desautels, "the capitalisation of assets was
critical to departments; 'management discipline' and their
'accountability to Parliament.' For example, the manager of a government
laboratory never had to consider the cost of the space the lab occupied
or the equipment it used when determining the price-tag of its programs.
Mr. Desautels argues these figures become more critical with the
government's push to recover more of the costs from user fees."
However, not a word about slashing of social programs over the
years to reduce the deficit which was systematically overstated. The
Auditor General compromised his self-respect as an accountant by
agreeing to coming up with a spin that distorted the real nature of the
accountancy problem that should have been addressed decades ago.
Even so the introduction of capital budgeting has not been
mentioned in all the debates on the uses to which the government surplus
is to be put. In the figures forecast by the Finance Minister for that
surplus over the coming five years, there is no mention of how much of
the forecasts will arise from capital investment. That is a crucial
omission since such government savings should never have been omitted.
And what was omitted ought to be restored to the social groups whose
revenue was plowed under by the panic whipped up with those inaccurate
statistics.
The games that have been played around this bookkeeping dodge
were endless. In our earlier issues1 we recounted the sudden
disappearance from the Canada Year Book around 1994 of a passage that
had appeared without a word altered for close on to 30 years that we
were able to ascertain explaining how government physical investments
were written off in a single year and entered at an asset value of
$1.00. This was the equivalent of recording the mortgage on your house
in your statement of net worth, but failing to mention the value of the
house that it was written to finance.
In a recent flying visit to the UK I learned that a memo has
been circulated in the Bank of England suggesting the introduction of
capital budgeting in Britain. One must ask where these world wide
initiatives are so closely are organised. It would appear that official
statistics are no longer a public utility, with information readily
available on how they are put together and what they signify. Instead
they appear to have undergone privatisation, subject to being hushed up,
misinterpreted. So long as there is a dearth of unmanipulated
information, democracy will be a wilting bloom on a prickly bough.
Could the semi-furtive introduction of capital accountancy
across the world have to do with the cleaning up of governments' balance
sheets in preparation for the next bailout of our financial
institutions?
1 Meltdown, edited by W. Krehm, COMER Publications 1999, p 261.
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