We all had to take US History in school so what I am about to Blog will not be much of a surprise. I think that we studied the fact that George Washington was our first President in at least 15 different classes and this counts thru college. We also heard about the Pilgrims from day one on. The problem is that we seemed to study the exact same set of facts over and over without adding too much new stuff. We learned all about the three branches of the Federal government, but there is one thing that we never covered and I now realize that it just might have been the most important. What is that, you might ask? Accounting for all the money our government collects and spends.
Most of you think of accountants as just "bean counters". This implies that their job is insignificant, but it is not. Because we have to pay taxes on our businesses, and corporations want to sell stock or be listed on one of the stock exchanges, there is a set of "rules" for accounting that all these units have to follow. This is not the case for governmental bodies. Some have such rules as that they have to have a "balanced budget". Exactly what do you think this proves? Those states or governmental unit that require a "balanced budget" are not any more understandable than those who do not. This whole thing would not be so pitifully except for the fact we are talking about billions and trillions of dollars.
In most companies, they produce something and sell it to produce revenue. The trick is to produce something that is worth more than it costs to produce. That difference is what we call "profit". Accounting for the above is handled on what is called the P&L, or profit and loss statement. We don't have this for our government even though they claim to providing a service, a product. Now, we don't know what the service or product is worth nor do we know how much it costs to produce. If I have heard this simple minded statement coming out of the mouth of a voter once, I have heard it a thousand times. "If is saves energy, we should do it." This is just an example. There are thousands of statements like this from simple minded voters who can not grasp the concept that services have value and that they also have a cost. Some thing as simple as a "benefit cost ratio" has not seemed to have gotten any traction either. I am not even going to go into the details of situations where the expenditure is today, but the benefits don't come for many years in the future. This is the case with all this global warming bull shit. If we spend ourselves into bankruptcy for the next 99 years, we might prolong the human race another 4 or 5 years. We have to get past the point where we only evaluate ideas or expenditures on the basis of being "good" or "saves lives" or "you can't put a value on a life" to one where we debate the "value" of something before we pull out the "credit card".
Before I leave the P&L, we need to look at a few items that are on the statement. One of the big items on the P&L is "accounts Payable" or liabilities. These are items that we have purchased or have gotten the value of, but have not yet paid for. In the case of our governmental units, these are the future benefits that they have promised, but have not yet set aside any money for. We keep hearing on the News that we owe trillions of dollars for these promises, but no one can tell us exactly how much we all owe. Isn't it strange that we should owe trillions and yet not have a good system to account for it? Back when the decision was made to promise these future benefits, who exactly signed those contracts and what did they tell the public they were signing? If you don't want something to happen again, then you should find out what caused it in the first place and put a stop to it. Seem logical to me. I would like to see some names.
How about the balance sheet? One thing that I always look for on their balance sheet is the place were it shows "net worth" or "owners equity". The reason that they call it a "balance sheet" is that the two sides "Balance", assets and liabilities. The difference between these two is what you own. In the case of the government, I would like to see an accounting of assets and liabilities so that we would know how much we "own". I just hope that our government is not "under water". That is where you owe more on your liability side than you are worth on the asset side. We all know what the impact was on real estate when our homes were worth less than what we owed on them.
In the state of the union by Obama, he is going to go on and on about "investing" in America rather than just spending and there is a difference. Take the bailout of the banks. We keep hearing that we spent all this money bailing out the banks, but what we really did was to "invest" or "loan" the banks some money for a short term so that if they had a run on their banks, they could pay off depositors. We have a system of insurance for depositors, but this loan went much further and provided money so that those who were "not" covered as depositors could get their money back. I am not going to go into the fact that it was a big mistake to loan money to AIG so that they could pay off banks all over the world who they owed money too. AIG should have paid 10 cents on the dollar to them rather than paying them the full amount. Us tax payers got screwed but not the banks around the world who knew they were taking on risk. In the case of AIG, I feel that it was not an "investment". We just "spent" the money and did not get much for it. Same for the auto companies. Now the banks were different. Those were "loans" that would be paid back and most have been. I would like to see an "accounting" of how that cash was used by the banks. The only reason for loaning the banks all that cash was so they could give depositors their money back if they asked for it. I don't think a lot of them asked for it and thus the banks just gave us back the same cash we loaned them.
Now the point of this Blog was to point out how confusing the accounting is within the government for all these financial transactions. Are you confused?
Most governmental use the basket method of accounting. That is where they put all the revenue into a basket and then take it out and spend it. When the basket is empty, they either have to stop spending or go borrow more money. It is like using the plastic to pay for food. If you notice on regular financial statements, there is an item called "cash". This is not cash in a basket, it is deposited in some bank where it earns interest. Over time, if you are making a profit, the cash can accumulate. That is the idea of a business. Many colleges have endowments or cash in the bank that earns interest. Why don't our governmental units have something like this? After over 200 years, you would think that we should be building up a very large bank account that should be earning interest wouldn't you? Well we have just the opposite situation. We owe money and are paying interest rather than earning interest. That's the problem and we don't have a good accounting system that points all this out.
Next time you talk to a school teacher who teaches anything to do with government, ask them what they teach about governmental accounting and financial systems.
