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.
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.
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.