Puzzling Questions

Author: Gary Hart

Among the many things I know little about, one big one is accounting.  But I do know there is a difference between expensing and amortizing a purchase or investment.  There is also the question of balancing assets against liabilities.

Now that the budget hawks have reappeared, it is instructive to consider both.  Take for example two big and venerable weapons systems: B-52 bombers and Nimitz class aircraft carriers.  Both have two things in common: they cost a lot of money; and they last a long time.  By comparison, the B-52s are much less expensive than their replacements, the B-1 and the B-2.  But in their day they were considered expensive.  And the CVNs (Nimitz class carriers), with a full complement of aircraft on board, are up around $10 billion or more.

From a budgeting standpoint, though, we “expense” both plane and ship, meaning we allocate their costs to the years in which they are or were being constructed.  Both, however, have service lives of over a half-century!  Those of you who know more than I about accounting, and that’s just about everyone, should tell me whether it wouldn’t make more sense to amortize their costs over their service lives.  This isn’t about a backdoor method of budget balancing.  It’s about common accounting practices.

Similarly, when looking at the nation’s books shouldn’t we balance our assets against our liabilities.  The national debt is now over $13 trillion.  On the other side of the ledger are $5 trillion in gold reserves and then trillions of dollars in federal lands, forests, minerals, wilderness, parks, and recreation areas, dams and water storage projects (almost all of these in the West), the value of our armed forces and defense equipment, federal buildings and facilities, and the list goes on.  We don’t know what all this is worth because no one knows how to conduct such a staggering appraisal.

But, the assets and liabilities balance is brought forward here not to escape the responsibility of wise stewardship of our national budgets and annual deficits.  That is one of the most important jobs of our elected national officials.  This issue, plus the idea of amortized accounting for long-term investments, is merely to try to put our national finances in a different, and hopefully more intelligent, context than they usually are when the deficit hawks start their periodic circling.

14 Responses to “Puzzling Questions”

  1. Pat Boice Says:

    This blog should be required reading for everyone….and why aren’t standard, recognized accounting principles used in government accounting and the budgetary process?

  2. John Lofton Says:

    Former GAO chief David Walker says all unfunded Congressional promises in “law” total more than $56 TRILLION!

    John Lofton, Editor, TheAmericanView.com
    Communications Director, Institute On The Constitution
    Recovering Republican

  3. Gary Hart: Puzzling Questions | GoodPorkBadPork.com Says:

    […] To comment, please visit: http://www.mattersofprinciple.com/?p=524 […]

  4. Paul Higbee Says:

    Please consider “off balance sheet” liabilities including Medicare, Medicaid, Social Security etc. Also, many departments of the government get poor marks for accounting and even tracking funds.

  5. Bette S Baysinger Says:

    Mr. Hart,
    To whom do we owe our debt? Do they owe any one? I need more information, but I guess we should be thankful that our assets weren’t used as collateral. We’d be kissing our assets goodbye.
    Thank you.

  6. Howard Rubenstein Says:

    Makes a lot of sense, but then you also have to account for the costs of our “entitlement” programs. What has the government committed to pay out over the next 30 years that has significant cost: medical care, retirement wages, drug coverage. If you add this in you will see we are like a massively underfunded pension system.

  7. C. P. Smith Says:

    Mr. Hart:

    Accounting like any other reporting discipline is about telling a story or communicating information. Our budget and other financial reports are intended to provide citizens with information to assist in establishing priorities, in particular those in the future. Your “puzzling questions” are only puzzling to me in the sense of how exactly does your suggestion contribute to enhancing the public’s understanding of where we stand as a nation?

    Let me attempt to clarify a few points given my own limited knowledge of accounting.

    First, the government does balance its assets against its liabilities. However, some of the assets you are referring to such as national parks, national monuments and historic sites are considered stewardship assets and are not treated like regular assets. For example, if these assets are to be treated like any other asset they would have to be amortized (depreciated) over time. How do you propose amortizing the Washington Memorial or the Grand Canyon? How do we estimate the value of mineral deposits and forests whose value may change, or what if minerals are in a protected area where the political decision has been made to value the natural beauty of the land over the marginal value accessing those minerals may provide our economy? Even if we were to amortize these assets, at some point these enduring assets, ostensibly maintained to preserve hallmarks of our culture as well as our nation’s treasures, would have no book value. In short, adding stewardship assets and several of the other assets you listed to the ledger would amount to a temporary gimmick and not really inform citizens any better about the present financial status of our nation or our finances moving forward.

    Second, governments (federal, states and local) do depreciate the value of assets over the estimated lifespan of the asset. Yes, construction expenses are paid (an “expense”) by some function as a percentage of construction completed, AND after construction is completed the value of the asset is then depreciated over the estimated service life of the asset. The exercise of adding and subtracting asset values balances each other out over time showing our citizens they have received value for their money and promoting an accurate assessment of our government’s assets. For example, if an aircraft costs $32 million to build and is estimated to have a service life of 20,000 flight hours, as the aircraft is flown the value of the asset is reduced accordingly by an agreed formula (there are several) until the aircraft has no value. Value is not the same thing as service life with your example of the B-52 or early Nimitz class carriers being a good example as these systems were never intended (or expected) to last half a century, but that is what good maintenance buys . . . which is another accounting question entirely.

    Third, there is a fundamental difference between budgeting and accounting. Government budgeting is the process of politically determining our priorities and assigning an amount to be spent on those priorities. Accounting is the reporting on how the funds were spent. Although tied together through financial processes, budgeting is primarily a forward looking perspective and accounting is a retrospective perspective, ideally confirming that what was intended through the budget actually happened with some degree of assurance. This fundamental difference means accounting practices such as amortization and depreciation have limited value in the discussion of how and why something should receive public funding.

    Finally, the limitations of assessing the value of federal government assets is not because no one knows how to conduct such an appraisal, it is merely a question of what value would the nation derive from the exercise given the expense to conduct such an appraisal. Could one assess a value to the Grand Canyon, yes, but what would it really tell our citizenry? What meaningful asset or liability would we balance the depreciation against, and to what end? How would it promote our understanding of the need to balance present wants vs. needs? Once the aircraft is fully depreciated using accepted accounting standards, what do you propose we do when the asset serves beyond its estimated life? Add some arbitrary value to the long-lived asset and depreciate that further? That would essentially be making money through accounting gimmicks, and we should not forget how that story typically ends. In any case, how would your proposal enhance our political leadership’s ability to parse conflicting needs and ensure our national finances will be in as good a condition as our more enduring assets. I do not see how that would help the dialogue you are concerned about. My impression is that the deficit hawks are focused (perhaps too much) on short-term spending and are concerned that borrowing for today’s immediate desires while encumbering the nation with long-term debt is ultimately counter-productive. Although it is worth highlighting that there may be value in borrowing today to enhance the economy’s long-term prospects, that argument will not be satisfactorily addressed by any of the accounting measures you have suggested.

    @ Boice: The government uses “standard, recognized accounting principles” promulgated by the Federal Accounting Standards Advisory Board (FASAB). That is not to say there is room for improvement. As Mr. Hart hints at, one area for improvement is in asset control and inventory, for example, the Department of Defense’s audit has not once been certified by the Government Accountability Office (GAO) due in large part to unaccounted assets.

    I recommend an excellent reference: Government and Non-Profit Accounting by Professor Michael Granof, who is presently serving on the board of the Government Accounting Standards Board. Much better than I can ever hope to, he can identify those areas where the accounting practice meets up with public policy, to include opportunities for improvement, and places where government accounting does not adequately capture the essence of a transaction.

    Thank you.


  8. Bette S Baysinger Says:

    Mr. Rubenstein,
    I wouldn’t worry too much over all that entitlement, the government is taking it away as we speak. As parent of a 21 year old with autism who has been using “entitlement” to be able to stay home to care for him 24/7, our household income was lowered by 1/3 this month of July, our new fiscal year. Now I cannot buy the medication he needs, and I had to borrow money so we could eat today. My evil plan to have a child with autism, and end up a single parent so California could pay my way is collapsing around us. Don’t worry about “entitlement.” We no longer care for our “deserving poor” which is what my son is, he can’t help it if I am his mom with only his twin sister to help us. She is also affected by all this.

  9. Gary Hart Says:

    I understood when I waded into this thicket that it was complex and I particularly thank CP Smith for helping educate us all on a field I barely understand. Governmental accounting, for all the reasons several have stated, is different from private/corporate accounting, and I understand the differences. Rather than getting into a technical discussion, however, I simply wanted to point out two significant ways in which both public deficits and debts look much different when normal budgeting and accounting principles are applied. It is also meant to be a warning against thinking there are overly simplistic ways to manage federal expenditures and revenues.

  10. Tom J. Flaherty Says:

    Consider this as a principled exercise.

    In my view economics is an artificial constraint on civil society.

    A forty year war on the productive real economy of trade and labor is the reality of a system that has gone so far awry that something called naked credit default swaps has become reality.

    Now I understand that first Japan and Toyota Loom Co. came to us in a pivotal time of mileage worries so a few dollars started to leave. Then the oil cartels really got us nervous. Now in addition to all that we have treaties and less rights so when China trades unfairly (in my opinion) we seem to be just unable in our forty years of reversals to be able to comprehend what has happened, after all we and our wives and many times children must hurry off to our second jobs. OH wait a minute that was a couple of years ago. Now we are looking for jobs but the jobs are controlled by the owners elite.

    Did you know that the owners like dysfunctional governments. Perhaps we should continue to have the NONE PRODUCTIVE, NON-ACCOUNTABLE, MILITARY INDUSTRIAL COMPLEX COST because that might be needed if our mercenaries get into trouble a libertarian might say, But to share and be equitable creating back a well balance citizenry might be a little more in the American Dream view as the Constitution speaks to THE GENERAL WEALFARE. The owners like entitlement view of say the king queen, royal family or maybe just a good fascist corporate welfare state that get’s re-inflated by congress that also allows bank, and financials to park the ill gotten loot (that that was not instantly sent abroad) into the Federal Private Reserve System for a profit by interest (something for nothing) It’s a real incentive to taking chances, lending, and building a better future as Mr. Smith does seem correctly focused on. Yes they can now consolidate their position of superiority from bankruptcy to status quo victors on the backs of the honest, diligent, hardworking, and yes as per Bette above the dispossessed because still have homes to target and the trust funds have not all fallen yet.

    You see until we get control of our elections and fund then for natural citizen publicly we are at peril from the media and financial subversive owners.

    MY VIEW is Principled in the progressive way.

    Generally speaking we need to have steady state economics with slight inflation. This helps pay yesterdays bills with cheaper money. As population increases we need to feed the positive to support a greater and more productive future.

    Taxation is the right and responsibility of a civil society and corporations need to be submissive to a sound uplifting economic structure that will allow profits but not profiteering. Yes I think competition results in productivity that benefits all. However It’s governments role to make sure they go after the money in the name of a better society.

    Today we have a 15 to 16 trillion dollar economy and the world economy is at about 60+ trillion. The problem may be that in an effort to maintain position relative to a the pressures so presented powers figured out how to manufacture money instead of equity, and jobs with dignity, for the real people.

    Again it seems to me that the system is artificle so we should present a reality that is constantly better for the majority of the citizens and from there we can go back to being the benevolent nation we like to be because we are stuck with a good personality.

    A couple last points: 1. There is six hundred to nine hundred trillion dollars in artificial welfare state of financial institutions and so get the damn money. A less than one percent tax on any transaction would create do I dare say trillions in short order. 2. The monopoly of the insurance industry still bothers me again I don’t mean to kill competition but isn’t that what monopolies due so lets realize that the government administers SS and Medi-Care at about 1 to 3 percent of cost. The insures on the other hand funnel royally at about 20 to 3o percent. That is about 600 billion or more a year wasted! Let’s make the private sector 10 percent of the market (twice what they were afraid they might have to surrender to the public option) and preserve competition while the civil servants continue to out perform and innovate the corporate welfare subversive mental midgets. Please excuse me for being so colorful but you see after listening for years to divisive talk radio of the owners I just have to speak out. Not sure if I still have the right but I know I have the duty.

    A couple of weeks ago the Bank sold my home at auction in the street and we found out upon arrival home by the neighbors. The bank had been taking new income numbers from us as things had turned around. The bank had told our home mortgage counselor that the foreclosure date had been put off. That made sense because we thought we were in the modification process! Yet now we loss our two family income property of almost ten years because we tried to be responsible with a modest house and a fixed interest rate that after ten years still had equity! The bank got all it’s money and nothing was left over for us because of a beast to big to keep it’s promises straight. The flipper company that won the auction stands to make a hundred and twenty five thousand dollar profit on a paint job.

    We must find a place to live with our 5,6, and 9 year old that will rent at above two times the monthly demand we had. Last year was the first year since 1986 that I had a loss. Now I’m afraid that new night teaching position won’t be close to what we need so back to the job search in a depressive economy greater and longer than the “Great Depression” with no end in sight because that is how the owners elite like it.

    Remember there is more money and solutions than ever before and for forty years of increased domestic product there is no excuse for depressive economies. Create new productive industries, jobs, and protect with the same tools others use. Dynamic tariffs would be justifiable as when balance return they can swing back. Codes updates could insure we stimulate subsidized green industry over counter productive war machines, corporate monopolies/cartels, and your turn!

    Eyes wide open, You have every right to a more natural family life, fight the real welfare queens at every point. One thing that really bothers me is how we can ask the British Government to stop it’s black banking in the Cayman Islands only to be ignored. That happened as a result of a conscious effort to break or tax structure for quick gain rather than real productive profit. The structure allows for our industry to ship at little or no profit to a Post Office Box great sales at no profit and hence no taxable income. Now that we are in the Kingdoms domain we can of course see at great profit the products of the United States Back to the United States and the rest of the world at great profit. The best part is that they don’t do to much taxing out of the Grand Cayman Island mailboxes. It’s a good case for a corporate Value added Tax structure similar to that of Europe and if we don’t do fix it the domestic legitimate companies will either collapse or move offshore.

    Sincerely to the sheep ale of the GOP/TEA Party find a progressive radio station that handles Thom Hartman or Ed Shultz and give it a month or two when you have the time. These are thoughtful folks with a plan of a stronger whole in image of the founders.

    All the Best,


  11. Tom J. Flaherty Says:

    Another quick thought.

    It seems to me just fine to deficit spend if you are buying the machines of the industrial revolution. However to deficit spend on nonproductive endeavors and to pay interest on the debt seems insane. Lets have some sunshine at the treasury while we are at it.


  12. femtobeam Says:

    What happened to the Government Accounting Records at the GAO, managed by Bechtel? What happened to the 2.3 Trillion Dollars in missing funds in one year that Rumsfeld spoke of on the day prior to 9/11? There is no accounting.

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