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Thursday, April 14, 2005

By Ralf Seiffe

OPINION - Back in 1953, Dwight Eisenhower nominated “Engine” Charlie Wilson, an executive at General Motors, to become his Secretary of Defense.

During Senate confirmation hearings, Mr. Wilson uttered the famous but often misquoted phrase “What’s good for General Motors is good for America”. That quip is worth keeping in mind because GM’s troubles will soon be America’s.

First, a bit of background.

One perquisite of writing a regular column is that I can occasionally indulge a personal interest. Today’s column is one of those times and the Institute For Truth in Accounting is my crusade.

The Institute’s mission is to bring clarity to financial presentations, particularly those produced by the federal and state governments. Sheila Weinberg, the Institute’s founder believes that government accounting, while lawful, is not truthful, making it impossible for the public to make informed policy decisions.

On Monday, this rather new organization introduced itself to Chicago with a luncheon featuring presentations by Congressman Mark Kirk, Corey Davison from the Concord Coalition and Ralph Yaniz from the AARP.

Billed as a discussion on Social Security Reform, the speakers went far beyond the usual sloganeering and presented solid reasons why Social Security reform---and good government generally---is harder than it looks.

Mark Kirk’s talk was particularly alarming because it showed how Congress has rigged its appropriation processes in favor of expanded spending. One way they are able to do this is that the Congressional accounting processes are designed to comply with accounting rules that the congressman characterized as unsuitable for a 1930’s industrial company, let alone the federal government, the world’s largest economic entity.

This concern brings us back to Engine Charlie.

Back in the 1950’s and ’60’s, General Motors and the other mighty industrial companies promised lavish pension and health benefits to their workers; Mr. Wilson put the first cost of living clause in his union contracts. This and other cost ratchets were easy promises to make because executives thought, back then, that their successful economic model would continue long into the future.

Reality has been quite different. Retirees of these old economy companies often outnumber the active work force and the costs of providing benefits are strangling the financial life from them. Accounting rules require General Motors to recognize those costs now---and to catch up from past under funding-so that they are suffering as much as a $1,500 legacy cost penalty on each and every car or truck they produce.

Things could be worse; the nation’s two mightiest steel companies--US Steel and Bethlehem Steel--have essentially disappeared for the same reason.

The federal situation is analogous. Starting with advent of Social Security during the New Deal and accelerating ever since, our government has expanded entitlements so that fully one-third of all beneficiaries are too young to retire and American’s life expectancy has increased that the average lifetime Social Security benefit has expanded from 11 checks to more than 240.

Unlike General Motors, however, the federal government operates under different accounting rules. These rules are closer to a cash accounting system rather than an accrual system which all large companies are required to observe. The federal government is able to create future liabilities without the pain the private sector suffers when they recognize the economic promises made long ago.

One would think what’s good for General Motors is good for America. If it makes sense to require private companies to estimate the certain costs they are piling into the future doesn’t the same requirement make sense for governments? Wouldn’t it be better to have more truthful financial statements than less?

Making that happen is The Institute For Truth In Accounting’s mission. They are working to become a change agent by exposing the problem and creating pressure among users and producers of public sector financial information.

The Institute is off to a good start but it’s not hard to understand where they will meet resistance. Not to pick on Mr. Yaniz but the AARP’s position shows why a change in accounting standards will not be easy. Consider this: AARP has made a big deal over the “transition costs” of Social Security reform.

Transition costs are one of their most potent arguments for preserving the status quo that’s brought the AARP such prosperity. They are really a creation of hoary accounting rules they treat reductions in cash tax collections as “costs” but fail to recognize the corresponding reduction in future liabilities. That’s like budgeting for a series of mortgage payments without recognizing the benefit of getting a house. Put in those terms, it is little wonder the AARP is winning the Social Security debate.

Accounting principles are sleeping sauce for most of us but this little example shows how arcane rules enable and sustain government policy that is financially unsound. Accounting is not benign and big spenders use the rules to advance their agenda while thwarting common-sense reforms.

Nevertheless, let’s give entitlers the benefit of the doubt and assume they are interested in sustainable public policy decisions rather than simply protecting the status quo. If so, they’ll agree with The Institute For Truth In Accounting that good public policy begins with truthful, financial data.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.