It's the Spending, Stupid

Here in capsule form is how it works, and what occurred that has distorted reported results:

  • The government no longer treats the money "invested" in propping up banks, other financial institutions, car companies, and other businesses as "outlays." Similarly, it doesn't recognize principal repayments as receipts.
  • If (more like when) it becomes clear that the government isn't going to get all of its money back, Treasury estimates how much those losses will be, and includes that estimate in "outlays." This is a highly judgmental calculation that is vulnerable to political manipulation. During fiscal 2009, Treasury write-downs amounted to hundreds of billions of dollars.
  • But in March 2010 (shazam!), Treasury decided that it had overestimated its fiscal 2009 TARP losses. It arbitrarily revalued its TARP investments upward by $115 billion, thereby reducing reported 2010 "outlays" by the same amount.

Here was my plain-English summary of that $115 billion adjustment when it occurred:

... the administration pushed as much "bad news" (asset writedowns) as it could into last year's financial reporting, since last year was going to be a disaster no matter what. But since they overdid it with the writedowns last year ("Gosh, how did that happen?"), they can make this year look better than it really has been.

After adjusting for the $115 billion non-cash item just noted (and wryly noting that TARP somehow is treated as "mandatory spending"), and assuming that there are no more surprise TARP writedowns or writeups before the end of the current year, here's how things really turned out last year, and how they will end up this year if the CBO's estimates are otherwise accurate (all figures are in billions; numbers that changed from CBO's original are highlighted):

Well, well. While the administration and CBO will claim that spending and the deficit started to head downward in fiscal 2010, the reality is that fiscal 2010 will be significantly worse on both fronts.

One look at Table 3 in the July 2010 monthly Treasury statement confirms that there has been no letup in spending in most areas of the government. There's a lot of competition for the most offensive increase, but my nominee would be the Department of Education, which through July had spent almost $81 billion compared to "only" $42 billion as of the same time last year. It would be nice to think that nearly doubling federal spending and building Taj Mahal schools with local tax dollars have made American students twice as smart. Dream on.

The administration's accounting shift cleverly masks what it has really been up to during its nineteen months in office: creating a permanently high spending structure that will become ever more difficult to reduce to a decent size when (or if) sanity finally prevails. A year ago, Victor Davis Hanson called this the "Gorge the Beast" strategy. Its aim is to justify tax increases and enhance the power of the ruling class over everyone else.

It must be stopped. A massive change in congressional leadership in Washington is a prerequisite, but it will only be a start.