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Aug. 19, 2012 - Freedomain Radio - Stefan Molyneux
22:51
2189 Lies, Damned Lies and Government Budgets!
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Hello everybody.
It's Stefan Molyneux from Free Domain Radio.
I have Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting on the line.
Thank you so much for taking the time today.
Oh, thanks for having me on your show.
So, Shiloh, what are you doing to our poor elected officials who are only here to try and serve us, the general public?
Why are you bringing all of this math and reality and numbers and ethical accounting?
You've got to know where that's going to lead.
Well, we're just trying to get our elected officials to tell us the truth about our finances.
We believe this is critical for our democracy because if the citizens don't have the information they need to make knowledgeable decisions, then they cannot be active participants in their governments.
Right.
Now, reading the reports that are on your, it's truthinaccounting.org, reading the reports that are available, and I urge people to go and read these reports.
It is a bit hair curling, mostly for me since I'm quite bald, my nose hairs, but it's really important to go and read these reports.
What are the major issues that you found, the gaps in good accounting practices that are reported by the states?
Well, by the states, our critical issue is that the states, most states except for Vermont, have a balanced budget requirement.
So I assume that to your listeners and to you, that based on this requirement, and your legislators have been telling you that they've been following this requirement, So, therefore, you would think that your governments are doing fine.
Meanwhile, secretly, the governments have been adding debt after every year they've been running deficits and adding debt to the state government's finances due to accounting tricks that they use when they calculate their budgets.
I think you mentioned that Illinois, which has a balanced budget requirement per year, is it $25 billion or some unholy amount that it's managed to dig itself into?
Oh no, you're being so generous.
I think it's up to $130 billion that it's dug itself into.
That's a large number.
And there seems to be two areas that are of particular concern.
Of course, the deficit, right?
Basic, you know, the amount that they're spending over and above what they're bringing in.
But I think people don't really see the unfunded liabilities, and I think that's the real crater that we're heading towards.
Would you agree?
Well, yeah, and you do not see the unfunded liabilities, especially these relate mostly to retiree healthcare benefits and pension benefits, and you don't see them on your books because, again, the states do not do the proper accounting when they calculate these theoretical balanced budgets.
The biggest trick they do is because The pension, each year an employee works for compensation.
So part of their compensation that they earn every year is salaries.
Part of it is they earn the right to receive their pensions and they earn the right to receive their retiree health care benefits.
The total compensation, including those benefits, should be accounted for in the budget year that those employees work.
And what the elected officials figured out is, hold it, but if I don't pay those, even though the employees have earned them, even though they're a cost, because I don't write the check for them and I do checkbook accounting, To calculate my balanced budget, I can balance my budget, promise these benefits, and they've dug their states in the hole because they're not including all the employees' compensation costs in every year's budget.
And then they just...
And sorry, when you say that they don't write the checks for them, do you mean that they don't top up what the funds require to become sustainable, or is it another branch of government that pays the checks?
They do not write, they do not, in a perfect world and what corporations do is, Stefan, if you were a worker, And you would earn your salary.
They would write a payroll check for that.
Then they would also write a check to the pension fund for the benefits that you have earned this year.
And then that would accumulate, just like you do your savings account, your IRA, and that would accumulate so you would have a pension benefit at the back end.
But what they do is they just promise these state employees the benefits, but they do not fully fund those benefits as they are earned every single year.
So they just dig themselves further and further into the hole.
I think the only flaw with your approach is it would seem that that would require a political class that preferred to buy votes in the short term And kick the problems down to the next generation.
And I just, I can't see how that even as a theory could be sustainable.
I'm kidding, of course.
I mean, isn't this the public choice theory that instead of giving them salary now, you promise them lavish benefits long after you're out of office and when somebody else inherits the problem?
Right, but if you did truthful accounting and if you really balanced the budget using truthful accounting, then they would not be able to do this.
So we're encouraging state legislators and the public to go to the states and say we need to calculate the budget Using business accounting not checkbook accounting and get our budget so they are really balanced and then therefore people understand the real cost of government.
In essence people are getting they're not in paying this full compensation that employees are earning every year so they really don't understand the cost of government.
Right now Isn't it fair to say, though, that if we were to calculate the true cost of government, that it would be ridiculously unsustainable, certainly over the next five to ten years, as you point out in your reports, which is a truism, but well worth repeating.
The boomers are retiring.
There's a lot of people with these sort of 350 plans.
Where you get 3% of your salary for every year that you work, that a lot of people are encouraged into early retirement, that they're going to start to chew up healthcare benefits and so on, that it's completely unsustainable.
If you took corporate-style accounting and applied it to the government, is there any amount of taxes in the world that would be able to close that gap?
Well, Wisconsin is a good example.
They do do pretty good truthfully accounting, and therefore, since they do truthful accounting, they include the truthful compensation costs in their budgets.
And so therefore people understand the cost of government, and up there they had a very tumultuous budget process because the public has to now decide, do we want a government that costs X amount, including the full compensation cost, and pay taxes for that, or do we want a smaller government and not have to pay higher taxes?
Yeah, if you don't have the facts, of course, you can't really make a decision.
Now, some of the arguments, I've just finished reading a book called Plunder about sort of public sector unions, and boy, pirates should have been so lucky.
But one of the arguments that the author makes is that the expected returns on the money that's been set aside for public sector pensions and benefits has been artificially inflated.
The people are expecting 7, 8, 9% return, and certainly since 2008, that's been a complete pipe dream.
Also, because they were so flush with money in the early 2000s to the mid-2000s, they went into some pretty speculative and risky investments, like real estate and so on.
This combination of the hammering of the principle That is required to pay off these unions and healthcare benefits.
The principal has diminished considerably, but they're still, in many cases, trying to say, well, yeah, we get 7%, 8%, 9% return, whereas I think in the private sector, you're really not allowed to claim that anymore, which would further adjust the expectation of what needs to be there to fill the gap.
Yeah, and the reason that they're doing that is because that expected rate of return, if you expect to earn more on the money that you put in, you can put less in.
And so the employees are therefore using these artificially high interest rates.
They can have it so the employees get to put less in than really should be required and the states get to put less in than they really should be required to.
So yes, again, you know, they need to look at and use truthful and I guess realistic accounting and those realistic rates of return.
And you're absolutely correct.
If those rates of return were used, It would astronomically increase the amount of unfunded benefits and the amount that would need to be funded for these programs.
But that's how much they really cost and the public really needs to know that information.
So they can decide whether they want to offer these types of benefits to employees or the state really can't afford them and they don't want to pay taxes to pay for these types of benefits.
Right.
Now, an aspect that you've written about or your institute has written about is the trade deficit.
You say 1% of the entire wealth that America has accumulated, not just that it has right now, but 1% of the wealth that's ever accumulated every year goes out to foreigners in this trade imbalance, and that, of course, has a significant effect on America's finances.
Could you break that down a little bit more so people could understand how important that is?
Because, you know, trade balance, it seems like such an abstract thing, but how does that affect the finances of the union?
Well, what it does is, you know, if you have, say, ten dollars and you continually give, say, your grandson a dollar every year, you know, And, you know, eventually you're going to run out of those ten dollars.
So what we're doing is giving foreign countries more money than we're taking in, so therefore we're just giving our money away and we're not getting the equal amount of money back in return.
So therefore our overall, you know, savings accounts or just account balances are less and we're sending our money overseas.
Right.
You've talked about the accumulating federal debt of more than 59 trillion dollars.
I know these numbers just become like grains of sand on a beach.
And you have put the argument forward, which other people have put forward as well, which is that really what is missing is a leadership deficit, it's an information deficit, and it's a public awareness deficit.
But also, looking at these numbers relative to the GDP of the United States, if not the entire world, If a leader were to come forward, wouldn't the leader have to say, we can't afford all of the obligations that we've incurred, and we can't possibly increase taxes enough to cover them, and so maybe some combination of tax increases, but there is going to have to be some significant cuts in benefits, I would imagine.
Again, I'm no accountant, but it seems the numbers fall out that way, which provokes a labor war, and Lord knows people lying down in the streets and storming the The legislature and the Scott Walker experience.
Do you think the leadership deficit comes because people feel like maybe it's just gone too far and nobody really wants to face that dragon?
I really don't look at it as a A political leadership deficit.
I look at it as a citizen leadership deficit.
If you elected somebody and you said, well we want them to lead us a certain way, well no, you elect people to do what you want them to do.
So it really needs to come from the public to say, and the public needs to lead.
And they need to focus, you know, the governments have gotten to such a point that the citizens can really no longer, you know, it's just the government, I really don't need to pay attention to that.
They're at such a size and they're at such a large part of people's lives and the economy that citizens really no longer have the luxury of not paying attention.
So citizens really need to pay attention, understand these numbers, and then the citizens need to lead and say, oh look, we have This much of debt, how are we going to get out of it?
And elected officials, here is what I want you to do to get out of it.
And other elected officials, if you're not going to do that, then we're not going to elect you.
But we understand that we are in tough times and tough choices are going to have to be made, but we're willing to make those and we're not going to harm elected officials who actually do what we want them to do, which is to make the tough choices.
Right.
Now, I mean, yes, I think that would be great.
Part of me sort of says, well, if you look at the experience, you know, to pick one Austrian beefcake out of a pile.
If you look at the experience of Schwarzenegger in California, where he came in and started to introduce measures like merit pay for teachers, and he also introduced a measure which seems to me entirely reasonable and ethical, which is to say that you cannot use forced union dues for specific political campaigns because it may be against the conscience of the people you're taking the money from, in a sense, or in essence by force.
And it got to such a ludicrous degree.
He kind of gave up and almost did a 180 because the unions had so much money and could spend so much opposing these things and could pitch so many court battles and so on.
I've seen a number of politicians, you can sort of go back from Barry Goldwater onwards, not that I'm quite that old.
We've seen a large number of politicians really run smack into this brick wall of public choice problems, of concentrated benefits and diffused costs and a sense of impotence.
People have tried that.
They have said elected people who are going to take on these.
I came from the 70s in England.
There were terrible problems with public sector unions.
Thatcher came along, there was a brief respite, and then, you know, it just kept marching onwards.
Do you think that there is, I'm sorry for that long question, do you think there is any spanner we can throw into this machine that does seem to be chewing up our futures very badly?
Well, I think, again, you know, I don't need to be Pollyanna, but I think that, again, the citizens need to pay attention, they need to educate themselves.
They need to understand the true financial condition of their governments.
And they need to demand change.
It can't come from Washington.
It can't come from the state capitals.
It has to come from the citizens.
And when we have politicians who do what the citizens want, we need the citizens to applaud them.
And, you know, again, I guess I would look at our Institute for Truth and Accounting That's a small organization but I think we're having a large impact just because we're focusing on these issues and we stay focused on them and concentrate all our efforts on them and slowly but surely changes will happen and they are happening.
Are there existing laws that could be exercised that would provide some negative consequences to people who are I mean, it seems like fraud is the right word, I mean, I'm no expert, but who are gaming the system to repress, to push off, to get off books these costs, things which I'm pretty sure would be illegal in the private sector.
So, are there existing laws that could be put, that could be exercised to rein in some of this behaviour?
Well, we had introduced here in Illinois the Truth in Accounting Act, which would require the state to calculate their budget using truthful numbers.
And if we could get the states to pass that, then they would, again, they would have to use the proper numbers, people would understand the cost of government, and then they would, you know, either decide, oh, we want to pay that much for it or we don't want to pay that much for it.
But right now, Because they don't use truthful accounting, they're hiding the real cost of the government, and people really don't understand the choices that need to be made.
And there seems to be a lot of closed-door sessions where if there's an economic analysis done, it's often done after the fact, or at least the information comes out after the fact, and of course nobody's responsible for the accuracy of those guesstimates, and it always tends to be more expensive.
The institute has been working to get resources where we could kind of be the watchdog to, okay, the state's saying they balanced their budget, well, was it really balanced or not balanced?
And then we could provide that source of how the government is doing on calculations.
And some of the cities or municipalities in California that have hit bankruptcy, it seems like the legislators who are coming into power or the politicians who are coming into power are shocked.
It seems like, I had no idea how bad the situation was.
I had no idea we were out of money.
Of course they would because the prior elected officials told them that they were balancing the budget, so everybody thought everything was fine.
Right.
And that would seem to be fraudulent in a particularly egregious kind of way.
But I mean, I don't think anyone's holding their breath to wait for the politicians to apply any of these laws against existing politicians.
So, okay, so let's say...
You're the average citizen and you're really interested in finding out the true costs of government.
You've taken your anti-nausea pills, you've strapped yourself into the roller coaster and you are ready to go and grapple with these numbers.
Of course, truthandaccounting.org is a great place to start.
Where would you suggest that people start to ingest these monster numbers and how to communicate them, how to get involved in Because I think it's a great idea to get the true cost of government out.
I think it is pretty foggy and pretty abstract for a lot of people.
So what would you suggest for individual citizens to do?
Well, yeah, as you say, go to truthandaccounting.org and as you did, read our reports.
The other thing is these issues also exist in the federal government, they exist in the state governments, but as you mentioned, they exist in the city and the very local governments.
So an average citizen should go to their elected officials and say, okay, give me our financial statements.
There's something called a comprehensive annual financial report that I would say 98% of the governments produce, governmental entities produce, and it can be up to 200 pages, but take a look at it, and I would urge you to go to something called the Schedule of Funding Progress, and that will tell you how well your pension plans are funded.
And look at that and then talk to your elected officials in your local government and say, you know, why are these not being funded and, you know, shouldn't we be funding these instead of pushing these costs onto future taxpayers?
Well, that's fantastic and encouraging.
I think you were pointing out in your report that some of these are 500 pages, whereas I think GEs for the whole world was about 100 pages, or at least for America.
So it can be a little bit daunting.
I'm sure that your website and other websites will provide summaries, but I do think it's really, really important that people get a grasp of the numbers that are involved here.
Go beyond the immediate deficits.
Recognize that mathematics are kind of an irrevocable discipline.
You know, like mathematically whatever can't continue, won't continue to really be aware of the, you know, I sort of get the image of Evel Knievel trying to cross the Grand Canyon.
Yeah, as you say, a good summary of the states, and we're just starting to work on Cook County here in Illinois, but on the state level, your listeners could go to, we have a sister website called statebudgetwatch.org.
And they can go to that website, click on their state, and on the right-hand side is a financial state of their state.
And it's a great summary.
It's a one-pager and just shows you, here's our assets, here's what we own, here's our bills, and it details out the bills and gives the citizens exactly how their financial condition And each and every taxpayer's financial burden, what is their share of this bill that their elected officials have pushed onto them?
And I've heard estimates of between a quarter million to a half a million for every newborn that they're currently in debt or unfunded liabilities.
And, you know, talk to people.
You know, you're over the barbecue.
You know, I know it's not the sexiest or most exciting conversation in the world, but it's a very important conversation.
Pull out the paper, say, did you know that?
And can you believe that?
And, you know, It's okay to get people's dander up.
I mean, to get these facts out there, I think is very important.
And I just urge people to, you know, break it out for, you know, even if you have a bunch of government employees across the table, or perhaps even especially if you have a bunch of government employees across the table in your family, you know, break it out and talk about it.
This is a conversation that people need to be aware of, so that we're not caught blindsided when this stuff really begins to hit the fan.
Yeah, and I would urge that if you have accountants or financial people, I would urge them.
They have, you know, they have a special duty or responsibility because they could understand the numbers better than the ordinary citizens.
So, you know, financial people, accountants, you know, look at these financial reports.
There's one for the federal government and there's one for the state governments and every single local government.
Accountants, financial people, go look at these and educate your neighbors and also educate your elected officials because I find that even the elected officials don't really understand the finances of the government that they are trying to run.
Yeah, with elected officials, usually the plan of attack is use small words and bring them a baby to kiss.
Yes.
Then you will get their undivided attention.
Well, thank you so much, Sheila.
And again, it's truthinaccounting.org, the Institute for Truth in Accounting.
I hugely respect the work that you're doing.
I think it's very important to blow these numbers up into the sky so everyone can see them.
The last thing we want is for the ground to give way without any prior preparation or understanding.
So I really appreciate the work that you're doing, and I hope that we can drive a little bit of traffic to your website.
We really appreciate your efforts.
Thank you.
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