The American government’s accounts look about as r…

The American government’s accounts look about as reliable as Enron’s

I had a post a couple days again that had this ‘completely different note’:

“why are there no aggregate wealth statistics that are widely reported? I mean you hear about GDP everyday it seems in one article or another. It seems that the health of the economy, as businesses, can be judged by looking at income AND the balance sheet (which I take to mean wealth).”

The Economist also points out this deficiency. They introduce two concepts FI (fiscal imbalance) and GI (generational imbalance). The first measures a sort of national balance sheet and the second measures discounted cash flows of the current generation (a negative value means that future generations will need to pick up the tab, in addition to paying for their own benefits).

The government can no more measure its fiscal health by measuring only its current income than a business can. The business who does this, ignores the revenues to be gained in the future by its current assets and it misses the burden of debts that may not come due but in years hence. The first thing you learn in financial accounting courses is that a good financial analysts take income, cash flow and the balance sheet in to account when analyzing the health of a company. The same is true of the government.

The government makes promises to its citizens that amount to debts that will come due only in the future. These promises are ignored by measures of GDP, deficit and debt. Those debts only make sense in the context of its future assets. Making promises is fine as long as policies also allow for those promises to be paid for. So measuring the difference between the present value of all future debt and assets gives a better sense of the fiscal health of the government.

Similarly, if a government is cash flow negative in the short term, it is borrowing against future generations. At some point cash flows will need to equalize. This is why its important to measure the balance of cash for the current generation to see how much they’re borrowing against us kids.

I’ve started to read the Gokhale and Smetters paper and I’m pretty sure I’m misplacing the analogies between FI and GI and balance sheets and cash flow statements… But its a start. I think this is an important enough issue to look into more seriously.