Tag Archives: Federal budget deficit

Bank Regulation: Rolling Backwards

Are you clinging to the hope that the 2008/09 crash of the global economy was the last one that we’ll experience in our lifetimes? Do you believe that our political leaders learned much from the events that almost destroyed the world’s financial system?

If you remain optimistic about our economic future, you might wish to ponder legislation that was approved by the United States Congress last week. Legislators easily passed a bipartisan federal budget that funded the operating activities of the United States and avoided any possibility of another imminent government shutdown.

That sounds very promising, doesn’t it? After all, any bipartisan activity in Washington can be a cause for celebration. And any budget process that avoids a federal government shutdown can represent a step in the right direction.

But before you permit yourself to feel optimistic about the future, you might wish to read the “fine print” of the budget bill. If you do, you’ll notice that an important component of regulatory oversight, one that was instituted by the Dodd Frank Act just a short time ago to prevent a future government bail-out of the “too big to fail” banks, is being dismantled.

Lobbyists from the global bank Citigroup reportedly helped write the provision that repeals restrictions on the riskiest investment activities of federally insured banks. On a go-forward basis, the new law “will allow banks covered by the Federal Deposit Insurance Corporation to directly engage in derivatives trading.”

In other words, as a result of this law, the world’s largest American banks will again be empowered to trade in the very derivatives that Warren Buffet once called “financial weapons of mass destruction.” And the institutions that engage in these trades will retain the benefit of insurance coverage by the taxpayer supported FDIC.

Will this new law encourage riskier behavior by America’s banking giants? And will it again create the very conditions that might lead to the next global economic collapse? The sudden roll-back of the derivative regulations that were first passed only four years ago makes it difficult to be optimistic about the future stability of the global financial system.

Fiscal Gimmickry: Pensions For Highways

For many years, the federal government of the United States has utilized accounting gimmicks to finance payments for obligations like pension plans and highway funds. But can you believe that the government is now creating a gimmick to sacrifice one of these obligations to pay for the other?

It’s true. Last month, the federal highway trust fund was running out of money. Because members of Congress could not agree on a responsible approach for raising new funds, many critical transportation infrastructure projects were about to grind to a halt.

So how did our elected leaders resolve the problem? They decided to weaken our nation’s private pension plans in order to generate additional government funds. By authorizing a practice known as “smoothing,” the government permitted private corporations to reduce their current funding payments into their own employee retirement benefit plans.

The reduction in pension expenditures during the current period is producing greater corporate taxable income. That, in turn, is increasing income tax payments to the government this period, which are being added to the highway fund.

Of course, this maneuver will result in greater pension payment obligations during future period(s). Interestingly, though, it would not have affected the tax liability of the corporations at all if the accrual method of accounting had been mandated under American laws of taxation.

Under this method, an expense is an expense whether or not it is paid. Prior to each payment, a liability (and its corresponding expense) must be recorded to reflect the unpaid obligation. The subsequent payment eliminates the liability; it does not affect the expense.

Although Generally Accepted Accounting Principles (GAAP) usually requires that the accrual method be used for corporate financial statement reporting purposes, American tax laws permit the use of the cash method to calculate taxable income and deductible expenditures.

In other words, had all corporate plan sponsors been required to follow the accrual method of financial statement reporting for taxation purposes, they would not have benefited from the government’s permission to delay pension payments. But because many of them use the cash method for taxation purposes, such benefits can be claimed by taxpaying organizations.

Thus, in the end, the federal government opted to take advantage of its own accounting gimmickry to generate highway funds by explicitly encouraging corporations to weaken their pension plans. Although America’s drivers are benefiting from this practice in the present, its employees and retirees will undoubtedly pay the price in the future.

Federal Budget: What Deficit?

Do you remember the American government shutdown of October 2013? Just five months ago, the “deficit hawks” of the United States Congress refused to finance the continuing operations of most of the federal agencies and functions.

They claimed that they were deeply concerned about the unrestrained debt financed spending habits that were imperiling the financial futures of the American people. And they had a point; after all, the federal government deficit had exceeded $1 trillion in each of the four fiscal years 2009 through 2012.

Last week, however, the U.S. General Accountability Office (GAO) announced some stunning news. Apparently, the deficit had plummeted to $680 billion in fiscal 2013; it represented the fastest deficit decline in the United States since the end of World War II.

Before we get too excited by that “historic” decline, of course, it would be helpful to remember why any such decline was possible in the first place. After all, had the deficit not climbed to record levels during the previous four years, it would have been impossible for the GAO to announce such a dramatic decline this year!

Nevertheless, for individuals who remain concerned about American profligacy, the decline can be perceived as a return to a level of relative normality. The United States produces $17.1 trillion of Gross Domestic Product (GDP) per year, an amount that is roughly 25 times as large as the $680 billion debt.

A ratio of 25 to 1 may be worrisome, but it is certainly not catastrophic in scope. It is analogous, for instance, to a family that earns $100,000 per year and that needs to borrow an additional $4,000 to make ends meet during a financially challenging period.

The total accumulated debt of the United States now exceeds $17.3 trillion. That is roughly 1% higher than the $17.1 trillion of annual GDP, representing (again) a troubling but not terrifying difference. It is analogous to a family with annual income of $100,000 that decides to carry a $101,000 mortgage.

These analogies are not perfect, of course. The federal government’s debt must be refinanced at regular intervals, while a family can often “lock in” mortgage debt at low fixed rates for up to thirty years.

On the other hand, a family can lose 100% of its earnings when a head of household loses his (her) job. The federal government, though, can continue to receive significant tax revenues throughout the most dire depression periods.

These facts may explain why Congressional Republicans recently “caved” (in the words of their own supporters) during negotiations over the debt ceiling. Although long term budget projections do show federal deficits climbing back to unsustainable levels within a decade, politicians on both sides of the aisle appear to be content to permit current budget policies to remain in place for now.

If you were Comptroller General Gene L. Dodaro of the GAO, would you regard the 2013 budget deficit as a promising sign of fiscal health, or as a troubling sign of fiscal stress?