SYNOPSIS: Krugman gets into the nitty gritty of fraudulent accounting and Bush budget chicanery
Senator Kent Conrad actually got it wrong yesterday when he criticized the Bush administration's new budget for its Enron-like accounting. Last year's budget, the one that included that big tax cut, was the one with a strong touch of Enron about it. This year's budget involves a different, though equally pernicious, kind of aggressive accounting.
Enron's illusion of profitability rested largely on "mark to market" accounting. The company entered into contracts that would yield profits, if at all, only over a number of years. But Enron jumped the gun: it treated the capitalized value of those hypothetical future gains as a current profit, which could then be used to justify high stock prices, big bonuses for executives, and so on.
And that's more or less what happened in last year's budget. The Bush administration took a bullish 10-year surplus projection — a projection that had a built-in upward bias, and in any case should have been regarded as no more than a guess — and treated it as if it were hard fact. On the basis of those surplus fantasies the administration — aided by an audit committee, otherwise known as the U.S. Congress, that failed to exercise due diligence — gave itself a big bonus in the form of a huge tax cut.
A year later the wrongness of the assumptions behind last year's budget is there for all to see, and in a rational world the administration would be called to account for misleading the American public. But instead the Bush administration has turned to the political equivalent of another increasingly common accounting trick: the "one-time charge."
According to Investopedia.com, one-time charges are "used to bury unfavorable expenses or investments that went wrong." That is, instead of admitting that it has been doing a bad job, management claims that bad results are caused by extraordinary, unpredictable events: "We're making lots of money, but we had $1 billion in special expenses associated with our takeover of XYZ Corporation." And of course extraordinary events do happen; the trick is to make the most of them, as a way of evading responsibility. (Some companies, such as Cisco, have a habit of incurring "one-time charges" over and over again.)
The events of Sept. 11 shocked and horrified the nation; they also presented the Bush administration with a golden opportunity to bury its previous misdeeds. Has more than $4 trillion of projected surplus suddenly evaporated into thin air? Pay no attention to the tax cut: it's all because of the war on terrorism.
In short, the administration's strategy is to prevent criticism of what amounts to a fiscal debacle by wrapping its budget in the flag. And I mean that literally: the budget report released yesterday came wrapped in a red, white and blue cover depicting the American flag.
But why am I so cynical? Isn't the war on terrorism a big deal?
The answer is that emotionally, morally, it is indeed a big deal; but fiscally it's very nearly a rounding error.
It's true that the administration is using the terrorist threat to justify a huge military buildup. But there are a couple of funny things about that buildup. First, if we really have to give up butter in order to pay for all those guns, shouldn't we reconsider future tax cuts that were conceived in a time of abundance? "Not over my dead body" isn't really an answer. And it's particularly hard to take all the grim war talk seriously when the administration is, at the very same time, proposing an additional $600 billion in tax cuts.
Second, the military buildup seems to have little to do with the actual threat, unless you think that Al Qaeda's next move will be a frontal assault by several heavy armored divisions. We non-defense experts are a bit puzzled about why an attack by maniacs armed with box cutters justifies spending $15 billion on 70-ton artillery pieces, or developing three different advanced fighters (before Sept. 11 even administration officials suggested that this was too many). No politician hoping for re- election will dare to say it, but the administration's new motto seems to be "Leave no defense contractor behind."
I could go on, but you get the point. The administration insists, and may even believe, that the war on terror has become a mission. But as far as the budget goes, it's not a mission; it's an excuse.
Originally published in The New York Times, 2.5.02