Accounting: “one of the most beautiful discoveries of the human spirit” — and the Social Security debate
That was Goethe, by the way. It would be a useful language to speak in the upcoming Social Security debate.
Social Security reform is coming. It will be the single largest reform of the largest income transfer program in human history. The economic structure of Social Security is precisely the Ponzi scheme: people pay money to someone today in order to get a return tomorrow, all the while that money is actually being transferred to others in the scheme, allegedly as a return on their “investment.”
The Social Security debate is actually pretty simple, as we have previously discussed. If we do nothing, a disaster will happen, with taxes up and benefits reduced. So the sysytem must change: the only question is when, and earlier is always better in these matters. But the system should never have been set up this way in the first place. It’s always talked about as some sort of savings program, where you put money in today, through the payroll tax, and get it back later in a larger amount. It is talked about and sold in that way because that’s what it always should have been.
Everybody in the world, except many Democrats and some Republicans, knows that saving for retirement is better than depending on somebody yet unborn to pay for it. Everyone who owns a house, has a Keogh, an IRA or a 401(k), or who own some stock, knows the value and miracle of compound interest — except the aforementioned Dems and Reps.
The reason everyone in America is rich — compared to the world — is American business, or capitalism if you like, as we have said.
Here is the signal fact of our progress in the last century. If you were born in 1900, your life expectancy was in the forties, and GNP per capita was about $4000. If you are born today, your life expectancy in about eighty, and statistically, as an average American, you are ten times richer. In reality you are a hundred or a thousand times richer, if you factor in your ability to be in Paris tomorrow for $500, your ability to watch events from fifty years ago as they actually happened, etc. – not to mention that your toddler’s severe pneumonia can be reliably cured in 48 hours or so.
Only a little of this has to do with government.
Mostly it is because 80% of everything ever invented in the history of humanity was invented in the last 130 years, and 80% of that was invented by Americans. Milton Hershey invented the candy bar, Carrier invented the air conditioner for a tire plant, Sears invented catalogue distribution, Henry Ford invented cheap cars, some guys from Texas Instruments invented the transistor. It is almost impossible to overstate the importance of the invention and wide use of brand names, which communicate the quality and dependability of every product we buy. This alone deserves the Nobel Prize. And it was a large and growing market, the availability of risk capital, standardized accounting, and protection of intellectual and personal property by the courts that made this possible.
People involved with owning and managing businesses speak a common language, accounting. It is a powerful language, and not knowing it is a great handicap in trying to understand precisely and coherently what happens in business, and sometimes government. A generation ago, for example, people were asked how much profit a company made on a dollar of sales and they answered $0.80, whereas the number is more like a nickel. We’ll see whether things have improved as the Social Security debate unfolds.
The government hasn’t helped matters. If a private corporation tried to get away with the accounting practices of the government, the CEO would be in jail faster than you can say Martha Stewart. Here are the US government’s 2004 financial statements, and this comment from the notes, which will stand in for every other atrocity in the report:
Expenses are generally recognized when incurred except that the costs of social insurance programs including Social Security, Medicare, Railroad Retirement, Black Lung and Unemployment are recognized only for amounts currently due and payable (p. 105)
General Motors, IBM and company in America with audited financial statements have to estimate, and record as a liability, the pension and other payments in the future they have to pay to all of us. Not so the US government. It does not record the $12 trillion (Moynihan report) in unfunded liabilities anywhere.
In truth the situation is not so bad, since it can be easily repaired by acting now, as the President has suggested. It will, I think, be amusing to see the Old Media, lately 12-to-1 in the tank for the President’s opponent, now try to report on a debate which take place in part in a language they have chosen not to understand.