BEYOND THE NUMBERS
So-called “fair-value accounting” is misguided because it would make federal loan and loan guarantee programs look more expensive than they really are, as my colleague Richard Kogan and I have explained. Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds. We concur. We have re-analyzed our assessment of investing a portion of the Social Security trust fund in equities and now come to a different conclusion than we did in 2005.
The current method of accounting for federal credit programs fully records — on a present-value basis — all the cash flowing into and out of the Treasury. In contrast, fair-value accounting would add an extra amount to the budgetary cost, based on the fact that loan assets are somewhat less valuable to the private sector than to the government for several reasons: businesses must make a profit; they can’t put themselves at the head of the line when collecting a debt; they borrow at higher interest rates; and private-sector investors are risk-averse — they dislike losses (in this case, higher-than-expected loan defaults) more than they like equal, and equally likely, gains (lower defaults). None of these factors represents an actual cost that the government incurs when it makes loans.
Including in the budget a cost that the government does not actually pay would overstate spending, deficits, and debt, making the federal budget a less accurate depiction of the nation’s fiscal position. It would also treat different federal programs inconsistently, because it would not make a similar adjustment for non-credit programs whose costs are also uncertain and variable. In a recent article, New York University law professor David Kamin thoroughly explains why “including the cost of risk would skew budget estimates.”
Proposals to invest the Social Security trust funds in the stock market raise similar issues. Stocks produce higher returns than Treasury bonds on average over the years, but they also entail a greater risk of losing money. That risk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget. This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.
(Proposals to replace Social Security with private accounts are very different, since individuals, rather than the government, would bear the risk of holding their retirement savings in stocks. Individuals are rightly risk-averse. As a result, any analysis of their well-being — as distinguished from analysis of the impact on government finances — should account for the variability of the stock market.)