This one is odd, and it has a few moving parts I haven’t figured out yet, but you still need to know about it.
In case you hear the Administration start bragging about a sudden reduction in this year’s deficit by about $175 billion, here’s what they’re talking about: they’re going to reduce the amount of the TARP outlays by that much.
No, that doesn’t mean they spent less than $700 billion. (Well, actually, a bit less than $600 billion has been spent so far, but they’ll spend the rest and may need more later.)
It means they won’t add the whole amount to what they say the deficit is.
How are they going to get away with that? By accounting for the TARP outlays on a net present value basis rather than as cash outlays. Think about it like this: the stimulus/porkulus funds are different from TARP. The government either borrows or prints money, and then hands it out to state governors to spend on salaries for unionized teachers, bureaucrats, and hospital administrators, and for things like the John Murtha Airport, bike paths to nowhere, and hamster subsidies for Nancy Pelosi.
Those are pure cash outlays. From our point of view as taxpayers, it’s pure waste, money flushed down the toilet.
But the TARP funds are, and always have been, different. Approximately $17 billion of the TARP was used to buy Christmas presents and holiday bonuses for unionized employees of GM and Chrysler (that money was wasted). The rest was used mostly to buy preferred stock (and in Citigroup’s case, common stock) in something like 200 banks and non-bank financial institutions.
As I’ve said from the beginning, these TARP outlays don’t represent a simple expenditure of cash. In theory, at least, they give the government (meaning, ultimately, we the taxpayers) a coupon-payment stream, plus some claim on the assets of the assisted banks.
In short, we should be getting back the money we put into TARP. It’s more of an investment than an expenditure. (Well, actually we should be getting back some fraction of the money, since it wasn’t a very good investment.)
Now the Administration’s budget people are looking at it that way too. They’ve decided to apply some kind of a present-value calculation to the shares that TARP purchased. And they’re going to tell you that the amount of the TARP outlay was less than it actually was by that amount, roughly $175 billion according to news reports.
Now there are obvious PR benefits to this. Obama loudly promises to cut the budget deficit in half by five years from now. He wants you to get the impression that he means he’ll cut it in half by what it was before he came to office, and certainly the news media do nothing to dispel that impression. In reality, he hopes to cut the deficit in half from his own first budget.
But Obama’s very first budget will be in deficit by at least four times as much as the previous record-high deficit in nominal dollars, and at 13% it will be the highest deficit as a proportion of GDP ever in peacetime. If he does reduce the deficit in half in five years, it’ll still be more than twice as high as the previous record.
It’s no joke that Obama would like to see his upturned nose on our currency someday, given how much of it he’s printing.
So to account creatively for the TARP expenditure will reduce his first budget deficit by about 10%.
But is it real? Government accounting is very different from the ordinary accrual accounting that large businesses use. It’s often said that the government keeps its books as if it were a candy store.
But that actually makes a lot of sense when you consider that the government has no use for retained earnings, as a business does. The government prints its own money, and every dollar that it spends simply “appears” in the commercial bank accounts that the Treasury keeps for this purpose. In a mechanical sense, the TARP outlays were accomplished simply by changing numbers in a few computer files.
If you’re a business and you have money left over at the end of the year, you pay taxes on it, and then you save or invest what’s left. If the government has money left over, it simply vanishes from the economy. It makes the most sense for the government to keep its books on a yearly cash basis.
So for them to say that TARP paid nearly $700 billion for securities with some kind of a stable long-term value, and then declare that those securities are now worth $175 billion, they would have to set up a separate capital account for those holdings. (The Federal Reserve, which does maintain a balance sheet, did something roughly similar with “Maiden Lane,” the vehicle that holds the assets taken out of Bear Stearns.)
But you have to match a credit in a capital account with an equal outlay somewhere else. I think they’re playing a game when they say that the deficit was reduced by $175 billion. There has to be an economic impact from the creation of that $175 billion, and someone has to reflect the $175 billion as a liability. If not the Treasury, then who?
You see how phony it is? The traditional way of doing it would be to consider the whole $700 billion TARP plan as a cash outlay (which is what they originally did). And then, as cash flows are realized from the assets that TARP purchased, those cash flows would be treated as cash revenue, offsetting future deficits.
Something tells me, given the “transparency” which is the great stated virtue of the Obama administration, that they’re going to try to have it both ways. They’ll reduce the stated deficit by $175 billion now, and they’ll reduce it again in the future as the TARP assets produce cash. Heads they win, tails we lose.