[Congressional Record Volume 140, Number 118 (Friday, August 19, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 19, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     CBO--BEST HUSH PUPPIES AROUND

                                 ______


                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                       Thursday, August 18, 1994

  Mr. STARK. Mr. Speaker, there has been some grumpiness at CBO 
recently because of the logjam over health care analysis.
  Prof. Uwe Reinhardt offers a refreshing look at this excellent corps 
of public servants:

                Hail to the Government Number Crunchers

                      (By Uwe E. Reinhardt, Ph.D.)

       Much sport is made these days of the hapless government 
     actuaries who, in 1965, so vastly underestimated the eventual 
     cost of the Medicare program. The error is deemed typical of 
     a government widely believed to be incapable of walking and 
     chewing gum at the same time. We remind ourselves incessantly 
     of that ancient error as we behold the CBO's current cost 
     projections for the new health reform proposals before us.
       It is fair to ask, however, whether anyone could have done 
     better, then or now. Do we sincerely believe that the 
     actuaries of, say, the General Motors Corporation (or, for 
     that matter, of any other American corporation) could have 
     predicted with any greater accuracy, in 1965, how many 
     dollars per employee the company would spend on health care 
     in, say, 1994? If you think so, think again!
       In its 1991 annual report, GM told its shareholders that 
     the company's year-end networth (the reported value of all 
     assets owned by GM minus all debt it owed) was $27.4 billion. 
     But only one year later GM told its shareholders that the 
     company's year-end networth was, Oops!, really only $6.2 
     billion. In both years, GM's outside auditor certified, for a 
     fee, that the year's figure represented ``fairly, in all 
     material respects,'' the financial position of General 
     Motors. But how could both numbers possibly be true? What 
     could explain this sudden massive meltdown of GM's networth? 
     A massive operating loss? There was a loss; but it amounted 
     to less than $3 billion ``before extraordinary items.'' It 
     must have been an ``extraordinary item.''
       A clue to that item can be found in the footnotes. Here GM 
     admits to a little error the company had made, year after 
     year, for several decades, when it promised its workers 
     generous post-retirement benefits without ever reporting to 
     shareholders the probable cost of these reckless promises. By 
     1992 these unreported and unfunded promises had run up a 
     tab amounting to $33.1 billion. That is the estimated 
     amount of money GM ought to have set aside, by 1992, to 
     guarantee payment for all of the post-retirement health 
     benefits it already had promised current and former 
     workers. Fessing up to this liability in 1992 forced the 
     company to make a sudden after-tax hit of $21 billion on 
     the $27 billion net worth it had reported to shareholders 
     only a year earlier.
       In fairness, it must be said that GM was by no means alone 
     in fibbing thus. Many other American corporations had made 
     similar promises to their workers, and virtually none had 
     been more forthcoming on the issue than GM. Their 
     shareholders learned about these liabilities (and the 
     corresponding meltdown of their companies' net worth) only in 
     1992, when the Financial Accounting Standard Board literally 
     forced management to come clean, at long last.
       In my accounting classes at Princeton, I regularly ask my 
     students what we are to make of adults who claim to be 
     describing, ``fairly, in all material respects,'' the 
     financial status of the companies they manage, all the while 
     overstating knowingly the firm's net income and networth, and 
     correspondingly understating its liability. Perhaps these 
     executives, far from being inept, simply found it expedient 
     to lie to their shareholders. Paying workers with promises 
     whose cost could go unreported and that required cash outlays 
     only decades hence allowed management to overstate the 
     earnings on which performance pay tended to be based. Not 
     surprisingly, I have yet to meet an executive willing to 
     plead guilty to that cynical charge. Instead, the excuse 
     invariably is that it was just too difficult to estimate 
     accurately the liability for post-retirement benefits. The 
     CBO's brave number crunchers, of course, would laugh at that 
     feeble excuse.
       But if that really be these executives' excuse, then how 
     can they even presume to comment on the quality of the 
     government's number crunchers? Indeed, apparently unbeknownst 
     to many, the decision makes in corporate America and on Wall 
     Street routinely dispose of billions of other people's money 
     on the basis of information whose quality is much below that 
     given by the CBO to the decision makers on the Hill. I am 
     speaking here of the accounting data that drive so many mega 
     deals in the private sector. While the intellectual 
     foundation for the CBO's work rests heavily on highly 
     sophisticated simulation models and equally sophisticated 
     econometric studies, the intellectual foundation for decision 
     makers in the private sector is furnished largely by the so-
     called Generally Accepted Accounting Principles (GAAP), a set 
     of relatively simplistic rules written on a rubber sheet that 
     can be stretched in any number of ways. All too frequently, 
     these GAAP allow private executives to march to the motto 
     ``Better to be precisely wrong than to be about right.''
       With appeal to the GAAP, for example, private-sector number 
     crunchers busily add up apples and oranges and then pretend 
     that the sum means something. They do this when they add 
     asset values stated in, say, 1993 dollars to asset values 
     stated in, say, 1975 dollars, without any adjustments for 
     general price inflation or, alternatively, for changes in the 
     market values of these assets. They do likewise when they 
     calculate net income by deducting from revenues expressed in, 
     say, 1993 dollars depreciation expenses and, sometimes, cost-
     of-goods-sold figures expressed in dollars of distant years 
     past, once again without any adjustment for inflation. Worse 
     still, with appeal to the hallowed GAAP these private sector 
     number crunchers routinely disregard any quantitive effects 
     they cannot measure ``objectively''--as GM evidently did when 
     it strung along its shareholders for so many years.
       All of which makes one wonder why casting aspersions at the 
     government's number crunchers is such a favorite sport among 
     Americans--particularly among corporate executives. My own 
     hypothesis is this: Americans in general hold the public 
     sector to much higher standards than they impose upon the 
     private sector. Deep down we know, or should know, that when 
     it comes to structuring data in imaginative and sophisticated 
     ways, the wing-tip booted number crunchers of the business 
     sector could not even tie the shoes of the hush-puppied civil 
     servant at the CBO. Sheer bluster helps them camouflage that 
     inferiority.

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