Although the beginning of the year has hardly been auspicious, investors are still saying “good riddance” to 2002. After all, the stock market has been down three years in a row--the last time that happened was 1939 to 1941. Investors also concluded that last year’s rogue's gallery at Enron, Tyco, Global Crossing, Adelphia, Worldcom, and a handful of other companies weren’t cases of sickening individual greed but evidence of systemic corruption in executive suites.
But it’s a new year and hope springs eternal. And in this case, investors have a good reason for optimism. Companies are cleaning up their act. Yes, only a handful of senior management will spend any time in the pokey, and denial is still a popular attitude among senior executives. Yet investors and regulators are demanding change, and senior management can’t ignore the pressure anymore. The focus has been on improved corporate disclosure of financial data and liabilities. Investors want to easily understand the cost of stock options, pension obligations, the extent of CEO compensation, and so on. Honest numbers allow investors to better gauge a company’s prospects. Good information makes it easier for investors to find and fund profitable ideas and, at the same time, flee from failed management strategies.
Well, what’s good for Corporate America, investors, and the economy goes for the federal government, taxpayers, and the economy. The federal government’s budget numbers are too opaque and vague, especially when it comes to the liability side of the balance sheet. The need for better financial reporting from the government is critical now that Washington is about to embark on a major tax cut debate.
Let me give you just one example of what I mean. It comes from a paper by Jagadeesh Gokhale, economist at the Federal Reserve Bank of Cleveland. He notes that the government reports its assets and liabilities in the annual Budget of the United States. The government also projects how revenues and expenditures will affect its balance sheet over the next five years. But the government doesn’t report its Medicare and Social Security obligations, net of the taxes available to pay for them, beyond a five-year time horizon. Well, he calculates their combined long-term net liability totals some $30 trillion dollars--or three times the current size of the U.S. economy.
Now, greater transparency in government accounting standards won’t tell voters or policymakers what to do. But, just as in Corporate America, better numbers will allow for more informed decisions by the electorate.
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