In the 1960 film Spartacus, Kirk Douglas stars as a Greek slave whose ‘job’ is to provide gladiator entertainment for corrupt Roman leaders. Spartacus ends up leading a slave revolt. Roman forces finally capture the slaves, and call on them to identify Spartacus so as to avoid their own crucifixions. In a thrilling scene, rather than force others to call him out, Spartacus rises to identify himself, only to see the other slaves quickly rise, one by one, and identify themselves. “I am Spartacus,” they announce, and share his fate.
In light of the recent Greek economic and financial crisis – well – are we Greece?
Looking at the factors responsible for the ongoing Greek crisis, the same forces are operating, to varying degrees, in the United States. The comparisons are a little harrowing, and call for more energetic leadership promoting truthful accounting by city, state, and federal governments.
Five factors responsible for the crisis in Greece include:
1. Persistent government spending above government revenue,
2. Persistent import spending above export revenue,
3. High and rising government debt,
4. False reporting of fiscal data,
5. Loss of trust in government.
All of these factors have been at work in the city of Chicago, the state of Illinois, and the United States of America.
Persistent government spending above revenue
In the decade leading up to its most recent crisis, the Greek government regularly spent more money than it received in revenue, funding the difference with high, rapidly growing debt. While difficult to measure with great precision (see factor 4, “False reporting” below), Greece ran a deficit in the official data for “general government deficit/surplus” reported by Eurostat in each of the seven years ending in 2013. As a percent of GDP, Greece had the highest deficit among all Eurozone nations, as an average for that time frame as well as the latest reporting year.
The deficit/GDP indicator might be argued to be a bit biased against Greece in recent years, given the severity of the crisis and its impact on Greek economic growth (and GDP). But Eurostat data showed the Greek deficit/GDP ratio running at the highest amount (in negative terms) in the Eurozone in 2006, before the crisis, and the first year for which Eurostat reports this statistic for Greece. (Note: The Eurostat data for deficits by country add up government deficits across levels of government, for example, for the central government as well as state and local governments and social security funds.)
How about the city of Chicago, the state of Illinois, and the United States of America? How might they compare to Greece, in terms of deficit spending by the government?
There are some disturbing similarities. The records here might be argued to be worse, not better, than in Greece. Since 2005, both the city of Chicago and the state of Illinois have persistently spent more money than they take in for taxes, fees, and federal government grants. This despite the fact that government leaders consistently stress that they operate under “balanced budget” requirements (see “False reporting of fiscal data,” below.)
Let’s turn from Chicago and Illinois to the United States, and the federal government. Does the United States look like Greece, too? At least in terms of persistent federal government spending above of incoming revenue?
On the surface, well, yes. Expressed as a percent of GDP, the federal government has reported a deficit for the past 13 reporting years ending in fiscal 2014.
While the cumulative shortfall has been especially gloomy since 2000, it is not as if deficits only reared their ugly heads in the George W. Bush and Barack Obama administrations. The Nirvana of the late 1990s (when some economists were actually writing papers about how the Federal Reserve could conduct monetary policy in a world without Treasury securities) was only a brief interlude amidst longstanding practice. The U.S. government ran a surplus, on its current accounting definitions, in only 6 of the 55 years ending in 2014.
Coincidentally or not, the reported U.S. government federal debt has risen much faster than the overall economy since 2000 – as has been the case for the city of Chicago, the state of Illinois, and the country of Greece.
Persistent import spending above export revenue
Countries can run trade deficits (or surpluses). A trade deficit arises when a country (including its citizens, private organizations, and governments) spends more on imports (goods and services purchased from outside the country) than it earns from exports (goods and services produced within a country and sold externally).
A trade deficit is not necessarily a bad thing. Trade deficits can reflect an inflow of foreign investment capital seeking a longer-term return. But persistent trade deficits driven by unsustainable debt-funded consumption can be a source of trouble, especially with the benefit of hindsight.
In Greece, optimism arising with the country’s entry into the Eurozone boosted the government’s willingness to borrow, as well as the country’s debt to the rest of the world more generally. Greece’s trade deficit ballooned in the early years of its participation in the Eurozone, together with the country’s debt. Greece has had some significant recent ‘improvement’ in its trade balance, mainly because of the impact of the loss of income (and confidence) led to a sharp pullback in consumption spending, including on imports, as the crisis intensified in recent years.
How about the United States?
The United States, like Greece, has had a long record of spending more on imports than it earns from exports. The U.S. trade deficit began ballooning in the 1990s, and has been persistently negative over the last twenty years.
One disturbing similarity is that the growth in the US trade deficit has accompanied accelerating growth in federal debt. Foreign nations – including China – have been more than willing to purchase debt issued by U.S. entities, including its governments, which helps fund the trade imbalance. But Greece learned the hard way that this willingness cannot be taken for granted, particularly if foreign creditors lose confidence in the integrity of a government’s economic and fiscal statistics.
High and rising government debt
The Eurozone tracks “general government gross debt” as one of the Maastricht Treaty criteria. The Eurozone defines debt differently than the federal government of the United States in a number of ways. For example, “general” government debt, in the Eurozone, includes federal as well as state and local debt.
For Greece, Eurostat only reports general government debt since 2006, given the dispute over the data Greece had been providing. In 2006, Greece had the highest debt to GDP ratio among 27 European nations for which data was provided for that year. At 103%, Greece’s government debt to GDP ratio was over twice as high as the 27 nation average in 2006. While Eurostat does not report this data before 2006, data from the World Bank show the ratio of “central government debt” to GDP rising from 100% to 123% of GDP from 1998 to 2006, even as the Greek economy was growing rapidly in the early years of its participation in the Eurozone. With the cratering in Greek economic activity in recent years, that ratio has since mushroomed to over 170%.
What does a simple Greek-to-USA comparison, using government debt data at face value, look like?
The U.S. Department of the Treasury “Debt to the Penny” website shows “total debt” of over $18 trillion – over 100% of U.S. GDP for the federal government alone. The total debt of state and local governments reported in the U.S. Census Bureau’s “State and Local Government Finance” dataset for 2012 (the latest year available) would add another $3 trillion to that total. That $3 trillion for state and local government reported debt in 2012 represents a 50% increase from 2004.
In other words, roughly speaking, the debt reported by governments in the United States runs about as high as a share of national GDP as in Greece in 2006, before the worldwide economic and financial crisis in 2007-2009 and subsequent economic crisis in Greece. And the debt reported by governments in the U.S. has been mushrooming in recent years, growing much faster than the US economy, as well.
Ambiguity abounds in the definitions of “debt” reported by governments, of course. In the U.S., the true government debt runs at multiples of publicly reported debt, at the federal as well as state and local government levels. State and local government accounting standards have long hidden massive, real liabilities in employee retirement benefit plans, but these standards have been changing. State and local government financial statements are going to look very, very different in coming years.
False reporting of fiscal data
For Greece, Eurostat no longer reports a deficit / GDP ratio before 2006, even though Greece adopted the Euro in 2001. Neither Eurostat nor the IMF would answer a direct question why this is the case, but it is certainly related to the years of disputes with Greece over the quality and truthfulness of its financial reporting. Manipulative financial transactions trading up-front cash and false accounting results for longer-term difficulties appear to have played a significant role in the charade.
How truthful is financial reporting by the city of Chicago, the state of Illinois, and the federal government of the United States?
Consider the city of Chicago. Every year, the city produces a budget under a state law that the city says requires a balanced budget. And every year, in recent years, the city and its mayor produces a budget claimed to be “balanced.” But a problem arises, in what the city claims as revenue – or more precisely, “funds estimated to be available” – to define a balanced budget. The city can include borrowing proceeds and transfers as “sources” of funds, it says, and use those planned funds to “balance the budget.” This is a bit like planning to run up a credit card balance as a source of funds, and thereby balance a household budget.
Practices like these help explain how city of Chicago leaders claim to deliver “balanced budgets” to their citizens, even as they spend billions of dollars more than they receive in taxes, fees and grants.
For example, in 2013, the latest year for which we have audited financial statements, the city of Chicago reported a “change in net position” -- revenue less expenses -- of negative $1.1 billion, in line with the deficits that developed in three previous years. The 2013 fiscal year began with the mayor claiming in a separate budget document that “this budget balances the City’s finances without raising a single tax or introducing a single new fee.” And in the 2014 budget, after the close of the 2013 year for which the city ended up reporting a deficit of over $1 billion, the mayor stated “That’s why, for the third year in a row, we have balanced the city’s budget finances without raising property, sales, or gasoline taxes.”
In one sense, this can be a true statement, if a budget is only a statement of intent, or if borrowing money is a way to balance a budget. But if truth can be measured by what is left unsaid, as well as what is said, then we may have another kettle of fish.
Slippery accounting and oratory practices like these help explain why the city of Chicago’s reported debt has risen so much faster (two to three times faster) than the local economy over the past 10 years. And this is just the debt reported on the city’s comprehensive annual financial report; it does not include the massive pension and other retirement obligations left off the city’s official balance sheet, nor does it include debt obligations of the Chicago Park District and the Chicago Public Schools, two large “off-balance sheet” entities.
These practices are akin to those Eurostat objected to, before recasting Greece’s reported data and reporting them on a more consistent basis for years beginning in 2006. Eurostat (and the European System of Accounts) define the above-described “general government deficit/surplus” data as “general government net borrowing / lending,” which would preclude the use of borrowing as revenue for a deficit calculation.
Illinois operates under similarly flawed budget accounting, assertably falling short even of the practices currently in place in Greece. Over the past decade, Illinois has one of the worst records among the 50 states in covering expenses with taxes, fees, and federal grants. And Illinois’s reported debt has also risen much faster than the state economy, despite what its leaders call a “balanced budget requirement” in the state constitution. Illinois, like Chicago, lays claim to planned borrowing proceeds among funds “estimated to be available.”
So, as in Greece, Chicago and Illinois have persistently spent more than they took in over the past decade, relying on traditional debt as well as expansion in unfunded pension obligations for a succession of short-run “balancing acts.” These actions may have long-term consequences like those that already have arrived for Greece. And the “balancing” was indeed an act, achieved with artful financial reporting and related public communication at odds with economic reality.
Chicago and Illinois differ from Greece, however, in at least one important respect. The balanced budget requirements in Illinois are homegrown, a matter of the state constitution and state law. For Greece, the apparent restrictions were conditions on its participation in an economic and financial agreement among sovereign nations.
How about the United States? Does government financial data reflect reality, or does it underreport debt?
The Treasury Department’s “Debt to the Penny” website currently shows over $18 trillion in “total debt,” while the Financial Report of the U.S. Government reports (on a different definition) about $20 trillion in “total liabilities.” Each of these totals pale in comparison to the unfunded obligations undertaken for Social Security and Medicare spending. Using the federal government’s own calculations of the present value of future Social Security and Medicare spending net of dedicated payroll taxes, we estimate the “true” federal government debt rises above $80 trillion.
The annual “debt ceiling” debates are based on total debt numbers far below the government’s true debt. They aren’t even “ceilings” even in their own narrow view of the world, given that the government always raises them whenever they might become binding. This is one factor in public cynicism and mistrust about government financial reporting more generally.
Loss of trust in government
Surveys show widespread deterioration in citizen confidence in government(s) in the Eurozone in recent years -- especially in Greece. This has been due in important part to the unmasking of government financial conditions underlying falsely-reported official accounting statistics. In turn, that loss of trust and confidence played a key role in the extended economic weakness, with a feedback effect on government financial conditions.
How about the United States? Do federal, state, and local governments provide a shining example of public confidence to which Greece and other European states can aspire?
In 2008, the Association of Government Accountants (AGA) commissioned a survey of public attitudes toward government transparency and accountability. The AGA concluded that “government at all levels is failing to meet the needs of its citizens with regard to financial management reporting. There is a large ‘expectations gap.’ The public overwhelmingly believes government has the obligation to report and explain how the government generates and spends its money; however, government is not meeting expectations in any area included in this survey.”
“Without accurate fiscal information, delivered regularly, in an easily understandable format, citizens lack the knowledge they need to interact with – and cast informed votes for – their leaders. In this regard, a lack of government accountability and transparency undermines democracy and gives rise to cynicism and mistrust.”
The 50 states have been called laboratories of democracy. One way to test the AGA results is to look across the states, using State Data Lab. In 2014, Gallup polled citizens across the country about their trust in government. Looking at their results, there is a significant relationship. States that have “hidden” more debt off of their publicly reported financial statements, and states that have most frequently spent more money than incoming revenue despite their “balanced budget amendments,” tend to be states with lower trust in state government.
Among the 50 states, Illinois ranked last in trust in state government in this 2014 poll. Illinois also ranks at or near the top of the 50 states in Truth in Accounting’s “Taxpayer Burden” measure, and at or near the bottom of the 50 states in the frequency of truly “balancing the budget” since 2005.
Are we all Spartacus?
Citizens in Chicago, Illinois, and the United States can learn lessons from the Greek crisis, and thereby reduce the odds that they end up in similar circumstances. Perhaps the most important lesson is that the factors leading to the crisis in Greece have also been at work in the Chicago, Illinois and the United States.
Back in the Roman Empire, Spartacus led a slave uprising. We aren’t all slaves, of course. But perhaps today’s Greek citizens should have stood up sooner, and held their government accountable earlier, to avoid the economic and financial travails they now endure.
Citizens in the U.S. should stand up now.