Why the federal deficit reminds me of Enron.

Why the federal deficit reminds me of Enron.

Why the federal deficit reminds me of Enron.

Commentary about business and finance.
Nov. 23 2010 2:11 PM

Unbudging Budget

Why the federal deficit reminds me of Enron.

Enron. Click image to expand.
Former Enron headquarters

Erskine Bowles and Alan Simpson, co-chairmen of the bipartisan National Commission on Fiscal Responsibility and Reform, got a chilly reception to their draft proposal on how to fix our deficit. House Democratic leader Nancy Pelosi, D-Calif., said the plan's proposed budget cuts were "simply unacceptable," while the right-leaning nonprofit Americans for Prosperity said that the plan's proposed tax increases were not "prudent or reasonable." The Wall Street Journal reported Nov. 19 that the commission had ended three days of closed door meetings without an agreement among its 18 members; several panel members told the Journal that time was running out before the Dec. 1 deadline to submit a final plan.

Bethany  McLean Bethany McLean

Bethany McLean is a contributing editor at Vanity Fair and the co-author of All the Devils Are Here: The Hidden History of the Financial Crisis.

Bethany McLean writes a weekly business column for Slate and is a contributing editor to Vanity Fair. She is the author (with Joe Nocera) of All the Devils Are Here: The Hidden History of the Financial Crisis and (with Peter Elkind) "The Smartest Guys In The Room."

I don't know whether Bowles and Simpson have arrived at the right solution. But Washington's failure to arrive at any solution as the deficit problem gets worse and worse reminds me of Enron, the much-admired Houston-based energy giant that crashed and burned nine years ago, uncovering the gaudiest business scandal of the aughts. The United States isn't going to disappear like Enron, of course. But it's not inconceivable that global investors who hold our debt could lose their faith, and begin dumping Treasury bonds, or refuse to buy new ones, thereby sending our interest costs sharply higher and our economy into shock.

Start with the most basic problem: accounting. At the heart of Enron's artifice were accounting tricks that served to mask the true amount of debt the company had by keeping it off the company's financial statements. This had the effect of making Enron look far healthier than it was. At the time Enron went bankrupt, it had $38 billion in debt—only about $12 billion of which was reflected on its balance sheet.


The federal government is similarly able to keep its biggest debt liabilities off the books: Social Security and Medicare. The vast payouts these two programs will need to make in coming years aren't reflected on the government's balance sheet. The government argues that's proper because the terms of the payout can be changed. (Really? See paragraph one.) David Walker, who served as comptroller general from 1998 to 2008, puts the liability at $45 trillion to $50 trillion. "They don't combine them, they don't add them up to show how serious the problem is," he said on TheDaily Show. John Williams of the Web site Shadow Stats said that if you added up the present value of all the government's liabilities, the annual deficit in 2008 was $5.1 trillion, versus the official number of $455 billion.

Granted, in Enron's case much of the debt was quite well hidden; the U.S.'s extra debt can be calculated based on publicly available documents. And intelligent people can certainly differ on what the true numbers are.

But keeping Social Security and Medicare off the books isn't the only way the government games the system. The Consumer Price Index, which serves as chief bellwether of inflation; the Gross Domestic Product, which tracks overall growth; and the unemployment rate are all calculations vulnerable to manipulation, as well. That's important, because revisions in these numbers can reverberate through the budget. At the state level, government-employee pensions assume a higher return on investment than corporate plans are allowed to do, so they, too, may be wildly understating their true liability. Fannie Mae and Freddie Mac … how about a drink right about now?

The rating agencies still say U.S. debt is a triple A, meaning it is as safe as it gets. But Moody's and Standard and Poor's rated Enron's debt "investment grade," meaning safe enough for widows and orphans, until a few days before the company's bankruptcy. And even Moody's has said that the U.S.'s triple-A rating could be threatened if Medicare and Social Security aren't dealt with.