Now It's Time for Government Reform
by Chris Edwards - August 2002

Chris Edwards is director of fiscal policy at the Cato Institute.

Now that the federal government has cracked down on corporate financial mischief, it should turn attention to its own accounts. Congress has passed a bill it thinks will promote sound corporate bookkeeping and punish business leaders who break the rules. Meanwhile, the financial accounts of many federal agencies are a shambles, and Congress breaks budget rules all the time. Companies such as Enron collapsed under piles of hidden debt. But the government is creating its own crisis by amassing trillions of dollars of unfunded retirement liabilities.

For five years the federal government has attempted to produce a comprehensive financial statement based on private sector accounting principles. Five years in a row the government's auditor - the General Accounting Office - has not been able to certify the statements as correct because of the government's weak financial controls and mismeasurement of assets, liabilities and costs.

The sloppiest bookkeeper in the federal government is probably the $370 billion Defense Department. The GAO finds that the department has "serious financial management problems ... that are pervasive, complex, long-standing, and deeply rooted in virtually all business operations throughout the department." The Pentagon loses track of assets, mismanages and wastes inventory, deliberately low-balls project costs, and makes billions of dollars of erroneous contractor payments.

Isn't it the job of Congress to make sure that the executive branch is held accountable for such shoddy management? Congress is supposed to represent taxpayers and make sure federal agencies use funds wisely. Ha ha. In reality, they spend little time on oversight, probably because they get no media from it. Instead, time is spent securing pork projects to tout in hometown newspapers, and grandstanding about the private sector's ills on national TV.

Besides, Congress is too busy skirting its own budget rules to worry about mishandled money in the bureaucracy. Congress routinely tags spending bills as "emergencies" to evade normal budget restrictions. It throws billions of dollars of earmarks into legislation at the last minute to avoid scrutiny. And this year Congress failed to pass an overall budget plan, which is needed to prevent a spending free-for-all. These folks could teach the financial hucksters at Enron a few tricks.

In fact, long before Enron began hiding huge debt loads off company books, the government was building up a massive hidden debt itself. The unfunded liability of Social Security now totals $9 trillion. Congress imposes strict rules to prevent corporations from under-funding pension plans, but it has refused to tackle this huge debt overhang in its own retirement plan. Congress even fraudulently tells citizens that their money is safe in a "trust fund."

Congress has learned other bad habits from the worst run companies. It really irks Americans when corporate leaders give themselves pay raises and bonuses while their company's finances head south. Now look at Congress. They have just given themselves a pay raise for the fourth year in a row, despite the fact that the federal budget has plunged into a $165 billion deficit. So as we fix the bad incentives in the corporate world, we also need to insist on no congressional pay raises without Congress meeting at least minimal standards of financial performance.

Pay raises should be used as a "carrot" to get better performance in the executive branch as well. The new management scorecard created by the Bush budget office could be the benchmark. Managers in agencies that receive red dots for "unsatisfactory" performance should not receive pay raises until they fix problems.

And more private sector "sticks" need to be introduced to the federal bureaucracy. As imperfect as private sector management is, everyone from CEOs to mail room clerks face firing for bad performance. By contrast, data from the federal Office of Personnel Management shows that the federal firing rate is stunningly low at just 1 in 4,000 per year. Comparable private sector firing rates are difficult to come by, but the overall average may be as high as 1 in 25 per year.

It is hard to believe, for example, that only 6 employees during the past 18 years deserved to be fired at the State Department. This 28,000-person agency is notorious for mishandling secret documents, allowing unauthorized people to wander its hallways, and letting Russian spies bug a meeting room down the hall from the former secretary's office. American voters, like shareholders of corporations, must demand better performance than that.