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Alan Greenspan testified before Congress today. I think his overall goal is to urge our politicians to get the U.S. fiscal policy back in order. Although usually on the side of President Bush, he urged a new accounting system to be adopted for making fiscal decisions, going from cash accounting to accrual accounting. Basically, he wants us to think about future liabilities (baby-boomers) vs future revenue sources (our sorry unemployed selves). Something the Bush administration has brushed off, even discontinuing 10-year projections because of a shortage of red ink.

It's also nice to hear Greenspan do his job - clear his throat and tell everyone that we're going to see endless deficits if things keep going the Bush way...

FRB: Testimony, Greenspan -- Monetary policy report to the Congress, U.S. Senate -- February 11, 2003

A general difficulty concerns the very nature of the unified budget. As a cash accounting system, it was adopted in 1968 to provide a comprehensive measure of the funds that move in and out of federal coffers. With a few modifications, it correctly measures the direct effect of federal transactions on national saving. But a cash accounting system is not designed to track new commitments and their translation into future spending and borrowing. For budgets that are largely discretionary, changes in forward commitments do not enter significantly into budget deliberations, and hence the surplus or deficit in the unified budget is a reasonably accurate indicator of the stance of fiscal policy and its effect on saving. But as longer-term commitments have come to dominate tax and spending decisions, such cash accounting has been rendered progressively less meaningful as the principal indicator of the state of our fiscal affairs.

An accrual-based accounting system geared to the longer horizon could be constructed with a reasonable amount of additional effort. In fact, many of the inputs on the outlay side are already available. However, estimates of revenue accruals are not well developed. These include deferred taxes on retirement accounts that are taxable on withdrawal, accrued taxes on unrealized capital gains, and corporate tax accruals. An accrual system would allow us to keep better track of the government's overall accrued obligations and deferred assets. Future benefit obligations and taxes would be recognized as they are incurred rather than when they are paid out by the government.

Reestablishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult. Tax cuts are limited by the need for the federal government to fund a basic level of services--for example, national defense. No such binding limits constrain spending. If spending growth were to outpace nominal GDP, maintaining budget balance would necessitate progressively higher tax rates that would eventually inhibit the growth in the revenue base on which those rates are imposed. Deficits, possibly ever widening, would be the inevitable outcome.