Thursday, July 21, 2011

Accounting for Government Like a Business and Holding Universities Accountable

Two WSJ Opinion Pieces That Make Sense (What!)

It is a well known fact that The Dismal Political Economist does not normally appreciate the editorials or the opinion pieces in the Wall Street Journal. For example, on Monday a former Reagan speechwriter wrote that The Debt Battle is Good for the GOP. This may well be true, the problem is that the battle is bad for the country, bad for the economy, and looks like it is going to be bad for the elderly, the sick, the student, the disabled and other unfortunate people who do not have access to the editorial pages of the WSJ to state their case.

So when two, count em, two pieces appear with which The Dismal Political Economist agrees, well that is important news.

The first opinion opines that the Federal Government should use business accounting methods to account for its finance and goes on to cite a study that shows that

if Congress had submitted fiscal year 2010 financial reports of our country in a fashion similar to a corporation, the U.S. would show a negative net worth of $44 trillion, an operating loss of $817 billion, and $1.3 trillion of negative cash flow.

So the appeal to Conservatives is that such accounting would show the Federal Government in even worse shape than everyone thinks, and thus create even more support for massive cuts in spending.

Now The Dismal Political Economist is not familiar with the study that produced those results, but it is almost certainly erroneous.  If one were to account for Federal spending like a business, it would show that most Federal spending is investment, and those costs would be spread over decades.  It would also show a balance sheet for the Feds (assuming current value accounting) that had enormous assets. 

 A correct study would surely show a very healthy and strong Federal government, as financial markets have already recognized.  The U. S. Federal government is the most credit worthy borrower in the world.

So The Dismal Political Economist agrees that governments should report financial statements like a business, but if it is done correctly he doubts if Conservatives will be so anxious to see the results.

The second opinion opines that colleges and universities focus largely on research at the expense of education.  The author, Naomi Riley says

In a book published last month, "The Faculty Lounges . . . And Other Reasons Why You Won't Get the College Education You Paid For," I argue that our system of higher education is focused too much on research and not enough on teaching.

Of course, Ms. Riley and leaves out the fact that college athletics consumes a major amount of educational resources also. 

Economists know that increasing utilization of a fixed cost enterprise reduces average per unit costs.  Really, it’s in all the textbooks. So when a university, which is a largely fixed cost business increases enrollment the logical expectation is that cost per students will decline.  That it has not done so says there is either something wrong with economic theory or with the universities.  Well, the theory is right so . . .

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