Taken In By His Own Fraud

Perhaps the most common financial fraud goes by the name of "channel stuffing."  The basic idea is that a metric - for example, revenue generation - has been selected to serve as a proxy for business success.  As long as the metric is not manipulated, it may be an excellent proxy for business success.  But then management realizes that it can manipulate the metric, and thereby deceive people into thinking the business is succeeding when it is not. 

The classic example arises in a manufacturing business.  The accounting profession somehow decided that the best proxy to use for determining when to recognize revenue is the time when the finished product leaves the factory on the way to the customer.  This metric can give a less volatile and arguably more accurate picture of the success of the business than alternatives such as when contracts are signed or when cash is received.  But then from time to time management realizes that it can goose revenue for a quarter and make the business appear more successful by the expedient of sending a truck filled with product out to a customer a day or two early.  Or maybe it's two trucks, or five, with quiet instructions to "drive slow."  The next quarter, of course, the revenue hole is a little deeper, so make it ten trucks.  This can go downhill very quickly.  Many corporate executives have gone to jail for this.

There is a completely parallel situation in the world of government accounting, namely government manipulation of GDP and jobs numbers to deceive people as to the success of the economy.  For purposes of GDP accounting, the accountants decided to adopt a metric where government spending counts at 100 cents on the dollar in the measure of GDP.  That may have made sense before politicians figured out that they could then manipulate GDP by the simple expedient of wasting government money or giving it to their friends and supporters, and thereby deceive the voters into believing that the economy is growing.  There is nothing fundamentally different between this game and corporate channel stuffing, other than that the government practices its fraud in the trillions of dollars rather than the millions or tens of millions involved in the corporate frauds.  

So here we have President Obama's big "jobs" speech in Tennessee a couple of days ago.  After five years of a languishing economy on his watch, now he is going to lay out his ideas to improve the economy!  And the big idea is ............  channel stuffing!!!  OK, he doesn't call it that; he calls it "job creation" through government spending.  Just to take a few examples:

[W]e need to keep creating good jobs in energy -- in wind and solar and natural gas.  Those new energy sources are reducing energy costs.  They're reducing dangerous carbon pollution.  They're reducing our dependence on foreign oil.  So now is not the time to gut investments in American technology.  Now is the time to double down on renewable energy and biofuels and electric vehicles, and to put money into the research that will shift our cars and trucks off oil for good.

Natural gas development does not require or call for any government involvement at all.  Wind and solar are pure wealth destruction, and any rational measure of GDP would record government spending on them as a reduction in GDP.  But no, the government spending is recorded as adding to GDP at 100 cents on the dollar.  Pure deception.  (You may think that using wind and solar energy is a good idea to "save the planet"; but if so, you should at least be honest with yourself and recognize that you are asking the American people to accept making themselves poorer - through higher energy costs -- to achieve an environmental goal.)

And then this: 

 We've got about $2 trillion of deferred maintenance here in this country.  So let’s put more construction workers back on the job doing the work America needs done.  (Applause.)  These are vital projects that Amazon needs, businesses all across the country need, like widening Route 27 here in Chattanooga -- (applause) -- deepening the Jacksonville Port that I visited last week.  These are projects vital to our national pride.  We're going to be breaking ground this week at the St. Louis Arch.  Congress should pass what I've called my “Fix-It-First” plan to put people to work immediately on our most urgent repairs, like the 100,000 bridges that are old enough to qualify for Medicare.  That will create good middle-class jobs right now.  (Applause.)  And we should partner with the private sector to upgrade what businesses like Amazon need most.  We should have a modern air traffic control system to keep planes running on time.  We should have modern power grids and pipelines to survive a storm.  We should have modern schools to prepare our kids for the jobs of tomorrow. 

I'm not opposed to all infrastructure spending, but this is just complete acceptance of the idea that all government spending on no matter what is an unalloyed benefit.  We'll replace all the bridges!  We'll replace all the schools!  This is exactly the strategy that Japan has embarked on for the past two decades -- massive, uncontrolled infrastructure spending to "create jobs" and "stimulate" the economy.  Result:  twenty years of stagnation and national debt at 200% of GDP.  And that's with full fraudulent 100 cents credit in GDP for all government spending.  Without that manipulation, Japan's economy has declined significantly.  So let's imitate them! 

Well, we could call President Obama the fraudster in chief, but to his credit I truly believe he really thinks that uncontrolled government spending benefits the economy.  He has been taken in by his own fraud!  (OK, and to be fair, by that of his predecessors.) The problem is, if this were corporate fraud, the fact that the CEO truly believed that his channel-stuffed numbers represented a correct picture of the corporation's financial position would be no defense whatsoever.  Off to jail with you!