How Advocates and Politicians Abuse Fair-Value Accounting

Jason Richwine and I have co-authored a lengthy article on fair-value accounting for government loan programs that appears in the fall issue of National Affairs. If you are new to this issue the article is a great primer on the accounting debate and what it means for student loans. For those who have some familiarity with the issue the article has a lot of new information on the fair-value debate; much of the article focuses on how liberals and conservatives have selectively supported or opposed fair-value cost estimates depending on the public policy up for debate.

Conservative pundits, like Stephen Moore (now at the Heritage Foundation), are seen ignoring fair-value accounting in their support for Social Security investment accounts and then using fair-value accounting to expose the unfunded liabilities in public pensions. Left-of-center groups and economists, like the Center on Budget and Policy Priorities (CBPP) and Jason Furman, have done the reverse. During the Social Security accounts debate, they cried foul, arguing that when fair-value estimates are used, the accounts do not offer any fiscal advantage for retirees or the government. But in the most recent student loan debates, the CBPP is one of the few groups arguing that fair-value accounting for government programs is bunk and produces “phantom costs.” Furman, now Chairman of the Council of Economic Advisors in the Obama administration, has looked the other way as the administration says fair-value accounting has no place in valuing government programs.

Perhaps most entertaining, even former Congressman Dennis Kucinich and Rep. Elijah Cummings show up in the article. They both support fair-value accounting, but only when trying to kill one government program they don’t like. In 2011, Rep. Kucinich asked the Congressional Budget Office for a fair-value estimate of the cost of making loans for nuclear power plant construction. When the results revealed much larger costs than officially reported, he and Rep. Cummings sounded the alarm that billions in taxpayer bailouts could occur. Of course, neither mentioned that the same was true for loans made under an identical program to subsidize wind and solar energy companies. Around the same time both lawmakers voted against budget reform legislation that would mandate fair-value accounting for government loan programs.

The National Affairs article explains these flip-flops in much more detail. Readers will notice that one entity has consistently argued for fair-value accounting for government programs for over a decade. Not surprisingly, it is non-partisan. The Congressional Budget Office has endorsed fair-value accounting as the most “comprehensive” measure of costs for government programs for years and does so to this day.