” Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.
A member should maintain objectivity … in discharging professional responsibilities….The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.”
—American Institute of Certified Public Accountants Code of Conduct
Firms and individuals depend on honest accountants.
Managers make decisions on the basis of information they provide. Investors decide whether to buy, sell, or hold on the basis of their pronouncements. And the advice of an accountant can make the difference between collecting a fat refund and going to prison for tax fraud.
Honest accounting is as important for countries as it is for firms and individuals. Accurate information helps policy makers design and implement sound economic policies, allows domestic firms and individuals to plan for the future, and gives creditors the confidence to lend the government money.
Fortunately for the United States, the governmental institutions that provide economic data, such as the Labor Department’s Bureau of Labor Statistics and the Commerce Department’s Bureau of Economic Analysis, are among the best in the world.
Unfortunately, President Donald Trump is trying to change all that.
Does this methodological change make my trade deficit look fat?
The Wall Street Journal recently reported that the administration was considering changing the way it calculates trade statistics, specifically excluding “re-exports” from total US exports. Re-exports are products that are imported into the United States and subsequently exported. For example, suppose an American business imports 200 smartphones from China and subsequently sells 50 of those to a Canadian retailer. Under current accounting standards, these transactions would be reported as a net import of 150 smart phones: 200 imported minus 50 exported. Under the new methodology, only the 200 phones imported would be counted, since the 50 that were re-exported would no longer be reflected in the statistics.
The new methodology does not do anything to change the actual flow of goods and so, in a sense, is cosmetic. Of course, people usually use cosmetics to make themselves look better—in this case, however, the cosmetic change is designed to inflate the size of the trade deficit. For a president who campaigned on the evils of trade, this bit of accounting legerdemain will make the US trade deficit appear bigger and give the administration more ammunition with which to sell its protectionist policies.
Just one month into his term, Donald Trump has begun to fracture that infrastructure and America’s status as a first world country.
Further, as both the Journal and the Economist point out, the accounting change will have an especially large impact on the US’s reported trade deficits with its North American Free Trade Area (NAFTA) partners, Canada and Mexico. Given that Trump campaigned as a determined foe of NAFTA, cooking the books to artificially inflate the US’s trade deficits with its NAFTA partners is a great piece of propaganda. But it’s lousy—and dishonest—policy.
Lies, damned lies, and Donald Trump
In a similarly pernicious move, the administration is fiddling with the government’s growth forecast.
The Journal and Washington Post have reported that the staff at the Council of Economic Advisors were ordered to produce overly optimistic forecasts of the growth of gross domestic product in the coming decade, in the range of 3-3.5% per year. That is nearly twice the consensus forecast among public and private forecasters, and twice the average growth rate during the past decade.
Because projected government revenues and expenditures—such as tax revenues and unemployment insurance—depend crucially on economic growth, incorporating overly rosy growth assumptions into their budget plans allows the administration to assume that there will be more money available to throw at their priorities. Like building a wall.
Washington, we have a problem
Although the lies and “alternative facts” put forth by the president and his administration are no longer shocking, they are nonetheless appalling. And they risk turning the US economic/statistical infrastructure—one of the world’s best—into something we would expect to see in a third world country.
In China, when the government forecasts 7% GDP growth, you can be pretty sure that the official statistics in subsequent years will show that GDP grew by 7%. No one’s forecasts are that good.
In Argentina, the government statistics office spent an entire decade producing misleading statistics at the direction of then-president Cristina Fernández de Kirchner, leading her successor to declare a “national statistics emergency” in 2016, suspending the publication of all new statistics until they cleaned up the mess.
Advanced industrialized countries, like well-run firms and households, must maintain honest and accurate accounting standards and make realistic assumptions about the future. It has taken the United States many years to build up the institutions that distinguish the US from a third world country. Just one month into his term, Donald Trump has begun to fracture that infrastructure and America’s status as a first world country.
Featured image credit: tax forms income business by stevepb. Public domain via Pixabay.