Enron's Math Has Something in Common With Rosy Federal Budget Projections
By Allan Sloan
Tuesday, January 29, 2002; Page E01
We heard a shocking tale in congressional hearings last week about huge amounts of money vanishing overnight, transactions with important consequences for everyone in the United States and math so fuzzy you want to hang it on your rearview mirror. But hold on. We're not talking about Enron. We're talking about the federal budget.
It was easy to overlook the budget news last week, what with Enron sucking up most of the oxygen in Washington. Last week's highlight: simultaneous televised congressional hearings, with the House and the Senate competing for attention. Soon we'll be tracking the hearings' Nielsen ratings, there are so many committees chomping away on Enron.
The Enron affair was good TV, with David Duncan, the head Arthur Andersen guy on the Enron account, pleading the Fifth Amendment like a common felon and juicy memos being waved around on camera.
But the real blockbuster numbers were unveiled at standard, unhyped House and Senate budget hearings, where the Congressional Budget Office served up its newest projections. The drama was the opposite of last year, when the CBO produced its most upbeat 10-year projections ever, with surpluses as far as the eye could see. From the current year through fiscal 2011, it predicted, Uncle Sam would run a total $5.6 trillion of surpluses.
Guess what. About $4 trillion of that $5.6 trillion has melted away in only a year. About half the vanished surplus is the result of President Bush's tax cut. A trillion or so more is from the economy having gone into the tank. What a shock! The business cycle lives, and it has a downside. And when the economy tanks, government tax receipts fall and spending on social programs rises.
Sure, there's $1.6 trillion of projected surplus left, but the great majority of that is projected to come in the ninth and 10th years. And the forecast for those years is ultra-iffy, because the further out the budget projections go, the less reliable they become. (Think of how reliable 10-day weather forecasts are, compared with looking out the window to see whether it's raining). Heck, last year's projection for the current fiscal year was off by more than $300 billion.
You wouldn't want to bet your life on these new numbers being right, but they certainly are disturbing to those of us who worry about how the government will meet the needs of retiring baby boomers. Even though $1.6 trillion of projected surpluses sure beats a sharp stick in the eye, there's a big problem here. That entire amount, plus an additional $1 trillion, comes from Social Security taxes. Social Security currently runs a huge surplus, which both George W. Bush and Al Gore said they'd set aside to pay baby boomers' retirement bills.
That promise has become inconvenient, with the tax cut, the recession, 9-11 and all. Now the plan is to just stuff a trillion dollars of IOUs into the Social Security trust fund and spend the money for general government expenses.
Why am I bothering you with budget numbers when the only numbers anyone seems to care about are Enron's? Because Enron and last year's optimistic budget numbers have more in common than simply having popped up in the same news cycle: Both are creatures of the late, lamented hot stock market. You do remember those days, don't you? Not so long ago, a whole generation of investors had never seen a down market. Stocks more than tripled from 1995 through 1999, with the Standard & Poor's 500-stock index posting a record five straight years of double-digit gains.
That enriched a lot of people and produced budget windfalls because of capital gains taxes and the huge -- and highly taxed -- profits that employees made on their stock options. The green-eyeshade types projected those numbers to stay high. Alas, with the market lower than it was three years ago, tax receipts from capital gains and options profits have shriveled like Enron's stock price.
Given the performance of companies like Enron, whose stock quadrupled from 1998 through 2000, it's hard to blame federal-budget number crunchers for assuming that stock gains would keep money pouring into the Treasury. Consider that Enron's recently ousted chairman, Kenneth Lay, made $250 million on his options, which theoretically translated into about $100 million of federal income tax payments. With Enron stock worth less than $1, it seems unlikely that Lay -- or anyone -- will be making profits on Enron options anytime soon.
For all the parallels between Enron and the federal government's vanishing surplus, there's one important difference. Last year's budget projections turned out to be way off, but they were produced by honest people who gave it their best shot and warned about the uncertainties. Enron's numbers seem to have been largely made up. (Arthur Andersen seems to be getting more blame for certifying the numbers than Enron is getting for creating them. Go figure.)
The bottom line from last week's news on both the Enron and budget fronts: Be wary of huge numbers that seem too good to be true, because they probably aren't true. And never, never, never fall in love with the stock market, because the market doesn't love you.
Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.
© 2002 The Washington Post Company



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