President Obama’s Budget Deception

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The following documents a tactic of deception that is being used by President Obama in his current budget that is illegal in the private sector. The deception tactic is the long known tactic of deceiving with a financial projection. The deception is being used by many elected officials. Researching the genesis of the deception tactic for the projection being referred to below lead me to the Democratic Policy Committee (DPC) press release on February 7, 2003. Because of the polar reversal on the reliability of a projection by the Chairman of the DPC, Senator Byron Dorgan (D-ND), from 2001 to 2003, I believe there is intent to deceive the public by the DPC. Details associated with the DPC and the contradictory statements of Senator Dorgan are in the penultimate paragraph of the following letter. Normally, deception by a politician cannot be considered newsworthy; however, I believe intentional deception by a politician using a tactic that is illegal in the private sector is newsworthy. The following provides the background to address the question: Is intentional deception by an elected official using a tactic that is illegal in the private sector a violation of the Code of Ethics for Government Service? Watch Speaker Pelosi use the same tactic on February 26, 2009. http://www.youtube.com/watch?v=Qo-geg9Axlo

February 26, 2009

Today, President Obama issued his 2010 budget and titled the document: A New Era of Responsibility - Renewing America’s Promise. Included in the document is a continuation of his successful tactic to deceive Americans through the use of a projection. The use of the well known deception tactic is easily provable. The only question is where its use falls within the continuum of immaterial to a violation of a public trust.

For the background on the tactic of deception with a projection, prior to the stock market collapse of 1929 there was a practice of deceiving potential securities investors through the use of projections. In fact, the practice was so prevalent the tactic became illegal in the private sector by passage of The Securities Act of 1933. The penalty for violation of the Act (Sec. 24) includes prison. To avoid deception The Securities Act of 1933 (Sec. 27A) requires the use of a projection to include meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the projection. Therefore, the inclusion of meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the projection is the underlining principle necessary to avoid deception, regardless of whether the projection is prepared internally or externally, publicly or privately, or by a partisan or non-partisan group.

Returning to President Obama’s budget I will focus on the President’s continued efforts to deceive using the pre-1929 tactic of deception with a projection. In the budget titled: A New Era of Responsibility - Renewing America’s Promise, the following sentence on page 14 (of the PDF file) references the economic events during and at the end of the Clinton Administration as well as economic activity during the Bush administration:

(President Bush’s decisions have) “helped turn a surplus of $236 billion at the end of the Clinton Administration, that was projected to grow still larger over time, into a deficit of more than $1 trillion in 2009.”

Highlighting the effectiveness of the deception tactic, only a critical and knowledgeable reader will recognize the obvious deception in this sentence. The deception occurs with the phrase “that (surplus) was projected to grow still larger over time.” The aforementioned phrase implies that had President Bush not made any policy changes, the Clinton surpluses would have continued. The deception occurs because there is no inclusion of meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the projected results.

What is the basis for the budget surplus projection the President references? In January 2001 the Congressional Budget Office (CBO) issued The Budget and Economic Outlook: Fiscal Years 2002-2011. This document begins with the following statement:

“In the absence of significant legislative changes and assuming that the economy follows the path described in this report, the Congressional Budget Office (CBO) projects that the total surplus will reach $281 billion in 2001. Such surpluses are projected to rise in the future, approaching $889 billion in 2011 and accumulating to $5.6 trillion over the 2002-2011 period.”

As pointed out by the CBO, and also in conformity with the preparation of every projection, the projected surpluses were based on a series of assumptions. With the CBO document being available on-line I will only state a few CBO assumptions associated with the surplus budget projection. The assumptions include the continuation of the Dotcom Boom, continued reductions in Defense spending and continuation of the disproportionately higher earning gains by high income earners. Having said this, there is no need to reference any specific assumption to prove the existence of deception by President Obama. The pertinent issues associated with the assumptions are that they exist, they are critical in determining the projected results, they are subject to error and a lay person does not necessarily understand their importance in the preparation of a projection.

Another pertinent issue associated with any reference to a projection is the well documented understanding there is a greater potential to mislead with a projection than there is in reporting historical results. This point can be confirmed with the American Institute of Certified Public Accountants.

To minimize the potential for deception with the 2001 surplus budget projection the CBO considered it necessary to include 11 pages of uncertainties associated with the projection. Deception by President Obama occurs because he did not reference any uncertainties with his projection reference.

To highlight the potential to deceive with a projection, an opportunity seized by President Obama, and the effort put forth by the CBO to reduce the potential for deception; I will draw attention to a few CBO comments included in the 2001 surplus budget projection:

“(T)he U.S. economy and the federal budget are highly complex and are affected by many economic and technical factors that are difficult to predict. As a result, actual budgetary outcomes will almost certainly differ from CBO’s ($5.6 Trillion surplus) baseline projections.”

“Moreover, projections that are quite different from the ($5.6 T) baseline also have a significant probability of coming to pass.”

“Thus, the short-term outlook for the economy, and hence for the budget, is particularly uncertain when the business cycle may be approaching a turning point.”

“The longer-term outlook is also unusually hard to discern at present.”

“Figure 5-1 is intentionally somewhat fuzzy because the uncertainties are themselves estimates.”

“For example, the figure (5-1) suggests some probability, albeit small, that the budget might fall into deficit in 2006, even without policy changes.”

“Since the Deficit Control Act requires CBO to use those inflation factors and to assume that current policies remain in place, the baseline projection is not a prediction of future outcomes.” – Emphasis added

From these few sentences the CBO believed the USA economy was difficult to predict; the final outcome would almost certainly differ from the $5.6 trillion surplus projection; the short-term outlook for the 2001 economy, and hence the $5.6 trillion surplus projection, was uncertain; the longer-term economic outlook was hard to discern; the uncertainties associated with the projection were themselves estimates, the budget might return to deficits without any policy changes from President Bush and the CBO was not making a prediction.

The above demonstrates the uncertainty of the budget projection, but the following are explicit statements by the CBO about the future of the USA budget surpluses.

“The primary negative risk (to the $5.6 T surplus budget projection) is that the current (2000) slowdown might turn into a recession. Although forecasters widely anticipated that economic activity would slow, the deceleration has been surprisingly rapid. … Although those developments must be watched carefully, they do not as yet constitute a strong reason to expect a recession.”

Because the primary negative risk in January 2001 to the $5.6 trillion projected budget surplus was the economy going into recession, a risk that became a reality in March 2001, that single primary negative risk realization eliminated the possibility of the $5.6 trillion surplus budget projection becoming a reality, based on the assumptions contained in the 2001 CBO report. The CBO as stated above concluded there was also a possibility the budget would return to deficits without any policy changes.

The CBO included the following statement concerning the budget surplus prospects for the USA, even with the assumption there was going to be a $5.6 trillion budget surplus over the next 10 years.

“Over the longer term, however, budgetary pressures linked to the aging and retirement of the baby-boom generation threaten to produce record deficits and unsustainable levels of federal debt.”

Returning to President Obama’s phrase in his 2010 budget “that (2000 surplus) was projected to grow still larger over time,” the deception should now be clear. President Obama is using a projection and not disclosing any details on the uncertainties associated with the projected results. In light of the CBO statement the budgetary pressures associated with the baby-boom generation retirement threatening to produce unsustainable levels of federal debt, it is noticeable to me that the President did not include the time frame over which the surpluses were projected to grow. Because of the ease to deceive with a projection, President Obama’s statement exemplifies why the Securities Act of 1933 makes it illegal to use a tactic of projection deception in the private sector.

Senator Obama also used projection deception tactics during his presidential campaign. I am specifically referencing statements he made in North Carolina on June 9, 2008 when he said “George Bush's policies have taken us from a projected $5.6 trillion dollar surplus at the end of the Clinton Administration to massive deficits and nearly four trillion dollars in new debt today.” Senator Obama made the previous statement and did not include any meaningful cautionary statements about the use of a projection in his speech. http://www.barackobama.com/2008/06/09/remarks_of_senator_barack_obam_76.php

Why is a deception that may appear trivial to many actually important? There are numerous reasons. First, it is a known deception tactic that is effective as evidenced by the need to make it illegal in the private sector. Second, President Obama used the deception tactic during the campaign to win the election and thereby become President. Third, the President is now using a known tactic of deception to justify his budget. Fourth, many more Democrats are using the tactic.

The most interesting points to me in this deception exposure exercise are: 1) when was the first occurrence and 2) was the first occurrence of the deception, intentional? Addressing the first occurrence, I located a Democratic Policy Committee (DPC) opening statement dated February 7, 2003, approximately two years after the publishing of the CBO projection. For background, the expressed purpose of the DPC is to serve “Senate Democrats by developing new policy proposals, providing research and legislative support, publishing reports on important legislation and policy issues…” The February 7, 2003 opening statement by Chairman Byron Dorgan (D-ND) included this statement: "Huge deficits for years to come: Two years ago, the President inherited a healthy budget surplus, a budget circumstance that predicted a $5.6 Trillion in surpluses over the next 10 years." - Emphasis added. There are probably earlier uses of the deception tactic associated with the 2001 CBO surplus budget projection; however, I found the usage of the word “predicted” by a committee that explicitly states one of its purposes is “providing research” to be most interesting. How much research was performed when the CBO explicitly stated, as included above, the $5.6 trillion surplus was “not a prediction?” Addressing the second point, I located in the March 20, 2001 Congressional Record (see “Dorgan March 20, 2001” tab) the following statements by Senator Dorgan. Less than 23 months prior to Senator Dorgan saying there was “a budget circumstance that predicted a $5.6 Trillion in surpluses over the next 10 years,” Senator Dorgan said the following about the same projection: “The projected 10 year budget surpluses are just that, projections, and are not at all certain” and “The President's plan assumes we will have budget surpluses for the next 10 years. I hope that is the case, but with the current slowdown in our economy, we ought to be cautious. Economic forecasts are no more reliable than weather forecasts.” For a single person, especially one in such a powerful position, to make two clear and unambiguous statements about the uncertainty of a projection and then 23 months later make a clear and unambiguous statement the same projection “predicted a $5.6 Trillion in surpluses over the next 10 years” is beyond my ability to believe to be an innocent oversight.

The beauty of accounting is that you can prove the existence of deception. The only question is whether the use of a deception tactic that is illegal in the private sector is either immaterial in the public sector or a violation of the Code of Ethics for Government Service.

Gregory R. Brice, CPA

Denver, CO 80210

References:

Ethics for Government Service

DEMOCRATIC POLICY COMMITTEE HEARING 2-7-2003

Democratic Policy Committee Homepage

Excerpt from AICPA concerning the potential to mislead with a forecast

Democrat Deception Log citing specific dates

2010 President Obama Budget

http://www.gpoaccess.gov/usbudget/fy10/pdf/fy10-newera.pdf

Securities Act of 1933 background:

http://www.wdfi.org/fi/securities/regexemp/history.htm