Monday Morning: Hold politicians’ feet to the fire, too

Congress has passed the Sarbanes-Oxley Act, which requires CEOs of major corporations to affirm in writing that financial statements are correct to the best of their knowledge. If the corporate executives knowingly sign financial statements that are incorrect, they can be fined and sent to jail.

I have a modest proposal.

Let’s apply the same standards to the government. Especially, let’s apply it to Congress and pass a new law to that effect.

Here’s how it would work.

Whenever Congress proposes a new entitlement program, such as this year’s farm-support bill or the proposed Medicare drug benefit for senior citizens, the Congressional Budget Office provides a cost estimate for the proposal.

Congress accepts the estimate and passes the program.

Generally, a few years after the proposal becomes law, the cost estimate turns out to have been wildly understated. Also generally, many members of Congress, but especially those proposing the bill, knew the estimates were wildly off when they approved the program, but went along to get the bill passed.

That is a fraud against all taxpayers. That’s far more significant, in my view, than corporate fraud against shareholders.

Under my law, when the actual costs turned out to be 10% or more greater than the estimated costs of the program, all those in Congress who voted for it would have to resign and stand trial for accounting fraud, subject to jail or fines. Any president who signed such a bill into law also would be liable.

All would have to prove they were unaware that the estimates were fiction or go to the slammer.

But members of Congress would say, “How could we have known that the estimates were too low?

I’d say, “The same way you expect corporate chieftains to know that the numbers they are required to certify are accurate: by paying attention and holding to the fire the feet of those who prepare the numbers.”

Now, I would be prepared to give Congress a little help here. Let’s also throw into jail those in the Congressional Budget Office or on congressional staffs who helped produce the misleading cost estimates.

That certainly would improve the quality of the estimates given to Congress.

I also would apply the law to estimates of the revenue effects of tax increases and tax cuts. Any estimate that was off by more than 10% would be cause for action.

Again, those who voted for the tax cut or increase, and the president who signed it, would be held accountable. Likewise, those who provided the estimates would be liable.

The new law would have several positive effects.

First, it certainly would improve the quality of information on which Congress and the president rely when proposing, passing or signing legislation.

The budget office certainly would move to a dynamic analysis of tax legislation, from static analysis, a move it has resisted for decades.

Dynamic analysis takes into account the changes in behavior that modifications in the tax laws cause. Static analysis assumes that increases or decreases in taxes don’t alter taxpayer behavior.

Second, the new law would improve the quality of legislation.

Congress would pay more attention to exactly what the congressional staff was putting into the bills it passes.

Ignorance no defense

Members of Congress too often pass bills that the majority never have read closely. Failing to read a bill wouldn’t be an allowable defense under my law.

Third, at least for a few years, the law would open up a lot of vacancies in Congress as members went to jail for accepting or tolerating bad numbers. Presidents also might have shorter terms – if they were impeached after being charged and found guilty under my law.

And we would have turnover in the ranks of congressional staff members and people in the budget office and other areas where the numbers backing legislation are prepared. Fresh blood can be reinvigorating.

Finally, members of Congress would find themselves rubbing shoulders with top CEOs in Club Fed.

That would be interesting to see.

Mike Clowes is the editorial director of InvestmentNews and sister publication Pensions & Investments.