In the post-Civil War era the American economy exploded in size as did corporations. As a result, corporate management increasingly separated from ownership as old family-run firms could no longer supply the needed capital from their own resources. They had to sell securities on Wall Street. 

Yet at first, there were few restraints on how management ran these now-public companies.

This resulted in some of the most spectacular scandals in American economic history. The management of the Union Pacific Railroad, for instance, which had been chartered by the federal government to build the eastern half of the transcontinental railroad, set up its own construction company and gave it a fancy French name, Crédit Mobilier of America. They then hired it to build the railroad. 

Not surprisingly, Crédit Mobilier charged wildly inflated prices to do so, becoming enormously profitable. The first dividend paid to investors was equal to 76 percent of their investment. When members of Congress were invited to invest, they were allowed to pay for the stock out of the fantastic dividends, essentially getting the stock for free.

Wall Street became increasingly concerned with such shenanigans, but also with how the companies that the Wall Street banks underwrote kept their books. 

There are any number of ways to keep books, both honestly and dishonestly. It is important, though, that they be kept the same way, so companies can be easily compared against each other. 

By the late 1880s Wall Street was increasingly requiring companies that wanted their securities underwritten by the Wall Street banks, such as J. P. Morgan and Co., and listed on the New York Stock Exchange, to keep their books the same way. 

This is what today is called Generally Accepted Accounting Principles. And those books had to be certified as both accurate and complete by independent accountants.

Management, of course, wasn’t happy about this, but they had no choice. By the first decade of the 20th century the new rules were accepted as a matter of course. 

Unfortunately Wall Street lacked the power to impose the new rules on the government. And so the federal, and many state governments, continue to keep their books as they please. 

That is to say, in ways that let management — the politicians in this case — pursue their own interests. That interest, of course, is re-election to one’s current office or election to a higher one. 

Generous government benefits and new projects help get politicians re-elected. High taxes to pay for them do not. So one solution to that political dilemma is to cook the books.

In the late 1960s, as the Vietnam War and Great Society programs were causing rising federal deficits, President Lyndon Johnson ordered that Social Security be put on budget. At that time, Social Security was running large surpluses, so putting that income on the books automatically made the deficit look smaller.

Yet imagine if a company were to try to call the contributions of its employees to its pension fund income in order to spruce up the bottom line. No independent accountant in the country would certify such a subterfuge.

In the years between 1998 and 2001, the budget was widely reported to be in surplus. In other words, the government was supposedly taking in more money than it was spending. Yet the total national debt went up, not down, in each of those years. How is that possible? It isn’t with honest books.

And in order to keep apparent spending down, while offering generous, re-elect-Senator-Snoot!-benefits, many of those benefits are kept off the books by allowing taxpayers to deduct them from their income taxes. 

So they never show up on the books at all. These “tax expenditures” hugely add up. For fiscal years 2023 through 2027 it is estimated they will total $7.74 trillion, $1.5 trillion per year.

There are many more ways to hide the true costs of government programs and, unfortunately, accounting is the ultimate inside baseball for most people — and, I suspect, all political reporters.

So what to do? Simple: Do what Wall Street did 140 years ago and take away the power of politicians to cook the books.

A Federal Accounting Board, consisting of professional accountants, could be structured as a politically insulated independent agency, charged with keeping the government’s books in ways that illuminate, not conceal, real federal spending. 

It would help if the budget were split into separate expense and capital budgets, as most states do. The former should always be balanced if at all possible, but the latter should be financed with bonds to allow future beneficiaries to pay their fair share. Future obligations should be on the books when they are incurred, not when they are eventually paid as is often the case now.

The board would also be tasked with making all estimates of the effect on the federal fisc of new spending and taxing proposals, which is now done by the White House’s Office of Management and Budget and the Congressional Budget Office. Both of these are subject to intense political pressure to make the numbers look good.

The politicians, like corporate management at the turn of the 20th century, will hate this idea, and for the same reason: self-interest. Yet can they really argue that keeping dishonest books is in the public interest?