Today's lesson is about political accounting, which is just one reason that government statistics differ from reality.

Many economic statistics are just what the government wants them to be.

Sometimes these fantasies seem harmless enough. One example is what Washington goes through in working up the balance of payments statistics.

A Thumb on the Scales

Until the early 1960s we used "liquidity basis accounting."

Under this approach, all short-term investments placed abroad were considered to be outflows of funds hurting our balance of payments position.

Short-term inflows of investment funds, on the other hand, were considered just "balancing items," since we had spent the dollars (and foreigners had invested them here for lack of anything better to do with them).

Why did we take so an masochistic attitude toward our balance of payments, when anyone could have seen how asymmetrical and unfair it was to America's international standing?

Because we were so superior to everyone else in the international payments sphere that we wanted to make ourselves look less good.

It was like a poker player who wins so much money that he understates his winnings so as not to embarrass himself and alienate the losers.

This changed in the early 1960s, when our trade and payments positions deteriorated.

We switched from this masochistic liquidity basis of accounting for our payments position to a new one - "official settlements."

This basis made our actual transactions look more favorable, by recording all short-term investments by private parties as helping us, rather than as merely balancing items to show how bad our deficit was.

All that Glitters

Of course, the practice of political accounting continues today.

Take our nation's gold stock. The Federal Reserve Board reported that at the beginning of June it totaled $11 billion.

How much gold is this? Well, since we value gold officially at $42.22 an ounce, the Treasury holds 261.8 million ounces of gold and has monetized it by giving the Fed gold certificates for $11 billion and receiving spendable deposits from the Fed for an equivalent amount.

But wait a minute! Where do we get this $42.22 figure? Isn't gold today just a little under $400 an ounce?

Yes. But we value Treasury gold at the price we set in the Nixon administration, just after we stopped selling gold at $35 an ounce to all foreign governments and central banks that wanted it.

In effect we said: We will no longer sell gold at $35 an ounce. We will value it at $42.22 (after an intermediate stop at $38). But no one will be able to buy it from the Treasury, at any price.

Easy Money

But what if we were to take our 261.8 million ounces of gold and place a realistic price on it - say, $375 an ounce?

The Treasury would have gold worth $98 billion, instead of $11 billion.

An extra $87 billion would sure help cut our budget deficits!

But would we be any richer if we switched to accounting for the gold at market prices?

No. Remember, the government doesn't intend to buy or sell gold at that level or any other. All we would be doing is fooling ourselves into thinking the deficit had been reduced.

So these are ridiculous numbers. The saving grace is that no one really digs in to their true significance.

But what if we did decide to get some money out of our gold by selling off some at $375 an ounce? How long do you think that price would stick, with huge American official gold sales coming on the market?

Changing the value of our gold would just make us look richer, and would undoubtedly lead to congressional cries to spend some of the profit.

If we did so, the real impact would be inflationary - more spending by Washington without additional revenues. That would make the impact of deficit finance on the capital market and the economy worse than it already is.

Though the gold pricing example may be entertaining, the distance between statistics and reality is often more significant. Unemployment, for example, may look better not because more people found work, but because more people ran out of benefits, got discouraged, and gave up even looking for work.

No Free Lunch

An acute Rutgers student of mine, Jeffrey Alexander, age 22, took the gold pricing example a bit further.

"Why not let the Treasury take the profit on its gold, cut the deficit, and then sop up the inflationary impact of its new spending of the profits through open-market operations?" he asked

Mr. Alexander, an A student, seemed crestfallen when I scotched the idea. Though the Treasury, spending would aid the sector where the government used the windfall, I explained, the offsetting open-market tightening would hurt all of us.

The lesson Mr. Alexander learned is that there is no free lunch, even when the Treasury has vastly underpriced an asset and has the opportunity to make a windfall profit from recasting its value system.

But think of how many in Congress, not having learned this lesson, use every aberration in our accounting system to generate "easy money" that no one has to pay for - at least for now.

Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.

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