How Government Finance Works: or, Did The Pentagon Lose/Misspend $21 Trillion?

There’s been a number of articles from various news sources, including some that are usually reliable, claiming that the Department of Defense (DoD) lost or “misspent” $21 trillion between 1998 and 2015. This is misleading at best, but mostly just wrong.

That $21 trillion figure exceeds the total Pentagon spending during that period (which was only $8.5 trillion). How can this be? Well, that $21 trillion figure does not represent lost money or spent money. What it represents is improperly documented internal transfers, so the same dollar can be counted multiple times if it is transferred back and forth between lines and systems within the DoD. What that figure actually represents is not government spending, nor lost money, but improperly documented accounting adjustments and internal transfers. “You moved funds from one line of accounting (LOA) to another. Where’s your documentation saying you’re authorized to move it? Where did you move it from, and to, and why?”

Also, there’s a bit of confusion here about how government spending works. The American federal government doesn’t spend from tax revenue. The government spends by “printing” (it’s really just typing numbers in a computer, but we still call it “printing”). When you pay federal taxes, that money is just removed from the money supply and ceases to exist, deflating the money supply in order to offset inflation (which in turn is caused by the government spending money into existence). So you have a line of accounting (LOA) with an authorization to spend. That money doesn’t actually exist until it is spent into being. The money on the LOA is basically just a total spending limit. The LOA isn’t a bank account with an actual pot of money in it. Think of it more like a line of credit or a credit card. The money in question doesn’t actually exist until you spend it. This is how modern monetary systems work in countries that have sovereign money. Spending and taxing are both monetary policies: government creates money by spending it and destroys money by taxing — spending is inflationary monetary policy while taxation is deflationary monetary policy. Ideally, you want them to balance out so that money has a stable value. The use of such monetary policy to help regulate the money supply and currency value is necessary because market fluctuations, speculation, and other factors cause unregulated currencies to drastically fluctuate in value and become unstable. (There are also other types of monetary policy which are not important to the topic at hand, so I will not go into those here.)

The $21 trillion figure, cited in the media so much, consists of transfers between LOAs, so it’s improper documentation of accounting transactions related to the amount of money allowed to be drawn from various lines of accounting — it’s not actual money. An LOA may have an amount on it that will never actually be spent, so those “funds” will never actually become money. You’re not dealing with real money here but with potential money, with “funds” that could become money if/when they are spent into existence. The so-called “lost funds” are really just improperly documented transfers of limits between lines and systems, not tax-payer money. This is why that number for “lost funds” actually far exceeds the total Pentagon spending for that same period. (Also, LOAs expire, so we’re talking mostly about potential money that the DoD could have created by printing it but that they didn’t spend and now cannot spend/print because the authorization has already expired. This means that a lot of this humbug is a moot point because it doesn’t really matter at all now.)

Imagine that I create a spreadsheet for my household budget. I allot so much to food, so much to gas, so much to rent, so much to clothing, etc. Then I decide that some of the clothing money really needs to be spent on food instead, so I just move it on the spreadsheet. Well, that’s fine, but within the government such adjustments have to be accounted for. This is where the problem arises. Basically, they moved their potential spending of $10 from clothing to food, then back to clothing, then over to rent. In the end, they spent a total of $10 on rent (that’s all); but they’ve got a total of $30 of transfers within the budget spreadsheet from moving that same money back and forth between columns before spending it. The problem is not that funds were lost or that they spent more than they were supposed to, but rather that they didn’t document their changes properly when transferring funds. This is a problem because DoD has to be accountable and is supposed to be auditable. If you don’t document what you are doing and show that you have authorization to do it, then you can’t pass an audit. The problem is an accountability issue. This is not to say that fraud, theft, and corruption have not occurred within government finance. I only mean to point out that any such questions are an entirely separate matter from this $21 trillion business and any corruption that there might be is certainly not as widespread as these clickbait articles would have you believe.

Also, these “lost funds” have nothing to do with corruption or improper business on the part of DoD and the Pentagon. It’s a result of complexity and the fact that the audit requirement is relatively new, so DoD is still learning how to meet it. DoD is made up of many different organizations (Army, Navy, Air Force, DARPA, DFAS, DHA, DAU, NGB, DCIS, etc. etc. etc.) — all these different organizations are somewhat independent but they’re also interdependent. They have their own systems and their own ways of doing things, so things get complicated when you try to audit all of DoD as a whole. It’s not auditable because it’s never been a single organization and it wasn’t designed with auditability in mind. The Army does national defense, DAU does education, and DARPA does research. These organizations weren’t designed to be audit ready. Now they’re trying to make them audit ready and subject them to audits to ensure that there is accountability, but you can’t really expect things to have went more smoothly or for things to have become auditable faster. The $21 trillion in improperly documented transactions just shows that it can’t pass an audit. Imagine if I walked into a local mom and pop shop and demanded to audit their books. The owner says, “We don’t keep books.” Well, I can’t audit them. That’s akin to what has happened here. Only it’s not that there are no books but rather more like each employee at the shop keeps their own books, so there are a hundred books and each one only has part of the records. This is why DoD has long been trying to consolidate things and get everything in one place. They’re pushing to get the different branches of the military to all use the same payment system and to get everyone using the same accounting system. However, the Defense Finance and Accounting Service (DFAS), which does the finance and accounting for DoD, doesn’t have the authority to force the DoD agencies to all get on board. In order to fix some of these problems, it would take either an Act of Congress or an Executive Order from the President, but the matters we’re talking about are matters that have never been understood by any President or Congressman.

Furthermore, the move towards more centralization fixes the auditability problem but also poses its own problems. As things become more centralized but remain partially decentralized, customer service becomes a problem since it can be difficult to determine who the customer needs to talk to in the huge mass bureaucracy. Moving everything to one system would make customer service and auditability easier, but it raises serious security concerns. If all the payment info for all of DoD’s customers is in one place, hackers getting into the system has a bigger impact. If a system glitch causes the system to fail, then the entire mission fails. They still haven’t moved everything to one system yet, but the closer they get the more problems arise. For instance, the Defense Travel System (DTS) had a malfunction at one point that caused thousands of payments to process out to incorrect accounts. As a result, many service members saw a delay in receiving payments that they were entitled to. Another example would be an issue that occurred with Global Exchange Services (GEX), which causes millions-of-dollars-worth of payments to be sent to the wrong financial institution. Or consider the great length of time it takes to get a payment reissued if a Government Charge Card (GovCC) payment to Citibank is done incorrectly and must be returned: the process can take months, causing the service member to incur a debt which can even negatively affect his or her personal credit score. Centralization, like globalization, seems to pose many problems that baffle our minds when we are forced to ponder the rapidly growing complexity of institutions in the modern world, but it also seems inevitable. Our world is growing more complex and more complex problems and solutions necessarily follow.