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Treasury closed the financial books on fiscal 2014 last week. As my colleague Howard Gleckman noted, the top line figures all came in close to their 40-year averages. The $483 billion deficit was about 2.8 percent of gross domestic product, for example, slightly below the 3.2 percent average of the past four decades. Tax revenues clocked in at 17.5 percent of GDP, a smidgen above their 17.3 percent 40-year average. And spending was 20.3 percent, a bit below its 20.5 percent average.

Taxes, spending, and deficits thus appear to be back to “normal.” If anything, fiscal policy in 2014 was slightly tighter than the average of the past four decades.

That’s all true, as a matter of arithmetic. But should we use the past 40 years as a benchmark for normal budget policy?

It’s common to do so. The Congressional Budget Office often reports 40-year averages to help put budget figures in context. I’ve invoked 40-year averages as much as anyone.

But what has been the result of that “normal” policy? From 1975 to today, the federal debt swelled from less than 25 percent of GDP to more than 70 percent. I don’t think many people would view that as normal. Or maybe it is normal, but not in a good way.

Just before the Great Recession, the federal debt was only 35 percent of GDP. Over the previous four decades (1968 through 2007), the deficit had averaged 2.3 percent of GDP, almost a percentage point lower than today’s 40-year average.

That comparison illustrates the problem with mechanically using 40-year averages as a benchmark for normal. A few extreme years can skew the figures. In 2007, we would have said deficits around 2 percent of GDP were normal. Today, the post-Great Recession average tempts us to think of 3 percent as normal. The Great Recession has similarly skewed up average spending (from 19.9 percent to 20.5 percent) and skewed down average taxes (from 17.6 percent to 17.3 percent).

As recent years demonstrate, we don’t want a normal budget every year. When the economy is weak, it makes sense for taxes to fall and spending and deficits to rise. When the economy is strong, deficits should come down, perhaps even disappear, through a mix of higher revenues and lower spending.

Looking over the business cycle, however, it is useful to have some budget benchmarks. A mechanical calculation of 40-year averages won’t serve. Instead, we need more objective benchmarks. On Twitter, Brad Delong suggested one benchmark for deficits: the level that would keep the debt-to-GDP ratio constant. I welcome other suggestions.

Lending programs create special challenges for federal budgeting. So special, in fact, that the Congressional Budget Office estimates their budget effects two different ways. According to official budget rules, taxpayers will earn more than $200 billion over the next decade from new student loans, mortgage guarantees, and the Export-Import Bank. According to an alternative that CBO favors, taxpayers will lose more than $100 billion.

Those competing estimates pose a $300 billion question: Which budgeting approach is best?

As I document in a new report and policy brief, the answer is neither one. Each approach tells only part of the story. Congress would be better served by a new approach that fairly reflects all the fiscal effects of lending.

Compared with what?

If lending programs perform as CBO expects, they will bring in new money that the government can use to reduce the deficit, increase spending, or cut taxes. In that sense, taxpayers may come out more than $200 billion ahead.

But these programs do not fully compensate taxpayers for their financial risk. If the government took the same risk by making loans and guarantees at fair market rates—perhaps by investing in publicly traded bonds—taxpayers would make much more. Taxpayers are subsidizing the students, homeowners, and companies that borrow through these programs. In that sense, taxpayers come out more than $100 billion behind.

The same issue can arise in personal life. Suppose your aunt asks for a $10,000 loan to start a business. You’ve got exactly that much in a government bond fund earning 2.5 percent, and she offers to pay 5 percent. She’s got a good head for business, so the risk of default is very low; realistically you expect a 4 percent annual return.

The loan sounds like a winner, right? Her 4 percent beats the bond fund’s 2.5 percent, if you can handle the risk. But there’s one other thing: your brother-in-law, equally good at business, would like a similar loan, and he’s willing to pay 6 percent, with an expected net of 5 percent.

Now the loan to your aunt sounds like a loser. Your brother-in-law’s 5 percent beats her 4 percent. You might still prefer to lend to her, but you would come out behind in financial terms.

The competing CBO estimates reflect this dichotomy. One approach compares the financial returns of lending with doing nothing (the $200 billion gain in CBO’s case, 4 percent versus 2.5 percent in yours). The other compares the returns with taking similar risks and being fully compensated (the $100 billion loss in CBO’s case, 4 percent versus 5 percent in yours).

Both comparisons provide useful information. If you want to predict the government’s future fiscal condition, you should compare the financial returns of lending with doing nothing. If you want to measure the subsidies given to borrowers, you should compare returns with the fair market alternative.

When you discuss your aunt’s proposal with your spouse, you would be wise to mention not only the potential financial gain (“4 percent is better than 2.5 percent”) but the subsidy to your aunt (“4 percent is less than the 5 percent your brother would pay”). Only then can you have an open discussion of your family’s financial priorities.

Today’s approaches

The same information is necessary for an open discussion of federal budgeting. But official budget rules, created by the Federal Credit Reform Act of 1990 (FCRA), require CBO to use just the first approach in its budget analyses. Official estimates thus measure the fiscal effects of lending, not the subsidies provided to borrowers. CBO rightly believes, however, that policy deliberations are incomplete without measuring the subsidies, which CBO calculates separately using an approach known as fair value.

Policy analysts have vigorously debated the pros and cons of FCRA and fair value for years. Neither side has scored a decisive win for a simple reason: both approaches are incomplete. Fair value measures subsidies well, but tells us nothing about fiscal effects; this is its missing-money problem. FCRA measures lifetime fiscal effects well, but tells us nothing about subsidies.

By recording expected fiscal gains the moment a loan is made, moreover, FCRA makes lending appear to be a magic money machine. Lending may pay off over time, but the gains do not happen the moment the loan’s ink is dry. Like any lender, the government must be patient to earn those returns. It must hold the loan, perhaps for many years, and bear the associated financial risk.

A better approach

For those reasons, I believe we should replace both approaches with a more accurate budgeting method, which I call expected returns. As the report and brief describe, the expected-returns approach forecasts the fiscal effects of a loan by projecting the government’s expected returns year by year, rather than collapsing them into a single value at the time the loan is made, as both FCRA and fair value do.

Expected returns accurately tracks the fiscal effects of lending over time, thus avoiding both fair value’s missing-money problem and FCRA’s magic-money-machine problem. It also provides a natural framework for reporting the fiscal effects of lending and the subsidies to borrowers. Expected returns would give policymakers and the public a more accurate assessment of federal lending than either of the approaches we use now.

Dane Stangler at the Kauffman Foundation debunks four myths about entrepreneurship:

Spoiler: 20-somethings make headlines, but founders in their 30s and 40s are more important.

(Disclosure: The Kauffman Foundation funds some of my research at the Urban Institute.)

Suppose your aunt decides to start a business making pizza ovens. She will design and build the ovens, and her daughter will manage operations. A bank is ready to lend her $100,000 to get started, but it wants someone to co-sign and be on the hook if she misses any payments. She offers to pay you $6,000 to do so.

A business-savvy friend tells you that missed payments on such a loan average $2,000, usually less, occasionally much more. He also reports that $7,000 is the going rate for co-signing.

Those insights spark lively family debate. Your aunt believes her proposal is a no-brainer. She would get to start her business, your niece would get a better job, and you would come out $4,000 ahead on average. It’s a win-win-win for the family.

Your spouse disagrees. Yes you’d net $4,000, on average, but you would get $5,000 by co-signing a similar loan in the marketplace. Your aunt is asking you to bear the financial risk of her loan without fully compensating you. In a worst case scenario, you might end up owing the bank $100,000. You deserve to be fairly compensated for taking that risk. Co-signing would help her and your niece and may be best for the family. But the deal is not a win all around. You would be bearing real financial risk, effectively giving your aunt $1,000, and everyone in the family should acknowledge that.

Co-signing the loan would thus make you $4,000, according to your aunt, or cost you $1,000, according to your spouse. But which is it? And should you co-sign the loan?

Those questions are at center stage as Congress debates the fate of the Export-Import Bank, whose charter expires September 30. The details are more complex—imagine the Bank co-signing a loan to a restaurant in Ethiopia that wants to buy an oven from your aunt—but the issues are the same.

Like your aunt, Bank proponents argue that guaranteeing loans is a win-win-win. American exporters will sell more abroad, a win for shareholders and a win for their workers. Bank fees more than cover expected losses, so taxpayers win as well. Indeed, the Congressional Budget Office estimates the Bank will net $14 billion from new guarantees over the next decade.

Like your spouse, however, others reject the idea that the Bank is really a win for taxpayers. While it might generate $14 billion over the next decade, the Bank would gain even more—$16 billion—if taxpayers were fairly compensated for the risks they would be taking. By offering loan guarantees at below-market rates, the Bank will effectively lose $2 billion over the next decade, again according to CBO.

Your view of the Bank’s profitability thus depends on what you measure it against. Official budget accounting, which shows the gain, compares the Bank’s performance to a scenario in which it doesn’t exist. CBO’s alternative, which shows the loss, compares the Bank’s performance to a scenario in which it does exist but charges fair market rates.

Both comparisons are important. The $14 billion represents the expected fiscal gain if the Bank is reauthorized for another decade, while the $2 billion represents the subsidy that exporters get from taxpayers who aren’t fully compensated for bearing new financial risks. The Bank’s specific activities are costing taxpayers, but in purely monetary terms that is more than offset by the gains from being a commercial lender.

If the Bank’s purpose were solely to make money, we’d do better to replace it with a commercial venture that operates on market terms. But making money is not the Bank’s mission. Instead, its goal is to support American exporters, particularly in competition with foreign firms that also receive government backing.

Policymakers thus confront the same tradeoffs that arise for almost any policy. The Bank creates winners and losers. Just as you need to balance the personal cost of co-signing your aunt’s loan at below-market rates against the potential benefits to your family, so must Congress balance the costs and benefits of the Export-Import Bank. It might still be worthwhile, but it’s not a win-win-win.

In this TEDx talk, Bob Litan shows how economic insights shaped the web economy, from dating to search to travel to logistics.

“On Sunday, a United Airlines flight was forced to divert after two passengers got into an argument over the Knee Defender, a $22 gadget that stops the person in front of the user from reclining,” report Alex Davies and Julie Zeveloff at Business Insider.

By packing people in tight spaces, air travel naturally sparks conflict over property rights. Who gets the overhead space? Or, in this case, who owns the right to recline?

Users of the Knee Defender believe they do. Deploying the gadget is thus no different from a homeowner putting up a fence to keep out unwanted intrusions.

Others think the right belongs to the potential recliner. But that doesn’t always mean conflict. As Davies and Zeveloff report:

“Gary Leff, who writes the blog View from the Wing, agrees, but told Business Insider that “some courtesy is appropriate.” To preserve his own space, he said he once gave a young girl $5 (with her mother’s permission) in exchange for not reclining her seat, an original solution.

Somewhere Ronald Coase is smiling. He identified that answer in 1960 in his famous paper, The Problem of Social Cost.

If the little girl has the property right to recline, then you can pay her not to do so. If you have the property right, you can install a Knee Defender.

But who should have the property right? Coase would say it depends–some people don’t like negotiating with other passengers. Given those “transaction costs” the right ought to be given to whichever person is most likely to want it most.

I’d bet on the “reclinee” not the recliner. Which might explain why more airlines now offer the ability to pay extra for more legroom. After all, United would rather you pay them than the little girl.

Yesterday, the Federal Reserve confirmed that it would end new purchases of Treasury bonds and mortgage-backed securities (MBS)—what’s known as quantitative easing—in October. In response, the media are heralding the end of the Fed’s stimulus:

“Fed Stimulus is Really Going to End and Nobody Cares,” says the Wall Street Journal.

“Federal Reserve Plans to End Stimulus in October,” reports the BBC.

This is utterly wrong.

What the Fed is about to do is stop increasing the amount of stimulus it provides. For the mathematically inclined, it’s the first derivative of stimulus that is going to zero, not stimulus itself. For the analogy-inclined, it’s as though the Fed had announced (in more normal times) that it would stop cutting interest rates. New stimulus is ending, not the stimulus that’s already in place.

The Federal Reserve has piled up more than $4 trillion in long-term Treasuries and MBS, thus forcing investors to move into other assets. There’s great debate about how much stimulus that provides. But whatever it is, it will persist after the Fed stops adding to its holdings.

P.S. I have just espoused what is known as the “stock” view of quantitative easing, i.e., that it’s the stock of assets owned by the Fed that matters. A competing “flow” view holds that it’s the pace of purchases that matters. If there’s any good evidence for the “flow” view, I’d love to see it. It may be that both matter. In that case, my point still stands: the Fed will still be providing stimulus through the stock effect.

P.P.S. I wrote about this last year during the tapering debate. In the lingo of that post, the Fed is moving from quantitative easing to quantitative accommodation. To actually eliminate the stimulus, the Fed would have to move on to quantitative tightening.

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