Can TARP Be Used to Pay for a New Jobs Program?

Washington is abuzz with the idea that Congress, the White House, or both may try to use unspent TARP funds as a way to promote job creation (see, e.g., this WSJ story and this WaPo story). Over the past two days, many reporters have asked me about the mechanics of this idea–can the government really use unspent TARP money this way? Here’s my best answer (given what I have learned so far).

There are two basic ways that our leaders could try to use TARP money to pay for new initiatives: through executive action or through new legislation.

Executive Action

Treasury Secretary Geithner has the ability to use TARP funds largely as he sees fit, as long as those uses are within the boundaries set out by the original legislation. As you may have noticed, the exact location of those boundaries–well, even the rough location of those boundaries–has been a topic of great debate during TARP’s existence. But the basic idea is that TARP can be used to purchase troubled assets, which the bill defines as follows:

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

If our leaders want to use TARP through executive action, they will have to come up with programs that fit within these limits. Additional support for small-business financing or home mortgages could certainly be structured to fit within these parameters; indeed, TARP already has programs for both of those. It would require substantial ingenuity, however, to figure out a way to support some of the other ideas being floated (e.g., aid to local governments).

New Legislation

The second approach would be for Congress to enact legislation that would increase spending on various programs and then pay for it, at least in part, by reducing the amount of money in the TARP program.

There have already been at least two pieces of legislation that have taken this approach:

• The Helping Families Save Their Homes Act of 2009, signed by the President on May 20, 2009, reduced TARP’s maximum authority from $700 billion to $698.74 billion. CBO scored that $1.26 billion reduction in TARP authority as saving $630 million.

• Last week, the House passed a bill that would create an improved database for tracking the TARP program. To pay for the database, the bill would roll back TARP authority by an additional $34 million (i.e., to roughly $698.71 billion). I haven’t seen an official score, but following the earlier example, I would expect that the reduction saves $17 million, which is presumably enough to pay for the database.

The key thing to note here is that each dollar of reduced TARP authority translates into only fifty cents of reduced spending. Why? Because TARP accounting is done using a “credit” approach, which accounts not only for the money that the government uses to purchase troubled assets, but also expectations of any money that will be returned.

The potential for returns varies greatly among the existing TARP programs. On average, the investments in banks seem likely to return most of the original investment, so the net cost of those investments will be relatively small. At the other extreme, the program supporting mortgage modifications will generate no returns. In scoring possible changes to TARP, CBO splits the difference and assumes that, on average, 50 cents of each TARP dollar will be repaid, and 50 cents will be added to the deficit.

How Much Money Is There?

According to the WSJ article linked above, there is about $226.5 billion of currently unused TARP authority. You might therefore be tempted to conclude that Congress could use that money to offset up to $113 billion in new spending. But there are two flaws in that reasoning. First, some of those monies have been committed to TARP programs that are still underway (e.g., support for small business financing and mortgage relief). Second, the administration almost certainly wants to hold some “dry powder” as insurance against some unpleasant financial surprise. I know that I would.

Taking those demands into account, the actual amount of “available” TARP funds is probably more like $50 to $100 billion. Rescinding those monies would thus pay for “only” $25 to $50 billion in new programs.

I should emphasize that “pay for” in this discussion means “pay for within the ground rules of the congressional budget process.” That process relies on the budget baseline that CBO published last March. Among other things, that baseline assumed that all TARP monies would be deployed. As a result, CBO will now score any TARP reductions as saving money.

The world has changed in the intervening months, and some observers now believe that Treasury will not use all the TARP money. As a result, there is potentially a disconnect between reality and congressional budget accounting. For example, suppose you believe that $50 billion of TARP money will go unused. Relative to that “personal” baseline, you would not attribute any savings to a bill that reduced TARP’s authority by, say, $30 billion. You would simply argue that the money would not have been used anyway. Meanwhile, the congressional budget process would give credit for $15 billion in savings from that reduction in authority. Given that disconnect, I suspect we will witness some rhetorical battles about what baseline to use in thinking about potential savings from TARP reductions.