On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.
There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?
Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.
As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.
The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:
Last week I published two posts expressing concern about how Congress might pay for proposed health reforms. The first post argued that policymakers should focus on the trajectory of new spending and offsets, not just the cumulative 10-year budget scores. The second post expressed concern that the offsets used to pay for health reform may include policies that otherwise would have been used to reduce our out-of-control deficits; as a result health reform that appears to be “paid for” could nonetheless worsen our long-run budget trajectory.
Needless to say, these issues are receiving lots of attention around the budgeting parts of the Web. Some important contributions include:
Over at the eponymous KeithHennessey.com, Keith Hennessey points out something I missed. In a Financial Times piece on June 22, OMB Director Peter Orszag suggested that paying for health reform over a 10-year budget window isn’t enough for budget neutrality. That’s exactly the point I made in my first post. Peter then sets out a second requirement: that health care reform must be “deficit neutral in the 10th year alone.” This is a good step, since it would rule out some trajectories of spending that would obviously worsen the long-run deficit. As Keith points out, this requirement isn’t sufficient by itself: you need to worry about the entire trajectory of spending and offsets, not just a single year. Nonetheless, it is a very good sign that the Administration is pointing out the limitations of 10-year budget scores.
In interpreting this increase, it’s important to keep several points in mind:
May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. Continue reading “Stimulus Lifts Government Transfers”
I’ve previously argued that Treasury ought to auction these warrants to the highest bidder. Auctions would (a) be transparent, (b) provide full, fair value to taxpayers, (c) free banks from the TARP, and (d) give banks the opportunity, but not the requirement, to repurchase the warrants. As close to a win-win-win policy as one can hope for in Washington.
Unfortunately, as I noted in a follow-up post, the original TARP investment contracts include a specific process by which banks can negotiate to repurchase the warrants. As much as I like auctions, I believe even more strongly that the government should live up to its agreements. Which is why you haven’t seen me blogging about warrant auctions lately.
How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?
The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.
The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:
If current trends continue, CBO projects that the level of debt, relative to the size of our economy, will grow to unprecedented levels — and keep going. Within a few decades, the ratio of debt-to-GDP could surpass the peak of World War II.
Our health care system is notoriously inefficient. Spending is too high, while quality is too low. Some patients undergo expensive treatments that provide little or no benefit. At the same time, other patients don’t receive some inexpensive treatments that could materially improve their health.
When I was CFO of a medical software start-up back in 2000, we diagnosed this problem quite simply: actual medical practice falls far short of best practices. Good treatment regimes are often well-known, yet are overlooked by a large fraction of practicing physicians. (The classic example at the time was that doctors were substantially under-prescribing beta blockers, which can help many patients after a heart attack; I would welcome comments about whether that’s still true.)
The implied treatment for our health care system is also simple: find ways to get patients, physicians, and other providers to adopt best practices. We were focused on information technology as one potential way to do this, but many others have also gotten attention, including:
As I noted, the Congressional Budget Office made a similar point in an important letter last week. Today, I’d like to emphasis another crucial point that CBO made in that letter — one that I think deserves much greater attention than it has received thus far.
Regarding the offsets that might be used to finance new health-related spending, CBO wrote:
Moreover, any savings in existing federal programs that were used to finance a significant expansion of health insurance would not be available to reduce future budget deficits. In light of the unsustainable path of the federal budget under current law, using savings to finance new programs instead of reducing the deficit would necessitate even stronger policy actions in other areas of the budget.
In other words, it’s likely that policymakers will pick the low-hanging fruit — the least-painful tax increases and spending reductions — to offset the costs of new health spending. That certainly makes sense politically, but unfortunately it may also make it that much harder to address our long-run budget problems.
Lawmakers want to be sure that health care reform — if it happens — won’t worsen the deficit over the next ten years. That’s laudable, but it’s not enough. There’s a risk that reform could be paid for over ten years, yet still worsen our long-run budget crisis. Policymakers should therefore focus on the long-run trajectory of new spending and offsets, not just the 10-year budget scores.
Faced with a frightening budget situation, lawmakers have rightly decided that health care reform — if it happens — should be budget neutral. In practice, that means that any new spending from health reform should be paid for — by other spending reductions or by increases in tax revenues — over a 10-year budget window.
That’s a laudable goal, but it’s not enough.
We also need to ensure that health reform doesn’t worsen our already grim long-run budget situation. Unfortunately, that could easily happen, even if its costs are paid for over the next ten years. To illustrate, consider the following stylized example. The red line is a hypothetical path for the net costs of health reform, and the blue line is a hypothetical path for the offsets that would be used to pay for that reform. I’ve chosen the numbers so that health reform costs $1 trillion over ten years, and so that the offsets total to $1 trillion over the same period.
This combination of policies would satisfy the “budget neutrality” test – the value of the offsets would indeed offset the net costs of the health reform. Nevertheless, it would substantially widen the deficit after several years, since the annual amount of new spending would eventually exceed the annual amount of offsets. If those trends continued, reform would not really be budget neutral; instead, it would exacerbate the long-term budget crisis.
The importance of this concern was highlighted by the Congressional Budget Office last week.