Archive for December, 2009

CBO Director Doug Elmendorf posted a particularly interesting piece on his Director’s Blog today. Summarizing a presentation he gave to the Group of 30, Doug responds to some of the more common concerns one hears about the budget effects of the health bills:

First, some analysts argue that CBO is underestimating the ultimate costs of the new subsidies to buy health insurance. My response was that the budgetary impact of broad changes in the nation’s health care and health insurance systems was very uncertain, but that CBO staff, in consultation with outside experts, has devoted a great deal of care and effort to this analysis, and the agency strives to have its estimates reflect the middle of the distribution of possible outcomes. CBO’s estimates of subsidy costs may turn out to be too low, but they could also turn out to be too high.

Second, some observers argue that CBO’s estimates are unrealistic because Congress will not allow the Medicare spending cuts in the proposals to take effect. My response was that CBO estimates the effects of proposals as written and does not forecast future legislation, but that the agency does try to provide information about the consequences of implementing proposals. Our cost estimate for the Senate proposal and our cost estimate for the House bill said that inflation-adjusted Medicare spending per beneficiary would slow sharply under those proposals. For example, growth in such spending under the Senate proposal would drop from about 4 percent per year for the past two decades to roughly 2 percent per year for the next two decades; whether such a reduction could be achieved through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care is unclear. In addition, relaxing previously enacted constraints on Medicare spending can add significantly to long-run budget deficits, as we wrote in answer to a question about the effects of combining the House bill with a change in the so-called Sustainable Growth Rate mechanism for Medicare physician payments.

Third, some analysts argue that the pending proposals will hamper future efforts at deficit reduction by using spending cuts and new revenues to pay for a new entitlement rather than to cover the costs of existing entitlements. My response was, again, that CBO does not and should not forecast future legislation; its cost estimates address the specific legislation at hand and do not speculate about the possible impact of a bill on future legislative actions. However, our June analysis of health reform and the federal budget noted that using savings in certain programs to finance new programs instead of reducing the deficit would ultimately necessitate even stronger policy actions in other areas of the budget.

Fourth, some experts argue that the proposals are missing opportunities to reform health care delivery and reduce spending more significantly. My response was that it is not CBO’s role to make such judgments, but that our December volume on Budget Options included a wide range of alternatives for changing the nation’s health care and health insurance systems. Those options covered many different types of reforms and included reforms with different degrees of aggressiveness in altering existing systems and pursuing cost-saving goals.

(I don’t usually post such long excerpts, but this one struck me as worth quoting in its entirety. Doug also shared some thoughts on stimulus and the state of the economy; click on over to his post for those.)


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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:


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This morning’s jobs report was encouraging not only in its headline figures, but also in its details:

  • Payrolls fell by 11,000 in November, the smallest decline since the recession began.
  • The unemployment rate declined to 10.0%, down from 10.2% in October.
  • Jobs losses in September and October were smaller than previously reported (by a combined 159,000).
  • Average weekly hours increased from 33.0 to 33.2.
  • Temporary help services, often viewed as leading indicator, added more than 52,000 jobs.
  • The underemployment rate (U-6) dropped from 17.5% to 17.2%.

In short, almost all the key measures moved in the right direction in November (the one disappointing figure was average hourly earnings, which increased only a penny in November).

It’s possible that some of these figures were helped by seasonal factors (last November was so bad that the seasonal adjustment process might give a little extra boost to this November’s figures). But the breadth of better news–including the revisions and the hours–gives me some confidence that these data do reflect real improvements in the labor market.

Still, we shouldn’t get too excited. We need the economy to add jobs–preferably 100s of thousands–each month if we are ever going to get unemployment down, so losing 11,000 is still bad news in an absolute sense. But today’s report is a step in the right direction.

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Yesterday the Treasury auctioned off its TARP warrants in Capital One. Treasury sold the warrants for $11.75 a piece, well above its $7.50 reserve price, but below some private estimates of $19.00 or more. I wouldn’t have gone as high as $19.00 myself, but I would have ended up a winner in the auction if I had found a broker with access. Oh well, maybe I can pick some up when they start trading on the NYSE (ticker COF WS) in the next week or two.

Disclosure: I have no position in any Capital One securities.

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A couple weeks ago, I highlighted an IMF report that compared the fiscal challenges facing developed economies. Not surprisingly, the IMF concludes that the United States has one of the largest structural deficits. To get our national debt back down to 2007 levels (relative to the economy), the IMF believes that we need to undertake a major fiscal adjustment–equivalent to a whopping 8.8% of GDP.

I have some quibbles about that figure, not least because the United States could avoid a fiscal crisis without getting the gross government debt all the way back to 2007 levels. But the basic message is sound: we face an enormous fiscal challenge.

However, we should not give up hope. As I discuss in a new piece over at e21, the IMF report also provides some reason for optimism: history provides numerous examples of developed economies that have successfully undertaken major fiscal adjustments. Indeed, the IMF finds 30 instances during the past three decades in which countries made adjustments of at least 5% of GDP, and nine cases in which the adjustments were even larger than the IMF currently prescribes for the United States:

The United States itself makes the list, with a fiscal adjustment (i.e., reduction in the cyclically-adjusted primary budget deficit) of 5.7% back in the 1990s.

Looking through the list, you will notice that many of these large adjustments occurred, at least in part, during the economic boom of the late 1990s. That isn’t surprising: fiscal adjustment is much easier if strong economic growth reinforces responsible fiscal policies.

P.S. For related posts, see this and this.

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Good Budget Reads

1. Jeff Frankel tops my National Journal post with nine more ways to trim the deficit.

2. EconomistMom Diane Lim Rogers scores the budget quote of the week: “‘Loosey-goosey’ out, loosey-goosey’ back at ya.

3. Bruce Bartlett makes the case for a war tax: “wars financed heavily by higher taxes, such as the Korean War and the first Gulf War, end quickly, while those financed largely by deficits, such as the Vietnam War and current Middle East conflicts, tend to drag on indefinitely.”

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Thursday is a nice milestone in TARP’s history: with the help of Deutsche Bank, Treasury is auctioning off the warrants it received when it invested in Capital One. The company has already paid off the preferred stock that the government purchased last fall, and will now be free from TARP oversight once the warrants are in private hands. Or, perhaps, in its own hands. Although Capital One declined to purchase the warrants from Treasury at a negotiated price (as had other firms that repaid the government’s TARP investments), it can still bid in the auction.

A few months ago, I pointed out many benefits from auctioning the warrants rather than selling them back to the companies at negotiated prices. To my mind, the biggest benefits are transparency and the fairness of market pricing. Everyone—including, at least in principle, small investors—can bid in the auction.

If you are interested, here’s the prospectus, which includes (pp. S-15 to S-16) a list of participating brokers. I don’t see my broker on the list, which is disappointing, but maybe others will be luckier.

For a nice discussion of the auction mechanism (a modified Dutch auction in which all winning bidders pay the market-clearing price, very similar to the method used to sell Treasury bonds) and some estimates of the warrant values, see this Seeking Alpha piece by Linus Wilson.

Disclosure: I have no position in Capital One and, apparently, no way to bid on the warrants. If I find a way, I might do it for fun.

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