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.
Wednesday was a rare day in Washington: the Federal government was actually cash-flow positive.
The reason, of course, is that ten major banks repaid $68 billion in TARP money. Smaller banks had previously repaid about $2 billion, so Wednesday’s action lifted total repayments to $70 billion, almost 30% of TARP support to individual banks.
(For those who don’t get the title, this pie chart reminds me of a peace sign.)
As noted in my previous post on TARP, that means that two firms — Citigroup and Bank of America — now account for the majority of outstanding TARP support to banks. Citigroup has received $50 billion in three transactions, and B of A has received $45 billion in two transactions. Investments in all other banks now total “only” $79 billion.
This morning, the Wall Street Journal editorial page questioned the oft-alleged link between health care costs and the competitiveness of American business. Echoing Council of Economic Advisers Chair Christina Romer, it referred to that argument as “schlock.” At the same time, everyone interested in health policy is still absorbing the trillion-dollar price tag that the Congressional Budget Office (CBO) put on the Kennedy health bill.
I’d like to point out that these two issues – any link between health care and competitiveness and the estimated cost of health reform – are closely related. The way that CBO estimated the budget impacts of the Kennedy bill implies that health care has little effect on competitiveness. If you take the contrary view, that health care is a big deal for American competitiveness, then you should also believe that CBO has underestimated the difficulty of paying for health reform.
On Monday afternoon, the Congressional Budget Office (CBO) released a preliminary analysis of the Affordable Health Choices Act, commonly known as the Kennedy Health Bill. The draft bill language was distributed last week by the Senate Committee on Health, Education, Labor, and Pensions (HELP) which Senator Kennedy chairs.
Based on work by CBO and the Joint Committee on Taxation (JCT), the analysis provides preliminary estimates of the budget impact of the bill as well as its impacts on health insurance coverage. Some highlights:
1. The analysis is preliminary. CBO and JCT have not yet had time to analyze every provision in the bill, some provisions remain in flux, and new provisions may be added. In short, health policy is a moving target.
2. The bill would have a net budgetary cost of slightly more than $1 trillion over the next ten years (2010 – 2019). To get the bill passed, its proponents will have to find a way to offset most or all of those costs. That’s why President Obama and others have been talking about various spending reductions (e.g., reduced payment rates for some providers) and revenue increases (e.g., reducing the benefit of itemized deductions) in recent days. As a political matter, the offsets may turn out to be more difficult than the core policy.
3. The bill would increase Federal spending by $1.3 trillion, which would be partially offset by about $260 billion in higher tax revenues; the net cost is slightly more than $1 trillion. Spending would increase primarily because the Federal government would provide subsidies for individuals and families to purchase health insurance through insurance exchanges (also known as gateways). Revenues would increase because fewer workers would receive employer-sponsored health insurance (which is not subject to income and payroll taxes). Those workers would still be compensated at market rates, but more of their compensation would be in taxable forms (e.g., wages and salaries).
When policy debates heat up, it’s not enough for policy analysts to run the numbers and for political analysts to count votes and gauge the influence of affected interests. You also need communicators to craft a crisp, clean message. One that resonates with listeners consciously and, if possible, subconsciously.
Every word counts. As a result, one of the key communication battlegrounds is very basic: What do you call the policy? If you can win the naming battle, you are a long way toward winning the policy war.
Having participated in a number of these debates, I would like to offer the following conjecture, which I will boldly characterize as a rule:
The Rule of Three: If debate about an economic policy is sufficiently important, that policy will have three different names: one used by proponents, one used by opponents, and one used by non-partisan agencies that don’t want to take sides.
That rule is asserting itself today in the debate over reforming the health care system, much as it did in the debate over Social Security a few years ago.
The TARP continues to grab headlines, so I thought it would be useful to summarize how the TARP money has been used to date.
As you may recall, the Troubled Asset Relief Program (TARP) created a pool of $700 billion that the Treasury Secretary could use to stabilize the financial sector. The following chart summarizes the TARP transactions that have already occurred (dark blue) and any additional funds that Treasury has announced for each program (grayish):
As the chart illustrates, Treasury has announced plans for about $645 billion of the TARP money, of which $435 billion has been committed to specific transactions. But the most interesting facts involve the specific programs:
Last week, the Congressional Budget Office released it’s latest snapshot on the Federal budget. CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009). During the same period last year, the deficit was “only” $319 billion. Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading).
Last week, the Congressional Budget Office released its latest snapshot on the Federal budget. CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009). During the same period last year, the deficit was “only” $319 billion.
Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading):
As the chart shows, there have been three basic factors driving up the deficit:
A large number of individual VCs are also departing their firms. And, the Journal notes:
The actual number of exits might be even higher than the trade group’s figures indicate. Venture-capital funds are typically 10-year investment vehicles. That means even if a venture capitalist no longer actively invests, he or she can remain on a firm’s masthead because they have to wind up their investments in older funds.
The article is worth reading in full for its discussion of the factors — weak economy, reduced investment capital, natural turnover, etc. — that are contributing to the decline in venture activity and the departure of individual VCs.
I don’t know how much this generalizes (readers please chime in) but one VC friend of mine reports two other factors that may be driving him and some other successful VCs from the business:
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