Within current budget rules, the Congress can indeed use unspent TARP money to “pay for” new spending initiatives. However, it needs to cut TARP authority by $2 for every $1 it wants to spend.
Those “savings” are mythical, however. Treasury Secretary Geithner recently predicted that TARP would use at most $550 billion of its $699 billion in authority. Trimming TARP’s authority by a moderate amount (e.g., $50 billion) will thus generate no actual budget savings. Only deep cuts would begin to generate some savings.
The financial system is not fully healed, and the United States still lacks a coherent system for dealing with large, failing financial institutions. For that reason, I support Geithner’s extension of TARP as an insurance policy. However, I do not support the TARP extension if its main effect it to allow Congress to use TARP “cuts” to generate mythical budget “savings” or to encourage creative uses of TARP money.
Usain Bolt had a remarkable year, but Chairman Bernanke is still the right choice as Person of the Year. And he’s the right choice for Fed Chairman.
But his work is only half done. If he can figure out an exit strategy that keeps the economy growing, avoids new asset bubbles, and sidesteps inflation, then maybe he will be Person of the Year again next year.
A few weeks ago, Fed Chairman Ben Bernanke appeared before the Senate Banking Committee for his confirmation hearing. Following the normal ritual, Committee members made their statements and peppered Bernanke with questions about every economic topic under the sun. That much is well-known (and was closely followed on CNBC).
What’s less well-known is that Bernanke went back to his office to discover an enormous stack of homework, including a 70-question take-home exam from Senator Jim Bunning.
Senator Bunning’s questions cover a lot of territory: Fed policy, fiscal policy, AIG, the dollar, etc. Chairman Bernanke’s answers are worth a read, when you have time for a 34-page, single-spaced document.
Here’s one important excerpt, reiterating the Fed’s view that Lehman could not have been saved with then-existing authorities:
54. What was your rationale for letting Lehman fail?
Concerted government attempts to find a buyer for Lehman Brothers or to develop an industry solution proved unsuccessful. Moreover, providers of both secured and unsecured credit to the company were rapidly pulling away from the company and the company needed funding well above the amount that could be provided on a secured basis. As you know, the Federal Reserve cannot make an unsecured loan. Because the ability to provide capital to the institution had not yet been authorized under the Emergency Economic Stabilization Act, the firm’s failure was, unfortunately, unavoidable. The Lehman situation is a clear example of why the government needs the ability to wind down a large, interconnected firm in an orderly way that both mitigates the costs on society as whole and imposes losses on the shareholders and creditors of the failing firm.
Well that was quick. This morning Treasury Secretary Geithner laid out the administration’s vision for TARP, answering the questions I posed yesterday.
As expected, Secretary Geithner is using his authority to extend the TARP program to October 3, 2010 (it otherwise would have expired at the end of this month). As I’ve suggested in earlier posts, I don’t see how he could have chosen otherwise. The administration is committed to programs that aren’t complete yet, and it needs to worry about unpleasant surprises. In the words of his letter to House Speaker Pelosi:
This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats.
Second, Geithner announced that henceforth TARP will be used for only four programs: to mitigate home foreclosures, provide capital to small and community banks, additional efforts to facilitate small business lending, and, possibly, to expand the TALF program that supports securitization markets for loans to small businesses, commercial real estate, etc. Notably (and correctly) absent from this list are some of the ideas — funding for new infrastructure, assistance to state and local governments — that have been floated in recent days.
Geithner is right to draw a moat around TARP and to limit its use to specific activities, except in emergencies:
Beyond these limited new commitments, we will not use remaining EESA funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.
Third, Geithner provided a new forecast of how much TARP money will eventually be used:
While we are extending the $700 billion program, we do not expect to deploy more than $550 billion. We also expect up to $175 billion in repayments by the end of next year, and substantial additional repayments thereafter. The combination of the reduced scale of TARP commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate.
In short, the administration believes that at least $150 billion of TARP money will never be used. That’s great news. But now attention will turn to Congress to see whether it tries to use that $150 billion to “pay for” new initiatives. As I noted the other day, current budget rules would give Congress credit for 50 cents of savings for each dollar that’s removed from overall TARP authority. But such savings are an accounting fiction, not real, if the TARP authority never would have been used anyway.
As I discussed the other day, using TARP to pay for new jobs programs faces some serious practical issues. First, the administration is limited in how it can deploy existing TARP funds. It should be straightforward to use more funds to support lending to small businesses (which TARP already does to some extent), but it would take great legal ingenuity to use it to fund infrastructure projects or aid to state and local governments. Indeed, in an article titled “Use of Cash from TARP Hits Hurdle“, the Wall Street Journal reports that top Democrats have concluded that TARP money can’t be used for either of those ideas.
Second, legislative use of TARP money are limited by budget scoring rules, which currently would attribute only 50 cents of budget savings to each dollar by which TARP’s authority might be reduced. And even then, careful budgeteers would realize that such savings are make-believe if, as seems likely, any such limits would apply only to TARP authority that was unlikely to be used anyway.
In short, the rhetoric about using TARP to finance various proposals seems to have gotten ahead of reality.
Here are the President’s three forward-looking statements about TARP (he also made some comments about TARP’s origin and history, but that’s a topic for another day):
I’m asking my Treasury Secretary to continue mobilizing the remaining TARP funds to facilitate lending to small businesses. …
[W]ith a fiscal crisis to match our economic crisis, we also must be prudent about how we fund [initiatives to accelerate the pace of private hiring]. So to help support these efforts, we are going to wind down the Troubled Asset Relief Program — or TARP — the fund created to stabilize the financial system so banks would lend again. …
TARP is expected to cost the taxpayers at least $200 billion less than what was anticipated just this past summer. And the assistance to banks, once thought to cost taxpayers untold billions, is on track to actually reap billions in profits for the taxpaying public. So this gives us a chance to pay down the deficit faster than we thought possible and to shift funds that would have gone to help the banks on Wall Street to help create jobs on Main Street.
If I am reading that right, the President would like to (a) continue Treasury’s existing effort to support small business lending through TARP, (b) wind down the TARP program, and (c) shift funds to other purposes. That leaves me with some important questions, including:
Does the administration plan to expand TARP’s small business lending support or just execute the one that’s already been announced? (NB: The President also endorsed several other steps to help small businesses, including easier access to SBA loans.)
Does “wind down the TARP program” mean that Secretary Geithner won’t use his authority to extend the program beyond December 31, 2009? If I were him I would sleep much better at night if I had some “dry powder” in an extended TARP, just in case we have another September-October of 2008. Such a replay seems highly unlikely (knock on wood), but if that exceedingly remote event did happen, I wouldn’t want to be the Treasury Secretary who went up to Capitol Hill to ask for a TARP II.
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:
Yesterday, the Congressional Budget Office released its much-anticipated analysis of how the Senate health bill might affect insurance premiums. As a political matter, the analysis appears to be a clear win for proponents of the bill. Most importantly, CBO found that average premiums in the large group market—which provides about 70% of private health insurance—would decline slightly in 2016. That provides comfort to Senate moderates who were concerned by claims that the bill would increase premiums significantly.
On the other hand, the report also found that average premiums in the nongroup market would increase by 10 to 13%. That substantial boost is providing some ammunition to opponents of the bill.
To put these impacts in context, it’s useful to dig a bit deeper to understand the various channels by which health reform may affect insurance premiums. CBO identifies three such channels: changes in the amount of health insurance coverage that each beneficiary purchases, changes in the types of people with coverage, and changes in the price of a given amount of insurance for a given group of enrollees:
For me, the most interesting of CBO’s findings is that the Senate bill would make the nongroup and small group markets more efficient. The price of nongroup coverage would be reduced by 7 to 10% (holding constant the amount of coverage and the type of people covered), while the price of small group coverage would be reduced by 1 to 4%. Where do these savings come from? From reduced administrative costs and competition in the exchanges (not, CBO notes, from any material reduction in cost-shifting from the uninsured to the insured).
The second key finding is the enormous increase in the amount of coverage that consumers would purchase in the nongroup market. CBO finds that the bill would induce people in the in the nongroup market to purchase insurance that covers a larger share of their costs; the bill would also require insurers to cover a broader range of services. Both of these changes would boost nongroup premiums.
The third major finding is that the changing mix of enrollees would lower average premiums in the nongroup market. Premiums in the large group market would decline slightly.
A fourth major implication, overlooked in most discussions thus far, is that we shouldn’t assume that average premiums going up is always bad (or, for that matter, that average premiums going down is always good). Consider, for example, the increase in average nongroup premiums, which occurs because nongroup insurance would expand to cover more services and a larger fraction of beneficiary costs. To what extent is that increase harming people in the nongroup market? It depends on how much the beneficiaries value their new coverage. When consumers move up from a Honda Civic to a Honda Accord, it’s usually safe to assume that they are benefitting, even though the Accord is more expensive. On the other hand, we would look askance (I hope) at a government program that forced potential Civic buyers to purchase Accords instead.
So it is with nongroup insurance. If people are trading up willingly to more expensive coverage, we shouldn’t view that as a bad thing (there is an issue about how broader coverage affects their consumption of health services, but let’s leave that aside for now). On the other hand, if the government is forcing them to buy coverage they don’t fully value, we might be concerned (with the obvious caveat that with health insurance, unlike car purchases, there are some legitimate reasons why the government might mandate some level of coverage). But even then, the most important concern is the net burden (how much consumers value the coverage less what they have to pay for it), not simply the gross burden of paying for it. CBO doesn’t get into these particulars in detail, but it does provide the following breakdown of the amount of coverage effect: two-thirds is due to greater actuarial value of the plans and one-third is due to coverage of more services (including those induced by the greater actuarial value). The increase in actuarial value means that, on average, about two-thirds of the increase in nongroup premiums will be offset by reductions in out-of-pocket spending. As a result, I think the increase in average premiums significantly overstates the burden that beneficiaries in the nongroup market might bear (and, indeed, some may well be better off).
Of course all of these conclusions come with numerous caveats. Most importantly: (a) YMMV; individuals may experience much larger premium increases or decreases than the averages, (b) CBO didn’t model some impacts that could raise premiums — most notably the possibility that increased demand for health services would drive up prices, (c) CBO didn’t model some impacts that may eventually reduce premiums — most notably provisions that might reduce health costs somewhat after 2016, and (d) these findings don’t include the effects of any subsidies or the tax on Cadillac plans; see the CBO report for analysis of those.
Senate Majority Leader Harry Reid unveiled his health bill yesterday. As everyone knows by now, the Congressional Budget Office (CBO) estimates that the bill would spend $848 billion to expand coverage over the next ten years, reducing the number of uninsured in 2019 by about 31 million. (The House bill would spend $1.05 trillion over the next ten years, and would reduce the number of uninsured in 2019 by about 36 million.)
As regular readers know, CBO reports two estimates of the cost of expanding coverage: the gross cost, which reflects all new spending and tax incentives to increase insurance coverage, and the net cost, which subtracts any tax revenue increases associated with coverage policies. Leader Reid, Finance Chair Baucus, and their Senate colleagues deserve credit for emphasizing the higher figure in explaining the cost of their bill. In contrast, House leaders tried to focus attention on the lower, net cost of their bill, which led to unnecessary confusion (nb: the net coverage cost of the Senate bill is $599 billion versus $891 billion for the House bill.)
Everyone following this debate should keep in mind, however, that even the gross coverage figures do not capture all the costs of these bills. As I’ve pointed out several times (e.g., here and here), the health bills include many important provisions in addition to those expanding coverage. Many of those non-coverage provisions are intended to save money and thus pay for the coverage expansions. But some of the provisions expand spending on other health programs.
To get a fair read on the total cost of the health bills, we should therefore add together the gross cost of coverage expansions and the cost of the other provisions that increase spending (or decrease revenues). I estimate, for example, the real gross cost of the Senate health bill is $940 billion over ten years: As noted in the table, the biggest non-coverage items are new discounts for drug purchases in the Medicare Part D program, a new fund to finance efforts in prevention and public health, and a one-year doctor “fix”. Together with other provisions, they add up to a bit more than $90 billion in additional spending, Along with about $1 billion in tax reductions, that means the bill costs $940 billion over ten years, about $92 billion more than for coverage alone. (In contrast, the House bill has a total cost that’s up near $1.3 trillion.)
Caveats: CBO does not calculate a total cost figure for the health bills. The bills include dozens of policy changes, and it would be difficult (perhaps impossible) to allocate all their impacts to specific provisions. Thus, my figures should be considered approximate. I calculated the $90 billion figure for additional spending by adding up all the individual line items in Table 4 of the cost estimate that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there was one policy that led to both spending increases and spending decreases; I included the net spending increase in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill. It’s also worth noting that I have taken as given CBO’s estimate of the gross cost of expanding coverage. There are some nuances in the calculation of that figure (e.g., the treatment of payments in a reinsurance program) that I need to understand better.
The voters of Maine disappointed me last week, voting to overturn a state law that allowed same-sex marriages.
Many public policy issues involve difficult tradeoffs. Health care, for example, is a hard issue. So is climate change. But same-sex marriage? That’s always struck me as a lay-up. It would benefit those who want to get married, while harming, as best as I can tell, no one. (In econo-speak, that’s called a Pareto improvement, and the first rule of economics is to take every Pareto improvement that life offers you.)
One sometimes hears the argument that allowing same-sex unions would weaken the institution of marriage. But I’ve never seen a plausible explanation of how that could happen. At best, the argument seems like a non-sequitur. And at worst, it may be exactly backwards.
As Theresa Vargas describes in today’s Washington Post, one group of people–the former spouses of homosexuals who tried to live as heterosexuals–believe that legalizing same-sex marriages would strengthen the institution of marriage:
As the debate over legalizing same-sex marriage in the District grows louder and more polarized, there are people whose support for the proposal is personal but not often talked about. They are federal workers and professionals, men and women who share little except that their former spouses tried to live as heterosexuals but at some point realized they could not.
Many of these former spouses — from those who still feel raw resentment toward their exes to those who have reached a mutual understanding — see the legalization of same-sex marriage as a step toward protecting not only homosexuals but also heterosexuals. If homosexuality was more accepted, they say, they might have been spared doomed marriages followed by years of self-doubt.
In short, the Pareto improvement from allowing same-sex marriages may be even bigger than I thought.
1. The Medicare doctor fix has gotten cheaper. Yesterday the Congressional Budget Office (CBO) released a cost estimate for the House proposal to make a permanent “fix” to the rates that Medicare pays doctors (as you may recall, those rates are scheduled to be cut by more than 20% at the end of the year). The ten-year price tag? $210 billion. That’s down from the earlier $245 billion cost because of an arcane change in Medicare regulations (in addition, it’s now being scored separate from other parts of health reform).
2. The House Republican alternative to the House bill would cost much less, but cover many fewer people. According to another cost estimate released yesterday, CBO estimates that the Republican alternative would spend $61 billion over ten years on expanding coverage versus $1.055 trillion in the House bill. In return, their proposal would reduce the number of uninsured by 3 million in 2019 versus 36 million under the House bill.
3. Over at EconomistMom, Diane Lim Rogers has a nice piece about some of the tax increases that the House bill would use to pay for health care reform. Her concern? That they look a lot like the tax increases currently scheduled under the alternative minimum tax. Congress always steps in to prevent the AMT from biting more deeply. Why would things be different with a new AMT-like tax?
4. Confused by all the different cost measures being thrown around in the health debate? Over at e21 (the new think tank), I’ve tried to provide some clarity about the leading measures and how they stack up for the House bill and the Senate Finance bill: “How much do the health bills really cost?“
In a series of posts last week, I noted that the coverage provisions in the House health bill would cost more than $1 trillion over the next ten years, notably higher than the $894 billion figure that was circulated when the bill was first released. In addition, I pointed out that the bill includes other spending increases that aren’t involved in expanding coverage; when you factor those in, I estimated that the real cost of the bill would be almost $1.3 trillion.
The health care bill headed for a vote in the House this week costs $1.2 trillion or more over a decade, according to numerous Democratic officials and figures contained in an analysis by congressional budget experts, far higher than the $900 billion cited by President Barack Obama as a price tag for his reform plan.
While the Congressional Budget Office has put the cost of expanding coverage in the legislation at roughly $1 trillion, Democrats added billions more on higher spending for public health, a reinsurance program to hold down retiree health costs, payments for preventive services and more.
Many of the additions are designed to improve benefits or ease access to coverage in government programs. The officials who provided overall cost estimates did so on condition of anonymity, saying they were not authorized to discuss them.
My own calculation came in at $1.27 trillion, which strikes me as “almost $1.3 trillion” rather than “$1.2 trillion or more”, but that’s nit-picking.
The key point is that there’s a consensus, at least behind the scenes, that the bill would cost more than $1.2 trillion over the next ten years.
