Tag: Budget

Baucus Bill: Four Steps in the Right Direction

From a budget perspective, the Baucus bill is a major step forward from the earlier HELP and House bills. There remains lots of room for improvement, and I am certainly not endorsing the bill at this point. But I do believe that Chairman Baucus and his team deserve credit for improvements on at least four important fronts: overall budget impact, doctor payment rates in Medicare, tax increases, and communications.

1. On paper, at least, the bill satisfies three key budget tests. It doesn’t add to the deficit over the ten-year budget window, it doesn’t add to the deficit in the tenth year of the window, and it doesn’t add to the deficit in years beyond the window. Indeed, it appears to reduce the deficit over each of those periods.

As CBO hinted in its cost estimate and Greg Mankiw discusses on his blog, there are reasons to doubt whether some proposed spending reductions and tax increases would actually materialize. Thus, the actual budget effects may not be as rosy. That’s a huge issue. But even with that caveat, the Baucus bill is a major improvement over proposals that didn’t even try to hit these budget targets.

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How Much Does the Baucus Bill Cost?

Yesterday, Senate Finance Committee Chairman Max Baucus released his much-awaited health care proposal. In his announcement, he described it as a costing $856 billion over the next ten years, costs that would be more than paid for by other spending reductions and tax increases.

Later in the day, the Congressional Budget Office released its preliminary estimate of the budget impacts of the bill. That estimate shows a $774 billion cost for the bill’s provisions that expand coverage. As a result, some commentators have suggested that Baucus somehow misspoke and over-stated how much his bill would cost by more than $80 billion.

That is not correct.

Why? Because the bill does more than expand coverage. It also increases spending on various health programs.

For example, it provides a one year “doctor fix”, delaying by a year dramatic cuts in Medicare payment rates. CBO estimates that provision has a ten-year cost of about $11 billion.

The bill also expands the prescription drug benefit in Medicare. That provision would cost more than $17 billion over ten years.

Those two provisions alone imply that the bill costs a bit more than $800 billion. And there are numerous other spending increases that would cost at least a few tens of billions more. I must admit that I couldn’t find my way all the way up to $856 billion when I quickly reviewed them, but it’s clear that the true cost of the bill is notably higher than $774 billion for the coverage expansions alone.

The larger point is that we should be careful to identify all the important provisions in these competing bills, and keep track of gross budget impacts, not just net impacts. I raised this issue in my discussion of the House health bill. That bill was often touted as costing around $1 trillion over ten years, but the actual cost of expanding coverage was closer to $1.3 trillion. And a permanent fix to the Medicare doctor issues would have added more than $200 billion to that.

I haven’t gone back to look at all the details, but on apples-to-apples basis, the House bill would cost at least $1.5 trillion compared to the $800 billion plus of the Baucus bill.

I think Chairman Baucus should be commended for trying to inject some gross (in the good sense) figures, rather than net ones into this debate. That can only improve the quality of the discussion. (But it would be great to get some more guidance on how to get to exactly the $856 billion figure).

Note for budget geeks: The biggest net-vs-gross question is how to think about the $30 billion budget impact of premium interactions. If those interactions are happening because of efforts to reduce costs, then they shouldn’t be included in the gross cost figure. If they are happening because of efforts to increase costs, then they should.

The Simple Economics of Student Loan Crises

Yesterday, my students heard my second lecture on supply and demand. You know, the one in which we examined how government policies like rent control and the minimum wage can affect market outcomes. Those are important examples, and I dutifully discussed both of them. But I must admit they also feel a smidgen stale – how many millions of students have seen a lecture on rent control and the minimum wage?

To spice things up, I threw in a third example of government intervention: the market for guaranteed student loans. As I mentioned a few weeks ago, the government has a major program in which it provides guarantees for private student loans. Under the program, lenders are protected against the risk of future defaults by the student borrowers. In return for providing these loans, the lenders receive interest payments that are limited by a formula that is specified in law. (These payments are determined completely separately from the amounts that are charged to students which, for simplicity, I will ignore in what follows.)

This program is currently the focus of a major political battle: the Obama administration has proposed eliminating the program and replacing it with direct loans from the government (which currently account for a much smaller portion of the market). But I didn’t get into that larger debate in class. Instead, the reason I focused on this program is that it has experienced two crises in recent years:

  • In 2006 and 2007, the crisis was kickbacks. In their enthusiasm to win more business, private lenders were offering “inducements” to schools and student loan officers in order to get preferred access to students who wanted loans.
  • In 2008, the crisis was a lack of lending. In large part because of the financial crisis, private lenders had no enthusiasm whatsoever for making loans. As a result, there was a real risk that students might not be able to get loans.

As I told my students, I think both of these crises had the same root cause: the fact that the government, rather than market forces, determined how much lenders were paid for making guaranteed student loans. In both cases, the government got the payment levels wrong, and the crises followed soon thereafter.

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The Exploding Deficit Reaches $1.4 Trillion

Earlier today, CBO released its latest monthly snapshot on the federal budget. The key things you should know are:

  • CBO estimates that the government ran a deficit of almost $1.4 trillion during the first eleven months of the fiscal year (up from $501 billion at this point last year).
  • CBO reiterated its forecast that the full year’s deficit will also come in around $1.4 trillion (September is usually a month of surplus because of strong tax receipts, but CBO apparently thinks this September will be close to break-even.)
  • CBO’s estimate is noticeably lower than the administration’s most recent deficit forecast of $1.58 trillion. If the final numbers next month are in line with CBO’s projections, some commentators will thus spin the full year deficit as good news (“the deficit came in lower than the administration expected”), while others will spin it as bad news (“yikes, the deficit was $1.4 trillion”). (As noted in an earlier post, CBO’s summer update was a bit complicated to interpret because its headline deficit estimate used different accounting for Fannie Mae and Freddie Mac than the administration used; on an apples-to-apples basis, however, CBO then forecast a deficit of $1.41 trillion.)
  • As shown in the following chart, the deficit has exploded for three main reasons:

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Tracking the Stimulus: Update

Good news: The Recovery.gov website now includes information about the tax components of the stimulus, not just the spending components:

According to the chart, an estimated $62.5 billion made its way out the door in tax reductions through the end of August. The corresponding spending data indicate that $88.8 billion in federal spending made its way out the door by August 28.

Putting these together, you get an estimated $151.3 billion in combined tax reductions and spending increases through the end of August.

Continue reading “Tracking the Stimulus: Update”

OMB’s 2009 Deficit Estimate Is Likely Too High

As expected, the new budget projections from the Office of Management and Budget show an estimated deficit of $1.58 trillion in the current year (which ends on September 30).

In their coverage of the dueling budget releases, many members of the media are noting that this estimate is almost identical to the $1.59 trillion estimate released by the Congressional Budget Office. Thus, it may appear that OMB and CBO reached similar conclusions about this year’s deficit.

That is not correct.

OMB and CBO use different accounting for a growing part of the budget — the federal take-over of Fannie Mae and Freddie Mac.  If you adjust for those accounting differences, an apples-to-apples comparison shows that OMB’s projection of a $1.58 trillion deficit should be compared to a CBO estimate of $1.41 trillion. (For details, see the table on p. 2 and the box on pp. 8-9 of CBO’s report.)

In other words, using identical accounting, CBO is projecting a deficit that is almost $200 billion less than projected by OMB.

Here’s how it works:

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More Stimulus Spending Than Originally Projected

Lots of budget news this morning, with the release of the newest projections from the Office of Management and Budget and the Congressional Budget Office.

One headline is that spending on the stimulus will be higher than expected. As reported by Lori Montgomery at the Washington Post (ht EconomistMom):

The $787 billion economic stimulus package President Obama signed earlier this year is likely to cost “tens of billions of dollars” more than expected, helping to drive projections for next year’s budget deficit to $1.5 trillion, White House budget director Peter Orszag told reporters.

With unemployment climbing, costs for a variety of stimulus programs are running higher than anticipated, Orszag said, including expanded unemployment benefits, food stamps and energy grants. In an interview embargoed for release Tuesday morning, Orszag said he could not estimate the overall cost of the package, but he called Republican estimates of $900 billion “slightly high.”

The $900 billion estimate that Peter mentions is reported in this letter from former CBO Director Doug Holtz-Eakin to Republican House Leader John Boehner.

The CBO also addresses this issue in its report (box on pp. 10-11). The box discusses lots of pesky nuances about budget accounting and the timing of payments. Perhaps the most interesting observation, consistent with the OMB quote above, is that:

The higher-than-expected unemployment rate has led CBO to raise its estimates of spending in 2009 for ARRA [i.e., stimulus] provisions that affect unemployment compensation (by $7 billion) and Medicaid (by $1 billion).

In other words, the weaker economy has added $8 billion to stimulus spending in fiscal 2009 alone with, presumably, more to come in fiscal 2010.

These developments further complicate the challenging task of tracking the stimulus.

$9 Trillion in Deficits for 2010 – 2019

If you have bad news to report in our nation’s capital, Friday afternoon in August is a good time.

So what did we learn this afternoon? Well, according to various news services (e.g., Bloomberg and Reuters) the Obama administration is projecting that budget deficits will total about $9 trillion from 2010 – 2019. That figure was released by an unnamed official (the usual practice) in advance of the release of new administration forecasts next Tuesday

That projected ten-year deficit is up about $2 trillion from the administration’s previous forecast, reportedly because of weaker economic assumptions. The new figure is in line with earlier estimates by the Congressional Budget Office, which will release new estimates on Tuesday as well.

As I discussed a few days ago, the administration estimates that the budget deficit this year will total about $1.58 trillion; that figure is not included in the $9 trillion figure, which covers the next ten years.

2009 Budget Deficit: $1.58 Trillion

Next Tuesday is a big day for budget watchers. The Congressional Budget Office will release its updated budget and economic projections in the morning, and the Office of Management and Budget will release its projections later in the day.

CBO isn’t a fan of leaks, so we probably won’t know much about its updated projections until Tuesday. The Obama administration, on the other hand, will likely allow select tidbits out early, as have previous administrations.

Indeed, Bloomberg is already reporting that an administration official told them that this year’s deficit will come in at “$1.58 trillion, about $262 billion less than forecast in May.”

There are several things you should know about this estimate:

  • The $262 billion difference is largely explained by a single factor: no TARP II. The administration’s original budget included a $250 billion placeholder for additional financial stabilization efforts. Happily, that never happened.
  • A second big factor, as reported by Bloomberg, is that spending on bank failures has come in $78 billion lower than originally forecast.
  • That good news is partly offset by the fact that tax revenues are projected to be about $83 billion less than originally forecast (presumably because of the weak economy). All other spending is forecast to be about $17 billion less than originally projected.

In short, the cost of fighting the financial crisis has been much lower than forecast in May, while the rest of the budget has done slightly worse than forecast.

This being Washington, there will be some debate about whether the $1.84 trillion figure from May is the right benchmark for evaluating whether the deficit is lower than forecast. That figure (the “policy deficit”) reflected not only the administration’s expectations about how the economy was affecting the budget, but also the budget impacts of its policy proposals, including the potential TARP II. At the time, the administration also made a second forecast that did not include any policy changes. That “baseline deficit” was $1.62 trillion, almost identical to the new estimate. Folks who use the baseline as a benchmark will thus conclude that the deficit is essentially in line with earlier expectations.

Note: The estimates of this year’s budget deficit will get lots of press (and blog) attention, but they are by no means the most important information in the new projections. The real question is what 2010, 2011, and subsequent years look like. We know the deficits will be scary-looking, but we will have to wait until Tuesday to find out just how scary.

Tracking the Stimulus

In her recent speech about the impact of the stimulus effort, Christina Romer, Chair of the President’s Council of Economic Advisers, noted that “as of the end of June, more than $100 billion had been spent.”

If you visit the government web site tracking the stimulus (Recovery.gov), however, it will tell you that the government had paid out only about $60 billion by July 3. (You can find this figure in the chart at the lower right hand corner of the home page.)

Why does Christi report a figure so much larger than the one reported on the official website? Because Recovery.gov isn’t tracking all of the budget effects of the stimulus.

Christi’s figure includes the $60 billion of spending reported on Recovery.gov plus an internal estimate, prepared by Treasury, of the tax reductions resulting from the stimulus effort through June 24. Those tax reductions are obviously a big deal, totaling $40 billion or slightly more through the end of June.

Based on conversations with friends and journalists, I get the sense that some users of Recovery.gov do not realize that its figures cover only the spending side of the stimulus story, not the tax side.

As a result, I think Recovery.gov is (unintentionally) confusing people into thinking that the stimulus effort to date is smaller than it has actually been.

I have two suggestions for how to fix this:

Step 1: Reduce Confusion: Recovery.gov should slap a warning label on the home page chart (and everywhere else it reports aggregate figures) that says something like: “These figures reflect only the new Federal spending that has resulted from the recovery act. The act also included significant tax reductions that aren’t reflected here.” 

Step 2: Provide the Information: Of course, it would be even better if Treasury would release official estimates of the week-by-week or month-by-month tax reductions flowing from the recovery act. These figures would obviously be estimates — and thus not able to be audited to the same degree as the spending programs — but would be invaluable to analysts trying to track the impact of the stimulus effort.

P.S. As I noted last week, the Congressional Budget Office recently estimated that the total budget impact of the stimulus effort reached about $125 billion through the end of July.

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