Tag: CBO

Outside Research Organizations Can’t Replace CBO’s Budget Team

The House Freedom Caucus wants to eliminate the Budget Analysis Division at the Congressional Budget Office and rely on outside research organizations, including the Urban Institute, instead. As a former acting director of CBO and an Institute fellow at Urban, I think this is a terrible idea. It would harm fiscal policymaking and weaken the Congress.

Here’s the proposal offered by Representatives Scott Perry (R-PA), Jim Jordan (R-OH), and Mark Meadows (R-NC):

The Budget Analysis Division of the Congressional Budget Office, comprising 89 employees with annual salaries aggregating $15,000,000, is hereby abolished. The duties imposed by law and regulation upon the employees of that Division are hereby transferred to the Office of the Director of the Congressional Budget Office, who shall carry out such duties solely by facilitating and assimilating scoring data compiled by the Heritage Foundation, the American Enterprise Institute, the Brookings Institution, and the Urban Institute.

We certainly appreciate the shout out. Here at Urban, we have amazing researchers who model policies involving health insurance, Social Security, taxes, food stamps, housing, and many other programs. We are proud of our work and try to be as helpful as possible to lawmakers across the political spectrum.

But neither we nor other private organizations can replace CBO’s budget group. Our skills overlap, but we fill different niches in the policy ecosystem.

Consider the sheer scope of CBO’s responsibilities. As Director Keith Hall noted in recent testimony, the agency expects to publish official scores of more than 600 pieces of legislation in the next year. The scores will estimate the spending and, usually with input from the Joint Committee on Taxation, the revenue implications of every provision in those bills. They will also assess whether the bills impose substantial mandates on the private sector or state, local, and tribal governments.

To do this, CBO has staffers familiar with every nook and cranny of the government, from agriculture to veterans. In just the past week, CBO has published more than two dozen cost estimates covering everything from flood insurance to child care to maritime administration to sanctions on Russia, Iran, and North Korea. Not to mention scoring Senate proposals to repeal and possibly replace the Affordable Care Act. Only CBO and its White House equivalent, the Office of Management and Budget, have the capacity to model every facet of federal spending.

Outside groups could certainly expand their capacities. And Congress could expand the list of anointed organizations. But the bottom line is that we would need substantial new resources, both funding and people. Replacing the capacities of CBO’s budget division is not something research organizations can or should do for free.

But resources aren’t the core issue. In addition to its published cost estimates, CBO provides thousands of confidential cost estimates to members of Congress and their staffs as they craft potential legislation. This service is vital to thoughtful legislating. Confidential feedback helps members test new ideas, consider alternatives, and refine proposals until they are ready to go public.

Outside organizations can, and indeed already do, provide similar modeling help to members. At Urban, we frequently get requests from Representatives and Senators of both parties. But working through iterations of potential legislation works best when lawmakers and their staffs work directly with the analysts who will give them official scores. Working with CBO’s budget team is a much more effective process than trying to coordinate different scores, based on different models and assumptions, from multiple outside organizations.

The most important difference between research organizations and Congress is also the most obvious. CBO works for Congress and only for Congress. CBO works closely with the budget committees and House and Senate leadership to juggle priorities, set deadlines, and provide the analyses Congress needs and wants. CBO obeys congressional budget rules, even when it disagrees with them. CBO has the backing of Congress when it gathers data and information from agencies.

CBO thus has an edge in providing the analyses Congress needs, when it needs them. Research organizations can and do provide timely analysis as well, but there are limits. We have other projects and demands on our time.

Moreover, we outside researchers rely heavily on the work that CBO’s budget analysis division currently does. CBO’s annual baselines, for example, often provide the starting point for our analyses. And CBO scores provide many of the numbers we use to model alternative policies. Eliminating CBO’s budget team would undermine our ability to deliver the type of analyses that Congress wants.

Eliminating CBO’s budget team would also weaken Congress. Congress created CBO in the early 1970s as part of a larger battle with President Nixon about power over the purse. Congress created CBO to ensure its own source of credible budget information. Defunding CBO’s budget team would weaken Congress at a moment when objective budget information and a balance between Congress and the President are as important as ever.

My colleagues and I would welcome opportunities to provide more help to Congress as members grapple with policy challenges, develop options, and try to understand the range of potential outcomes. But asking us to replace CBO’s budget team would undermine thoughtful policy making and weaken the Congress.

Immigration, Dynamic Scoring, and CBO

Immigration policy poses an unusual challenge for the Congressional Budget Office and the Joint Committee on Taxation. If Congress allows more people into the United States, our population, labor force, and economy will all get bigger. But CBO and JCT usually hold employment, gross domestic product (GDP), and other macroeconomic variables constant when making their budget estimates. In Beltway jargon, CBO and JCT don’t do macro-dynamic scoring.

That non-dynamic approach works well for most legislation CBO and JCT consider, with occasional concerns when large tax or spending proposals might have material macroeconomic impacts.

That approach makes no sense, however, for immigration reforms that would directly increase the population and labor force. Consider, for example, an immigration policy that would boost the U.S. population by 8 million over ten years and add 3.5 million new workers. If CBO and JCT tried to hold population constant in their estimates, they’d have to assume that 8 million existing residents would leave to make room for the newcomers. That makes no sense. If they allowed the population to rise, but kept employment constant, they’d have to assume a 3.5 million increase in unemployment. That makes no sense. And if they allowed employment to expand, but kept GDP constant, they’d have to assume a sharp drop in U.S. productivity and wages. That makes no sense.

Because increased immigration has such a direct economic effect, the only logical thing to do is explicitly score the budget impacts of increased population and employment. And that’s exactly what CBO and JCT intend to do. In a letter to House Budget Committee Chairman Paul Ryan on Thursday, CBO Director Doug Elmendorf explained that the two agencies would follow the same approach they used back in 2006, the last time Congress considered (but did not pass) major immigration reforms.

In scoring the 2006 legislation, JCT estimated how higher employment would boost total wages and thus increase income and payroll taxes, and CBO estimated how a bigger population would boost spending on programs like Medicaid, Food Stamps, and Social Security. They found that the legislation would boost revenues by $66 billion over the 2007-2016 budget window and would boost mandatory spending by $54 billion; various provisions also authorized another $25 billion in discretionary spending subject to future appropriations decisions.

I remember that estimate well since I was then CBO’s acting director. At the time, I thought this was a pretty big deal, doing a dynamic score of a major piece of legislation. I expected some reaction or controversy. Instead, we got crickets. It just wasn’t a big deal. The direct economic effects of expanded immigration—bigger population, bigger work force, more wages—were so straightforward that folks accepted this exception from standard protocol. I hope the same is true this time around.

Note: The approach CBO and JCT will use in scoring immigration legislation is only partially dynamic. It accounts for the direct effects of increased immigration, such as a bigger population and labor force, but not indirect effects such as changing investment. In other words, it follows the standard convention of excluding indirect changes in the macroeconomy; the innovation is accounting for the direct effects. We used the same approach in 2006, analyzing indirect effects in a companion report separate from the official budget score. CBO and JCT will take the same approach this time around.

Do Federal Workers Get Paid More Than Private Ones?

Yes, according to a new report by the Congressional Budget Office. As always in such comparisons, however, there are some caveats.

CBO summarizes its main results in this handy chart:

Report author Justin Faulk summarizes the findings as follows:

Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees also varied according to workers’ education level.

Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.

Federal workers whose education culminated in a bachelor’s degree averaged 15 percent higher total compensation than their private-sector counterparts.

Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.

Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

Of course, a lot is riding on the phrase “certain observable characteristics.” CBO did an extremely careful job of measuring total compensation and of controlling for observable factors such as education, age, and occupation. But many other factors are impossible to measure. CBO’s summary mentions effort and motivation. There are also issues such as job security and developing valuable skills and knowledge.

Congestion Pricing Saves Time and Money

The Highway Trust Fund will soon be broke. Gasoline tax revenues haven’t kept up with spending, and it’s likely that demands for new highway infrastructure will grow in the future.

Joseph Kile, head of the microeconomics studies division at the Congressional Budget Office, discussed various policy options to deal with this funding gap in his testimony to the Senate Finance Committee on Tuesday. Most news coverage of Joe’s testimony emphasized his suggestion that taxes based on miles traveled, rather than gasoline consumption, might be a better way to finance America’s highways. After all, miles traveled is, along with weight, the primary driver of wear and tear on the roads. And it’s a decent proxy for the benefit that drivers get from having functioning roads.

That’s an interesting idea, but I’d like to highlight another important point that Joe made: the amount of infrastructure America should build depends very much on how we price it.

If a six-lane highway gets congested, that doesn’t necessarily mean that we need to build new lanes or lay out parallel roads.

We could charge congestion fees instead. That would discourage driving at peak times and thus speed traffic without new construction. That’s what London and Singapore famously do to limit traffic in their downtowns. And it’s something we should more here in the United States.

Joe reports estimates from the Federal Highway Administration (FHWA) that congestion pricing could decrease highway spending needs by 25 to 33 percent:

The federal government spent about $43 billion on highway investment in 2010. To maintain the same quality of highway performance would require an average of $57 billion in annual federal spending in coming years, according to the FHWA. That price tag drops to only $38 billion, however, if we make good use of congestion pricing. Congestion pricing would thus save federal taxpayers almost $20 billion per year; state and local governments would save even more, since they pay for more than half the costs of these projects.

Congestion pricing can make our roadways work better, save Americans precious time, and reduce federal, state, and local budget pressures. That a great combination in this time of growing infrastructure needs and tightening budgets.

What is Health Care Reform?

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Greg Mankiw set off a vigorous discussion in the blogosphere (see, e.g., Ezra Klein, Clive Crook, and the Austin Frakt) with a provocative analogy about health care reform:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I read Greg as raising an important rhetorical / pedagogic question which, judging by some responses, may have been overshadowed by his satire.

That simple question is “what is health care reform?”

The policy community and commentariat often equate health care reform with the legislation (actually two pieces of legislation) that President Obama signed into law last year. As everyone knows, the Congressional Budget Office estimated that those two laws would, if fully implemented, reduce the federal budget deficit by $143 billion from 2010-2019. That’s the basis for the claim that “health care reform would reduce the deficit over the next ten years.” (CBO also discussed what would happen in later years, where the law, if allowed to execute fully, would have a bigger effect, but let’s leave that to the side right now.)

The complication, which Greg’s post partly addresses, is that the health care reform legislation included many provisions. Greg notes, for example, that some expanded health insurance, while others raised taxes. In his view, only the first part constitutes health care reform — an effort that by itself would widen the deficit — while the tax increases are what made the legislation deficit-reducing.

In fact, it’s more complicated than that. By my count, the two pieces of health care reform legislation combined seven different sets of provisions:

1. Expanding health insurance coverage (e.g., by creating exchanges and subsidies and expanding Medicaid)

2. Expanding federal payments for and provision of health care services (e.g., reducing the “doughnut hole” in the Medicare drug benefit)

3. Cuts to federal payments for and provision of health care services (e.g., cuts to Medicare Advantage and some Medicare payment rates)

4. Tax increases related to insurance coverage (e.g., the excise tax on “Cadillac” health plans)

5. Tax increases not related to insurance coverage (e.g., the new tax on investment income)

6. The CLASS Act, which created an insurance program for long-term care

7. Reform of federal subsidies for student loans

(The House Republicans’ effort to repeal health care reform would overturn 1-6, but leave the student loan changes in place.)

To capture these complexities, I occasionally refer to the legislation as the health care / tax / student loan / long-term care legislation. But whenever I write that for publication, my editors take it out. Although my lengthy description is accurate, it doesn’t work for friendly conversation. So the law (which again, was really two laws) gets called the health care reform law.

Greg’s point, I think, is that this rhetorical convention creates confusion when talking about the law’s budget impacts. To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.

I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.

However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.

Our current tax system provides enormous ($200 billion per year) subsidies for employer-provided health insurance. They should be viewed as part of the government’s existing intervention in the health marketplace. And rolling back those subsidies strikes me as essential to future health care reform. I would count any revenues raised from doing so as part of health care reform.

That didn’t happen, but the legislation did include a tax on “Cadillac” health plans as a partial substitute. That will clearly affect health insurance markets, and it offset a portion of existing tax subsidies. For both those reasons, it should be viewed as part of health care reform.

The key thing is not the difference between spending and revenues, but between provisions that fundamentally change the health care system and those that do not.

Happily, I am not alone in this view. Indeed, it has been endorsed by none other than the Congressional Budget Office. CBO grappled with this issue during the health care debate. And after much thought, it came up with a useful measure of the health care reform part of the legislation: the “Federal Government’s Budgetary Commitment to Health Care“. This measure combines the spending and tax subsidies that the government provides for health care.

Taking all the health care provisions into account, CBO concluded that the health care reform legislation would increase the federal government’s budgetary commitment to health care. But not as much as many critics suggest. Adding together items (1) through (4) on my list, CBO concluded that the health care reform parts of the legislation would increase the deficit by about $400 billion over ten years. That would then be more than offset by the other provisions — primarily taxes but also the student loan provisions and the CLASS Act. (In later years, by the way, CBO projects that the legislation would actually reduce the federal commitment to health care.)

Bottom line: Health care reform increases the federal deficit over the next ten years, but the health care reform legislation reduces the deficit. What could be simpler?

P.S. I hope it goes without saying–but will say it anyway–that one should not evaluate the health care reform legislation on its fiscal impacts alone … or even predominantly. The legislation has a wide range of benefits (e.g., 32 million more people with health insurance) and costs. The key question is how they net out.

Why Does It Cost $230 Billion to Repeal Health Reform?

Last spring, the Congressional Budget Office estimated that the new health legislation would reduce the deficit by $143 billion over ten years. Yesterday, CBO estimated that repealing that legislation would increase the deficit by $230 billion over ten years.

What gives? Why would it cost $87 billion more to repeal the law than was saved by enacting it?

The main reason is that the 10-year budget window moved. The health debate started in 2009, so CBO used a 10-year window that ran from 2010 to 2019. It’s now 2011, so the repeal law will be judged against a 10-year window that runs from 2012 to 2021. The $230 billion figure reflects that longer window. Through 2019, the cost would be $145 billion.

The second reason is that the legislation President Obama signed last spring wasn’t the final word on health reform. In December, Congress was struggling to find a way to pay for the infamous Medicare “doc fix”, which now runs through the end of 2011. To do so, Congress decided to cut $15 billion from the subsidies created by the health legislation. Because those cuts reduced future subsidies, it is now $15 billion more expensive to repeal the overall health reform.

The third reason is that the original health legislation wasn’t just about health policy. It also included fundamental reforms to the way the government subsidizes college loans. The repeal bill wouldn’t undo those changes, which resulted in budget savings of $19 billion over 2010 to 2019.

Finally, the original health reform included about $7 billion in net budget costs during 2010 and 2011. It’s unlikely (to say the least) that the health repeal bill would be enacted in time to avoid those costs.

Bottom line: CBO estimated that the original legislation would reduce deficits by $143 billion over 2010-2019. CBO now estimates that repeal would increase deficits by $145 billion over the same period; the slight difference reflects the education provisions in the original legislation, the 2010 and 2011 costs that can’t be avoided, and the December 2010 changes to the law. The jump from $145 billion to $230 billion then reflects the addition of two years to the budget window.

P.S. The $230 billion figure is preliminary and subject to change once CBO has an opportunity to update its calculations to reflect the latest information about the economy, health care markets, etc.

P.P.S. Aficionados of the health debate will recall that many differences of interpretation surround CBO’s cost estimates for health reform. You can see some of my discussion here.

CBO Weighs in on Fannie and Freddie

Yesterday, the Congressional Budget Office released its long-awaited report on the future of Fannie Mae and Freddie Mac. Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market (written by Deborah Lucas and David Torregrosa, with input from a cast of dozens — including, full disclosure, me as an outside reviewer) provides an outstanding overview of Fannie and Freddie’s history, the arguments for and against a government role in the secondary mortgage market, the flaws of the precrisis structure of Fannie and Freddie, and the pros and cons of possible reform models.

Readers may recall that last spring Phill Swagel and I proposed a reform in which Fannie and Freddie would be privatized, the government would sell guarantees on mortgage-backed securities composed of conforming loans, and that this guarantee would be available not only to Fannie and Freddie but also to qualified new entrants. (Here’s the blog version; here’s the full paper.)

CBO provides a thoughtful overview of such hybrid models:

A Hybrid Public/Private Model

Many proposals for the secondary mortgage market involve a hybrid approach with a combination of private for-profit or nonprofit entities and federal guarantees on qualifying MBSs. At its core, the hybrid public/private approach would preserve many features of the way in which Fannie Mae and Freddie Mac have operated, with federal guarantees (combined with private capital and private mortgage insurance) protecting investors against credit risk on qualifying mortgages. However, most hybrid proposals would differ from the precrisis operations of Fannie Mae and Freddie Mac in several important ways: A possibly different set of private intermediaries would participate in securitizing mortgages backed by federal credit guarantees, the guarantees would be explicit rather than implicit, and their subsidy cost would be recorded in the federal budget.14 As the public-utility and competitive market-maker models illustrate, a hybrid approach could be implemented in a way that involved more or less federal regulation of participants in the secondary market and a smaller or larger number of competitors in that market.

Advantages of a Hybrid Approach

Regardless of its exact design, a hybrid model with explicit federal backing for qualifying privately issued MBSs would have several advantages over the precrisis model, as well as over either a fully federal agency or complete privatization (approaches that are discussed below). An explicit federal guarantee would help maintain liquidity in the secondary mortgage market, in normal times and particularly in times of stress, and could retain the standardization of products offered to investors that Fannie Mae and Freddie Mac bring to that market. Compared with the precrisis model, imposing guarantee fees would ensure that taxpayers received some compensation for the risks they were assuming.

Compared with a fully federal agency, a hybrid approach would lessen the problem of putting a large portion of the capital market under government control, encourage the inflow of private capital to the secondary market, and limit the costs and risks to taxpayers by having private capital absorb some or most losses. Putting private capital at risk would also provide incentives for prudent management and pricing of risk.

Compared with a fully private market, hybrid proposals would give the government more ongoing influence over the secondary market and an explicit liability in the case of large mortgage losses that would be reflected in the budget. That arrangement might have the advantage of leading to a more orderly handling of crisis situations.

Disadvantages of a Hybrid Approach

Relative to other approaches, a public/private model has a number of potential drawbacks, the importance of which differs depending in part on the specific design chosen. Experience with other federal insurance and credit programs suggests that the government would have trouble setting risk-sensitive prices for guarantees and probably would shift some risks to taxpayers. A hybrid approach also might not eliminate the tensions that exist—with regard to risk management and pursuit of affordable housing goals—between serving private shareholders and carrying out public missions.

Another concern is that over time, the secondary-market entities might push for broader guarantees of their product lines and attempt to reestablish themselves as too-big-to-fail institutions backed by implicit federal guarantees. Consequently, regulators would need to be vigilant to control risks to the financial system and avoid regulatory capture, while also being open to market innovations.

A Second Thought on the Cost of TARP

Two commenters (Jack B. and John L.) raise an important point about the $25 billion price tag that the Congressional Budget Office recently placed on the Troubled Asset Relief Program. Their concern is that the $25 billion figure includes some impacts that should rightfully be attributed to other government actions, not to TARP itself.

To illustrate, suppose that Treasury used TARP to buy $10 of preferred stock in Bank X in 2008 and that a year later Treasury sold its position for $12, including accrued dividends. This investment would be recorded as achieving a $2 profit in TARP (subject to one technical caveat, see below).

That’s the normal way of calculating profit on an investment, and is what CBO was instructed to do for its part of TARP oversight. But as Jack and John point out, there’s an important complication here. During the year, the federal government undertook many other policy actions which may have boosted the value of Bank X (remember all the new acronyms?). From the perspective of policy evaluation, some or all of the $2 gain should be attributed to those other policies, not TARP.

It could be, for example, that absent further action, Bank X would have struggled, leaving Treasury with stock worth only $6. Other government actions, however, breathed enough life into the company (or, at least, boosted the value of its assets) that the stock ultimately became worth $12.

In that case, you could argue that TARP, by itself, resulted in a $4 loss, while the other government actions created a $6 gain. That puts the budgetary impacts of TARP in a different light: a 40% loss versus a 20% gain in this example.

Of course, you could also argue that the $6 gain was only possible because of the TARP ownership stake. There’s certainly an element of truth to that. But the basic concern still applies: the $2 gain in this example reflects both TARP and subsequent government actions, not just TARP alone. That’s an essential point when trying to evaluate these policies after the fact, and we commenters should keep that in mind when interpreting CBO’s findings.

And that’s not all. The other government actions may also have imposed additional direct or indirect costs on the federal budget. As a result, the $2 gain in this example may be offset (or more) by other costs that aren’t included in the calculation.

Bottom line: One reason that TARP appears much less expensive than originally predicted is that many of its investments benefitted from other government actions whose costs show up elsewhere in the budget.

Caveat: CBO’s methodology actually judges the profitability of investments relative to benchmark rates of return. The details are surprisingly complex, but just for purposes of illustration, suppose that the appropriate benchmark rate of return for investing in Bank X was 10%. If Treasury sold the stock for $11 after one year, CBO would deem that as breaking even. If it sold it for $12, that would be a $1 profit.

How Much Did TARP Cost? $25 Billion

The much-maligned TARP program will cost taxpayers only $25 billion according to the latest estimates from the Congressional Budget Office. That’s substantially less than the $66 billion CBO estimated back in August or the $113 billion that the Office of Management and Budget estimated in October.

The good news, budget-wise, is that the government is on track to make about $22 billion on its assistance to banks.

However, CBO estimates that TARP’s other activities will cost $47 billion. This reflects aid to AIG ($14 billion), the auto industry ($19 billion), mortgage programs ($12), and a few smaller programs ($2 billion).

A New Price Tag for Stimulus: $814 Billion

Last week the Congressional Budget Office released updated budget projections — a treasure trove of information for budget wonks. For example, CBO released new estimates of the direct budget costs of the 2009 stimulus bill, officially known as the American Recovery and Reinvestment Act (ARRA).

CBO now estimates that ARRA will cost $814 billion from 2009 through 2019. That’s up from the original $787 billion estimate, but down from the revised, $862 billion estimate released in January.

Spending exceeded original expectations because both unemployment and food prices rose more than anticipated, driving up the cost of extended unemployment benefits and expanded food stamp benefits. On the other hand, spending estimates have come down because “recently enacted legislation rescinded some of the funds appropriated in ARRA and limited the period in which higher payments under the Supplemental Nutrition Assistance Program [formerly known as food stamps] will be available.” (CBO did not update estimates for the tax provisions in ARRA.)

For a discussion of why the $814 billion figure (formerly known as the $862 billion figure or the $787 billion figure) is not really the right measure of stimulus, see this post.

On a related note: Earlier today, CBO released an updated analysis of the economic effects of ARRA. It estimates that ARRA reduced unemployment in the current quarter by 0.8 to 2.0 percentage points. In other words, without that stimulus CBO believes that the unemployment rate today would be between 10.3 percent and 11.5 percent, not the 9.5 percent reported in July.