Beyond the $23.7 Trillion Headline

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (affectionately known as SIGTARP), is making headlines with his estimate that the government has provided “potential support totaling more than $23.7 trillion” in fighting the financial crisis. That estimate will be officially released on Tuesday morning in the SIGTARP’s latest quarterly report (you can find an early copy here – ht WSJ).


As the media are already noting (e.g., WSJ and Yahoo), there are many reasons to believe that the $23.7 trillion figure is overstated. For example, as noted in the footnote to the table above, the figure “may include overlapping agency liabilities … and unfunded initiatives [and] … does not account for collateral pledged.” In other words, there may be double-counting, some of the programs won’t happen or are already winding down, and the estimates assume that any collateral is worthless. For example, to get to $5.5 trillion in potential losses on Fannie Mae and Freddie Mac (part of the $7.2 trillion Other category), you would have to assume that all GSE-backed mortgages default and that all houses backing them are worthless.

In short, the SIGTARP estimate is a way upper-bound on likely Federal support to the financial support. That fact shouldn’t detract, however, from the importance of the rest of this report.

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House Bill Fails Budget Tests

Lawmakers face more work if they want to pay for health reform. According to the latest analysis by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation, the House health bill fails two key budget tests:

  • New spending isn’t fully paid for. House committees haven’t identified enough spending reductions or tax increases to offset the spending. As a result, the bill would increase the deficit by $239 billion over the next ten years.
  • The bill would widen the structural deficit. CBO estimates, for example, that the program would increase the deficit by $65 billion in 2019, the final year of the budget window.

These budget challenges stem from the fact that the House bill would increase spending in two major ways:

House Bill - Net Budget

  • First, the House bill would increase health insurance coverage. As noted in a previous CBO analysis (and summarized in a recent post), that effort would have a net budget impact of $1.04 trillion over the next ten years; spending would increase by almost $1.3 trillion, while tax revenues would increase by about $240 billion.
  • Second, the bill would change the formula that determines how much Medicare pays physicians. Those payment rates are scheduled to be cut 21% next year under an arcane formula (the sustainable growth rate mechanism). The House bill would replace those cuts with increases in coming years, at a cost of $245 billion over the next ten years.

As I’ve noted in previous posts (e.g., here), a key risk is that health reform would put the U.S. on an even worse fiscal trajectory. As shown in the following graph, that’s exactly what would happen under the current House bill:

Offsets Dont Keep Up

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CBO, Health, and the Budget

As I’ve discussed in a series of posts (e.g., here and here), the Congressional Budget Office (CBO) has a pivotal role in the health debate. By telling Congress how potential policy changes would affect the budget, CBO analyses can make or break proposed legislation.

As a result, I think it’s important that participants in the health debate – policymakers, analysts, journalists, and ordinary citizens – understand how CBO approaches health issues. That can sometimes be a challenge, however. As I note in a new paper:

CBO analyses often rely on sophisticated economic modeling and are usually framed in ways that match the specific, sometimes arcane, requirements of the congressional budget process. As a result, the cost estimates and related analyses may sometimes be challenging to understand. The unfortunate result can be confusion about what the scores mean and, equally important, what they do not mean.

That’s not a knock on CBO, which I think does a great job; it’s just the nature of the work.

To help reduce potential confusion, my paper (“Understanding CBO Health Cost Estimates”) discusses how CBO approaches cost estimates and some of the particular issues that arise in health policy. Many of the insights come directly from recent CBO reports (CBO takes transparency seriously), while others are based on my own experiences at CBO.

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Raising the Curve, Not Bending It

Doug Elmendorf, the director of the Congressional Budget Office, has one of the most difficult and important jobs in Washington: delivering tough budget news to Congress.

Americans are fortunate that he is so good at it.

Today, Doug’s message was particularly stark — and, in many circles, unwelcome — as he reported that the health reform proposals now under consideration by Congress would worsen our already-daunting fiscal outlook.

As noted by the Associated Press:

From the beginning of the health care debate, Obama has insisted that any overhaul must “bend the curve” of rapidly rising costs that threaten to swamp the budgets of government, businesses and families.

Asked by Senate Budget Committee Chairman Kent Conrad, D-N.D., if the evolving legislation would bend the cost curve, the budget director responded that — as things stand now — “the curve is being raised.”

Explained Elmendorf: “In the legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs.”

Even if the legislation doesn’t add to the federal deficit over the next years, Elmendorf said costs over the long run would keep rising at an unsustainable pace.

Standing Firm on Auto Dealers

Over the past year, the U.S. government has acquired an unprecedented investment portfolio, including a majority stake in GM and a large ownership stake in Chrysler. These investments have raised a plethora of difficult policy challenges. One of the most important is the ongoing risk that private business decisions may get transformed into public policy issues. Or, put more bluntly, that policymakers might use the ownership stakes as justification for and leverage to pursue their own policy agendas, regardless of whether they would be good for the companies.

Yesterday’s newspapers provided an excellent example of this risk. Some lawmakers want to use legislation — the annual appropriations bill that funds financial services and general government — to restore the franchise agreements of several thousand dealers who were terminated as part of the restructuring of GM and Chrysler. It’s easy to see how such a proposal can gain traction in the House of Representatives. Every terminated dealership will get a sympathetic hearing, at a minimum, from their local representative. But such meddling is not in the interests of GM and Chrysler, nor the nation at large.

Happily, the Obama Administration has come out against these efforts. In a Statement of Administration Policy on the appropriations bill released Wednesday, the Administration wrote:

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Defending the Fed’s Independence

I’m not usually one to sign public petitions, but I made an exception today for a key issue: defending the independence of the Federal Reserve.

Like many other economists (here’s the list of signatories, with a day’s lag), I am troubled by the anti-Fed rhetoric emanating from some parts of the Congress. The Fed has taken a remarkable series of actions that deserve close congressional oversight. But that oversight should not endanger the Fed’s fundamental independence in executing monetary policy.

The petition therefore makes three important points about Fed independence:

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference.

Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

Over at the WSJ, David Wessel has a nice piece on the petition.

Counting Stimulus Efforts

Today, the Washington Post has a letter to the editor about counting stimulus efforts. I think the letter is pithy and on-point, but that might be because I wrote it. Anyway, my conclusion is:

[T]here have already been two rounds of stimulus since the recession started in December 2007. The first, enacted in February 2008 (when I served at the President’s Council of Economic Advisers), provided $168 billion in tax cuts for families and businesses. The second, enacted in February of this year, provided $787 billion in various spending programs and tax cuts. The question we face today is whether to enact a third stimulus, not a second one.

The letter was a response to an editorial the Post ran last Friday.

Stimulus aficionados will recognize that, in the interest of brevity, I used dollar amounts that aren’t completely apples-to-oranges. As noted in my previous post on this topic, the $168 billion amount for the first stimulus reflects the gross amount of stimulus in the first couple of years; the long-run, net cost budget cost of the bill is lower. The $787 billion amount for the second stimulus is the ten-year net cost; the initial stimulus is a bit larger. I think the gross impact is a better way to characterize the stimulus effort, but I didn’t want to confuse anyone by referring to an $800+ billion stimulus, when everyone knows it as $787 billion.

CBO on the House Health Bill

On Tuesday, the Congressional Budget Office (CBO) released a preliminary analysis of the House health bill, aka the Tri-Committee bill. Among the key findings:

1. The bill uses five levers to increase health insurance coverage:

  • Expanding Medicaid
  • Subsidies for purchasing insurance through new exchanges
  • An individual mandate (enforced by a penalty if you lack coverage)
  • Play or pay (requiring employers to offer qualifying insurance or pay a tax)
  • A public plan (whose rates would be lower than those of many private plans)

2. These provisions would sharply reduce the number of uninsured. In 2019, for example, CBO estimates that the number of uninsured would fall from 54 million to 17 million, a decline of 37 million. Many of those who would remain uninsured are particularly difficult to reach (e.g., individuals who qualify for Medicaid but don’t enroll) or are unauthorized immigrants (who aren’t a focus of the legislation). Put another way, the bill would result in 97% of the non-elderly (excluding unauthorized immigrants) having health insurance by 2015.

3. The bill would increase spending by almost $1.3 trillion over the next 10 years. The penalties and fees would raise a bit less than $240 billion over the same period, so the 10-year net budget cost would be slightly more than $1 trillion. The bulk of the penalties and fees — $208 billion — would be paid by employers (who would then pass on some or all of the costs to workers). The remaining fees — $29 billion — would be paid by uninsured individuals. As Keith Hennessey notes, the prospect of levying such fees on the uninsured raises some difficult political and policy questions.

4. Enrollment in the public plan would be substantial, perhaps 11 to 12 million people by 2019. The plan, operated by the Secretary of Health and Human Services, would pay providers at levels very similar to those in Medicare. As a result, CBO expects that the public plan would offer lower premiums than many private plans.

5. The analysis is preliminary in two key ways:

  • It does not include any of the potential offsets — e.g., tax increases and Medicare spending reductions — that lawmakers would need to pay for the bill.
  • The CBO estimate is based on “specifications” that the committees asked CBO to evaluate. CBO has not yet had time to analyze the actual language of the proposed bill. It’s always possible that the language would have different impacts than the less-detailed specifications.

UPDATE: The Committee for a Responsible Federal Budget takes a stab at toting up the likely offsets for this bill. A surtax on high earners would be the single largest item, at $544 billion over ten years.

CLASS Act Fails the Offset Test

If you take budgeting seriously, people sometimes think you are a curmudgeon. When I was at the Congressional Budget Office, for example, we were once denounced as anti-housing because we concluded that increasing subsidies for low-income housing wasn’t free. CBO reached that conclusion using an advanced tool known as “arithmetic”, but some advocates tried to portray it as an anti-housing policy statement.

At the risk of again appearing curmudgeonly, I would like to draw your attention to a provision in the health care reform bill being considered by the Senate HELP Committee. That provision, the Community Living Assistance Services and Supports Act, would create a new program to insure participants against some of the financial costs of disability and long-term care.

I have nothing to say about the merits of this provision, except to note that it has one of the best acronyms in legislative history: the CLASS Act.

I have a great deal to say, however, about the arithmetic of the CLASS Act, because it illustrates just how hard it will be for our legislative process to really pay for health care reform.

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We Already Did a Second Stimulus

Much ink, both physical and electronic, has recently been spilled on the question of whether the United States should undertake a second stimulus.

To which there is only one possible answer: we already did a second stimulus.

The first stimulus — the Economic Stimulus Act of 2008 — was signed by President Bush in February 2008. That Act gave families $115 billion in tax rebates and allowed companies to depreciate business investment more rapidly. Overall, the Act reduced taxes and increased spending by $168 billion in 2008 and 2009 (the long-term budget hit from the Act is smaller — about $124 billion over ten years — because the corporate tax reductions deferred tax payments rather than eliminating them.)

Those were the days before the collapse of Lehman (heck, it was even before the collapse of Bear Stearns) when policymakers were rightly worried about a weak economy, but $168 billion seemed like a lot of money.

The second stimulus — the American Recovery and Reinvestment Act of 2009 –was signed by President Obama in February 2009. That Act increases spending on a host of programs, including infrastructure, state assistance, and extended unemployment insurance. It also created the Making Work Pay tax credit, among other tax reductions. The Act is usually described as a $787 billion stimulus, with ten-year spending increases of $575 billion and tax reductions of $212 billion. The reality is a bit more complex, however. On the one hand, the Act provides somewhat more stimulus than the headline figure; for example, there are about $810 billion in spending increases and tax reductions during the first seven years. On the other hand, the stimulus takes time to phase in; during fiscal 2009, for example, the estimated stimulus is about $185 billion.

The question we face today is whether to enact a third stimulus, not a second one. I will have more to say on this in the future. For now, I think the Obama administration has it exactly right, indicating that it’s premature to enact a third stimulus, but their economic team is closely monitoring the situation.