Congressional Budget Office
Director’s Blog

The emergence of H5N1, or “avian flu,” motivated the Department of Health and Human Services’ 2005 plan to prepare for and combat an influenza pandemic. Three years ago domestic manufacturers were unable to rapidly produce enough vaccine to protect the more than 300 million people living in the United States. That remains the case today. With current technology, a pandemic could circle the globe more quickly than vaccines could be produced.

HHS’s plan has enlarged the role of the federal government in the influenza vaccine market, and the paper released by CBO today examines that increasingly prominent role — in developing new vaccines, expanding the capacity of the industry to manufacture them, and procuring stockpiles of prepandemic vaccines.

HHS’s plan has multiple objectives, including to:

• Increase manufacturing capacity by refurbishing and expanding plants that produce vaccines using traditional egg-based processes (developed in the 1940s) and increasing more costly cell-based manufacturing technology.
• Make vaccines available more quickly. The plan takes two approaches to this objective. First, stockpile a relatively small amount of prepandemic vaccines that could blunt the worst effects of a pandemic by protecting particularly vulnerable groups and first responders. Second, develop so-called next-generation vaccines that can be produced more rapidly than currently available vaccines to more efficiently  meet long term needs.

Ongoing research has changed the environment in which HHS’s plan was originally formulated in at least one important regard. Adjuvants—substances that may be added to influenza vaccines to reduce the amount of active ingredient (called antigen) needed per dose of vaccine—are showing promise in clinical trials in the United States; some of them have been approved for limited uses in Europe. That promise may offer a basis on which to make adjustments to HHS’s plan.

 Specifically, CBO reached the following conclusions:

• The manufacturers of currently approved vaccines made in the United States cannot produce vaccines of sufficient effectiveness, in sufficient quantities, or in the time required to meet public health needs in the event of an influenza pandemic.
• In the short term, adjuvanted vaccines offer the best hope for achieving HHS’s goal of having enough vaccine to protect 300 million people within six months of the outbreak of an influenza pandemic.
• CBO estimates that it would cost between $1.2 billion and $1.8 billion to build new facilities for producing adjuvanted cell-based vaccines and between $7.6 billion and $11.4 billion to build new production facilities for cell-based vaccines without adjuvants.
• Manufacturing capacity needed to produce pandemic-influenza vaccine exceeds that necessary to make seasonal vaccine; ongoing federal support may be required to meet and maintain necessary capacity.

Adjuvants developed since 2005 could substantially reduce the amount of antigen needed per dose, raising the question about whether HHS’s current policy is the most cost-effective approach to meeting its vaccine production goals. In light of this, the report briefly examines several other options to consider if adjuvanted vaccines prove successful, including reducing capacity targeted for manufacturing cell-based influenza vaccines while expanding resources available to support development of next-generation vaccines, entering into advance supply agreements (an approach used by several European nations that allows countries to make advance payments to manufacturers in exchange for a guaranteed supply of vaccine in the event of a pandemic); and modifying the size of the planned vaccine stockpile.
 

Last year, the Congress authorized the Department of Energy to make $25 billion in loans to auto manufacturing firms and suppliers of automotive components. Manufacturers could use those loans to reequip or establish facilities to produce “advanced technology vehicles” that would meet certain emissions and fuel economy standards; component suppliers could borrow funds to retool or build facilities to produce parts for such vehicles.

Subsequent funding was required before such loans could be made, and that funding has not yet been provided.  The budgetary cost for such loans, based on the rules in the Federal Credit Reform Act of 1990, reflects the expected cost to the government of any subsidy, not the face value of the loans.

Several recent press reports have incorrectly suggested that CBO has estimated a 15 percent subsidy cost for loans to the automakers, so that $25 billion in loans would cost $3.75 billion.  CBO’s analysis, however, suggests a 30 percent subsidy cost for such loans under the conditions specified in the authorizing legislation.  The resulting subsidy cost would imply a budget cost of $7.5 billion for $25 billion in loans.  (Early this year, CBO had informally suggested a 15 percent subsidy cost.   Since then, however, credit conditions for the auto manufacturers have deteriorated markedly — the market interest rates on their outstanding debt, for example, have risen dramatically.)

Tim Taylor has always struck me as wise. And not just because of this section from his most recent “Recommendations for Further Reading” in The Journal of Economic Perspectives:

CBO and the Health Care System

Our national debate over reform of the nation’s health care system would be vastly improved if all participants familiarized themselves with recent Congressional Budget Office reports on the subject. Here are some examples:

“The Long-Term Outlook for Health Care Spending” describes factors that will drive health care costs over the next 75 years. “[I ]n the absence of changes in federal law: Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082. Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.” November 2007. The Long-Term Outlook for Health Care Spending

A February 2008 report discusses “Geographic Variation in Health Care Spending.” “Per capita health care spending varies widely across the United States. In 2004, as an example, per capita spending ranged from roughly $4,000 in Utah to $6,700 in Massachusetts. The variation is even greater among smaller geographic units and among individual medical providers. Among large hospitals in California from 1999 to 2003, Medicare spending per patient in the last two years of life ranged more than fourfold, from less than $20,000 to almost $90,000. Researchers affiliated with the Dartmouth Atlas of Health Care estimate that among groups of Medicare beneficiaries who are otherwise similar, individuals who live in highspending areas receive approximately 60 percent more in services than do those who live in low-spending areas.” Geographic Variation in Health Care Spending

A January 2008 report explores the connections between “Technological Change and the Growth of Health Care Spending.” “Technological innovation can theoretically reduce costs and, for many types of goods and services, often does. Historically, however, the nature of technological advances in medicine and the changes in clinical practice that followed them have tended to raise spending . . . .Breaking down the long-term growth in spending into its various components leaves much of the increase unaccounted for by measurable factors such as the aging of the population or rising personal income. Table 2 shows estimates from three studies of the contributions of selected factors to the long-term growth of health care spending in the United States. Overall, those factors [aging of the population, changes in third-party payment, personal income growth, prices in the health care sector, administrative costs, defensive medicine and supplier-induced demand] appear to account for no more than half of that growth. Analysts generally attribute the rest of the growth to increases in the technology-related changes in medical practice.” Technological Change and the Growth of Health Care Spending

“Research on the Comparative Effectiveness of Medical Treatments: Issues and Options for an Expanded Federal Role” explains: “More recently, the Agency for Health Care Research and Quality (AHRQ) has been the most prominent federal agency supporting various types of research on the comparative effectiveness of medical treatments. Established in 1989, . . . [i]t currently has a staff of about 300 and an annual budget of over $300 million, which primarily funds research grants to and contracts with universities and other research organizations covering a wide range of topics in health services.” December 2007. Research on the Comparative Effectiveness of Medical Treatments: Issues and Options for an Expanded Federal Role

“Evidence on the Costs and Benefits of Health Information Technology” arrived in May 2008. “Many analysts and policymakers believe that health IT [information technology] is a necessary ingredient for improving the efficiency and quality of health care in the United States. Despite the potential of health IT to increase efficiency and improve quality, though, very few providers—as of 2006, about 12 percent of physicians and 11 percent of hospitals—have adopted it.” Evidence on the Costs and Benefits of Health Information Technology

CBO released the annual summer update to the Budget and Economic Outlook for Fiscal Years 2008 to 2018 today. (Today’s report updates the Budget and Economic Outlook published in January 2008.)

Today’s report makes it challenging to avoid playing the dismal economist, which I generally dislike doing. The budget deficit has risen substantially over the past year. And according to CBO’s updated economic forecast, the economy is likely to experience at least several more months of weakness. (Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.) Finally, the Treasury and Federal Housing Finance Agency have announced significant steps regarding Fannie Mae and Freddie Mac, which carry important implications for how the operations of those entities should be reflected in the federal budget.  The estimates presented in the report CBO released today do not reflect the specific details of those actions.

Some more details from today’s report include:

Budget projections

• CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.
• Since March, the bottom line in CBO’s baseline over the next ten years has worsened by an average of nearly $260 billion per year. Some of that deterioration is due to the weakened economy, near-term inflation, and other economic variables; those factors increased projected deficits (or decreased projected surpluses) by about $85 billion a year. However, the larger component of the changes results from extrapolating into future years the supplemental appropriations enacted in June (in accordance with the rules governing the baseline).
• Over the longer term, the fiscal outlook continues to depend mostly on the future course of health care costs as well as on the effects of a growing elderly population. CBO estimates that federal spending on Medicare and Medicaid will grow to 6 percent of the GDP in 2018 and 12 percent of the GDP by 2050.

Economic projections

• An unusual amount of turbulence has roiled the U.S. economy this year, weakening the near-term outlook since CBO’s previous forecast.
• Specifically, CBO forecasts that GDP will grow by about 1.5 percent in real terms in calendar year 2008 and 1.1 percent in calendar year 2009.
• Inflation (as measured by change in the CPI-U) is projected to remain high and average 4.7 percent for 2008 but moderate in 2009, falling to an average of 3.1 percent.
• CBO’s projections beyond the two year horizon indicate real growth averaging 2.8 percent and CPI-U inflation averaging 2.2 percent.

Fannie Mae and Freddie Mac

• Significant government actions regarding Fannie Mae and Freddie Mac occured as this report went to press. The actions were taken to reduce the risk of a systemic shock to the financial system and to stabilize the mortgage markets.
• In a letter issued on the topic in July, CBO noted that “a strong argument can be made that if the Treasury used the proposed authority, the GSEs’ operations should be incorporated directly into the federal budget.” CBO concluded that the proposal at that time, especially to the extent it would result in any government acquisition of an equity stake in the GSEs, raised a significant budgetary question. Currently, data on the GSEs are reported along with federal budget information each year, but the activity of those entities is not encompassed within the budget. As CBO noted at the time, “That treatment could change if the federal government’s financial stake or control changes in a significant way.”
• Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

CBO released its Monthly Budget Review today. CBO estimates that the federal budget deficit was $486 billion in the first 11 months of the fiscal year, $212 billion more than the shortfall recorded over the same period last year.  CBO anticipates that the government will realize a surplus in September, stemming from quarterly payments of estimated income taxes. The result will be a deficit in the vicinity of $400 billion for the fiscal year. CBO will release a new estimate of the 2008 deficit and updated baseline projections for fiscal years 2009-2018 on September 9.

Total receipts for the first 11 months of fiscal year 2008 were about 1.4 percent lower than receipts in the same period in fiscal year 2007, CBO estimates. Individual income taxes showed a decline in receipts of 3 percent, primarily due to tax rebates. Social insurance (payroll tax) receipts grew by about 4 percent, and corporate receipts fell by about 15 percent during the period.

Today we released a paper on updated long-term projections for Social Security. (Our last long-term projection for social security was included in the December 2007 Long-Term Budget Outlook.) As CBO has highlighted in previous reports, the number of Social Security beneficiaries will grow considerably as the baby boomers become eligible for retirement benefits. Absent legislative changes, spending for the program will therefore climb substantially and exceed the program’s revenues. CBO projects that the 75-year actuarial imbalance in the program amounts to 0.38 percent of GDP, or 1.06 percent of taxable payroll.

The projections released today differ somewhat from earlier results because of newly available programmatic and economic data, updated assumptions about future demographic and economic trends, and improvements in CBO’s models. For example, these projections assume that future immigrants will be younger and more numerous than was assumed in 2007. (This change was included in the 2008 Social Security trustees’ report; CBO adopts the trustees’ aggregate demographic assumptions.) As a result of this and other changes, CBO projects somewhat smaller future deficits than we did in our 2007 projections.

CBO’s long-term Social Security projections have always shown both a point estimate and the range within which 80 percent of the possible values are likely to fall. In this update, however, CBO has expanded its uncertainty presentation. Many figures and tables still show the 10th and 90th percentiles of various measures, but new presentations show the probabilities of specific outcomes.

Here is an example of our new presentation. A table in today’s report shows the probability that Social Security outlays will exceed revenues by a specified percentage of GDP in a selected year. For example, the likelihood that outlays will exceed revenues in 2030 is about 97 percent, CBO projects, and there is almost a 50 percent chance that the gap will be larger than 1 percentage point of GDP; the chance of its being 2 percentage points (or more) of GDP is only 6 percent.

Another new table shows the probability, for different birth cohorts, that the Social Security trust funds will be sufficient to pay specified percentages of scheduled benefits. According to CBO’s projections, the 1940s cohort, for example, is virtually certain to receive all of its scheduled first-year benefit. The 1990s cohort has only a 32 percent chance of receiving all of its scheduled first-year benefit but an 84 percent chance of receiving at least 70 percent of that benefit.

Both the analyses that show 10th and 90th percentiles and the new presentations are based on the same underlying data, but we hope that the different perspectives will help to communicate uncertainty more fully to readers.

I recently gave a talk at the Retirement Research Consortium conference on the behavioral economics lessons gleaned from retirement research and how those lessons may be applicable to other pressing policy discussions. (I blogged about it here). In that speech I argued that the full benefit age seems to have a signaling effect on social security claiming behavior. The webcast of the speech is available here. A recent blog posting argues that my discussion overlooked the role of the retirement earnings test.

It is true that if people don’t understand how the retirement earnings test (RET) works, knowing that it no longer applies starting at the full benefit age could cause some people to claim at that age. (Those who do understand the RET know that the recalculation that occurs when a beneficiary subject to the RET reaches the full benefit age compensates them for the benefits offset while they were still working–again making the benefit actuarially fair).

Whatever is or is not understood about the operations of the RET, the response to it is not large enough to drive the response that we see at the full benefit age. In a recent CBO working paper, Jae Song and Joyce Manchester found that the elimination of the RET in 2000 for people at the full benefit age through age 69 led to an increase of about 5 percentage points for men and about 2 percentage points for women in claiming at age 65 (the full benefit age) in 2000-2002. Hence the RET cannot explain the full peak of 12-14 percent moving out as the full benefit age rises.

Contractors play a substantial role in supporting the United States’ current military, reconstruction, and diplomatic operations in Iraq, accounting for a significant portion of the manpower and spending for those activities.

CBO released a study today, conducted at the request of the Senate Committee on the Budget, on the use of contractors in the Iraq theater to support U.S. activities in Iraq. The webcast of the press briefing is available here.

CBO found:

• From 2003 through 2007, and converting the funding into 2008 dollars, U.S. agencies awarded $85 billion in contracts for work to be principally performed in the Iraq theater, accounting for almost 20 percent of funding for operations in Iraq. Including funding for 2008 itself, the U.S. has likely awarded $100 billion or more for contractors in the Iraq theater.

• More than 70 percent of those obligations were for contracts performed in Iraq itself. The Department of Defense awarded contracts totaling $76 billion, and the U.S. Agency for International Development and the Department of State obligated roughly $5 billion and $4 billion, respectively, over the same period.

• Contractors provide a wide range of products and services in theater. Most contract obligations were for logistics support, construction, petroleum products, or food.

• Although personnel counts are rough approximations, CBO estimates that at least 190,000 contractor personnel, including subcontractors, work on U.S.-funded contracts in the Iraq theater. About 20 percent are U.S. citizens.

• The United States has used contractors during previous military operations, although not to the current extent. According to rough historical data, the ratio of about one contractor employee for every member of the U.S. armed forces in the Iraq theater is at least 2.5 times higher than the ratio during any other major U.S. conflict, although it is roughly comparable with the ratio during operations in the Balkans in the 1990s.

Private security contractors have been a particular focus of attention. Our analysis shows:

• Total spending by the U.S. government and other contractors for security provided by contractors in Iraq from 2003 through 2007 was between $6 billion and $10 billion.

• About 10,000 employees of private security contractors work directly for the U.S. government. Another 15,000 to 20,000 work for the Iraqi government, other contractors, and other customers, bringing the total to approximately 25,000 to 30,000 employees of private security contractors operating in Iraq.

• The costs of a private security contract are similar to those of a U.S. military unit performing similar functions. During peacetime, however, the private security contract would not have to be renewed, whereas the military unit would remain in the force structure.

Regarding the legal issues associated with contractor personnel, CBO finds that military commanders have less direct authority over the actions of contractor personnel than over their military or civilian government subordinates. In addition, the legal status of contractor personnel in Iraq is uncertain, particularly for those who are armed.

CBO’s report was prepared by Daniel Frisk and R. Derek Trunkey of our National Security Division.

Many of the most dramatic behavioral economics success stories come from work done in retirement research. Researchers have found, for example, that more workers participate in a 401(k) retirement plan if they are automatically enrolled (with the ability to opt out of the plan) than if they have to make an affirmative decision to participate. Researchers have also found that the number of investment options offered changes how participants allocate their assets, and that cues embedded in employer-based retirement plans as well as entitlement programs like Social Security and Medicare shape people’s decision about when to retire. This work has emphasized the power that defaults, framing of decisions, and perceptions of social norms have on how individuals make decisions.

I’ll be giving a speech today at the Retirement Research Consortium conference that highlights the important work done in this arena and explores how some of these behavioral economics lessons could potentially be applied to another crucial policy issue– health care costs and the large portion of those resources that do not result in improved health. The hope is that behavioral researchers will help uncover the same type of policy-relevant insights into improving people’s health — perhaps especially among those on the lowest rungs of the socioeconomic ladder — as has occurred in retirement saving.

CBO released the Monthly Budget Review today. CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.