Congressional Budget Office
Robert A. Sunshine, Acting Director
Director’s Blog

CBO has been privileged, for the past two years, to have Peter Orszag as its Director.  During that time, he worked tirelessly to ensure that the Congress received the timely, high quality, budget and economic information and policy analysis that it needs to address the important public policy issues facing our nation.  He also expanded the agency’s focus on key areas like climate change and health care, with particular emphasis on the long-term fiscal threat posed by rising health care costs.  CBO’s work, under his leadership, was done, as always, in a scrupulously objective and nonpartisan manner. 

Peter’s broad knowledge, energy, wisdom, and dedication have been enormous assets to CBO, and the agency wishes him well as he begins the next phase of his career in public service.

Bob Sunshine, Acting Director

Today President-elect Obama announced his intention to nominate me as director of the Office of Management and Budget.  I am therefore resigning as director of CBO and this will be my final blog entry.

I have absolutely loved my time at CBO.  CBO is unique because it combines rigor, relevance, and range.  Rigor reflects the intellectual integrity of what CBO does.  Relevance speaks to the importance of what it does.  And range reflects the wide array of topics upon which CBO has something important to say – from national security to labor markets to natural resources, health care, immigration, and the list goes on and on and on.  (This blog has also been a special treat: it has provided another way of discussing CBO’s work and some of my own views about the policy world.)

Perhaps most fundamentally, CBO is a reflection of the smart and hard-working but also warm and wonderful people who work here.  (If you find it hard to believe that budget analysts and economists can be warm and wonderful, please just take my word for it.) I have worked with many outstanding people in both the public sector and the private sector, and the CBO staff is truly exceptional in its analytical capability and its devotion to the work it does.   

I will very much miss CBO, and hope that I will do it proud if I am confirmed by the Senate to assume my new post.

Peter R. Orszag

Today CBO released the Monthly Budget Review.

In fiscal year 2008, the federal government recorded a total budget deficit of $455 billion — $293 billion more than the deficit incurred in 2007. As a share of the nation’s gross domestic product (GDP), the deficit rose from 1.2 percent in 2007 to 3.2 percent in 2008. That increase in the deficit of 2 percentage points of GDP reflected both a reduction in revenue (which declined by 1.1 percent of GDP) and an increase in spending (which rose by 0.9 percent of GDP).

Today’s report also includes CBO’s first preliminary estimate of operations thus far under the Troubled Asset Relief Program (TARP). In October, the government disbursed $115 billion under the TARP to purchase preferred stock in eight large banks. In CBO’s view, the equity investment and associated warrants should be recorded on a net present value basis, accounting for market risk, as specified in the Emergency Economic Stabilization Act. CBO’s preliminary estimate of $17 billion for the present value cost of the TARP equity injections is included in our estimate of $134 billion for the October deficit. CBO anticipates, however, that the Treasury will report the stock purchases on a cash basis; as a result, CBO estimates that the Treasury will report the October deficit at $232 billion (which is $98 billion, or $115 billion minus $17 billion, larger than the deficit using the net present value figures).

Tonight I’m giving the Goldman Lecture in Economics at Wellesley College. (Here are the slides from my talk.)  The topic is climate change—starting with an overview of the problem and then discussing a range of possible approaches to reducing the risks involved.  As I’ve noted before with regard to health care, our political system doesn’t deal well with gradual, long-term problems. And climate change would definitely qualify as one of those gradual, long-term problems.  (More precisely, let’s hope climate change is a gradual long-term problem and doesn’t become a sudden crisis, as is possible given the potential nonlinearities involved.) 

Reducing the risks associated with climate change requires trading off up-front costs in exchange for long-term benefits.  Given the difficult political economy in such trade-offs, the Goldman lecture discusses ways of reducing the shorter-term economic cost of meeting whatever longer-term environmental objective we choose. 

Today, I will be delivering the Eighth Annual Marshall J. Seidman Lecture on Health Policy at Harvard Medical School.  (Here are the slides from my talk.)  The title of the lecture is “New Ideas About Human Behavior in Economics and Medicine,” and it builds upon a theme I have been speaking about over the past few months:  that just as the field of economics suffered for ignoring psychology for too long, so too has much of medical science and health policy largely ignored the crucial role of expectations, beliefs, and norms.  (The broader lesson is that the allure of pure science — which works beautifully in physics and some other fields — can go astray when the subject involves human beings.)  The placebo effect is perhaps the most compelling example — one that tends to be dismissed as a statistical annoyance rather than examined in and of itself, even though it is often more potent empirically.

Greater emphasis on the psychological and sociological influences on human health could lead to improvements in many areas of health care and medicine.  For example, ICU doctors in Michigan drastically reduced the rate of infections associated with catheterizations through a shift in professional norms brought about by the institution of a simple five-step checklist.  Setting default rules that are more in tune with the realities of human behavior in such diverse settings as doctors’ offices and federal nutrition programs might help to improve a range of health outcomes, from the adherence of patients to their doctors’ medication regimens to the proportion of Americans eating a healthier diet and exercising more.

Just as economists have put behavioral insights to use in the retirement and pensions fields to boost personal savings, especially among those at the lower ends of the socioeconomic spectrum, thinking carefully about these intersections between psychology and health care is vitally important because of a pair of disturbing trends in the United States today:  the rapidly rising share of the nation’s income devoted to health care costs, and the growing gap in life expectancy between those at the top of the socioeconomic distribution and those at the bottom.  Greater attention to the insights of behavioral economics in medical science and health policy may help to mitigate both of these trends.

The 2008 deficit totaled $455 billion, roughly $17 billion more than the $438 billion estimated by CBO on October 7th. That difference does not reflect any economic or programmatic developments; rather, it reflects an accounting adjustment by the Department of the Treasury, which increased the outlay and deficit figures for June 2008 by $17 billion. In fact, the surplus for the month of September that was reported in the Monthly Treasury Statement (MTS) was slightly more than CBO had estimated.

The accounting adjustment corrected the amounts reported by the Federal Communications Commission (FCC) for offsetting receipts from the March 2008 auction of licenses to use the electromagnetic spectrum made available by the transition to digital television.  Proceeds from that auction, which totaled nearly $19 billion, are deposited in the Digital Television Transition and Public Safety Fund administered by the Department of Commerce.

The Department of the Treasury adjusted the June outlay figures because the FCC had recorded receipts before it had issued the licenses to the winning bidders. Proceeds from such auctions, as well as from leasing activities and similar asset sales, are deposited in the Treasury soon after an auction closes but are not classified as federal receipts until the government awards the licenses. In this case, the FCC recorded the entire $19 billion in the June MTS in an effort to comply with a statutory directive to book those receipts by June 30, notwithstanding the fact that few licenses had been issued at that time. Because the receipts should not have been recorded at that time, the Treasury has reversed $17.2 billion of the $19 billion that was recorded in June, reducing the surplus for that month from $51 billion to $34 billion (see footnote 2 on Table 1 of in the MTS for September).

CBO anticipates that most or all of the pending licenses will be awarded in the near future and that the receipts will be recorded in fiscal year 2009.

In many settings, prizes can be an efficient way of encouraging new breakthroughs.  (For a paper exploring the use of prizes to encourage technological innovation, see here.)  I was therefore particularly encouraged to see that the X-Prize Foundation and Wellpoint have created a competition with a prize of at least $10 million for innovative approaches to addressing health care problems and improving the sector’s efficiency — which is a key issue for our long-term fiscal and economic future.  Wellpoint has committed to testing the ideas in its state markets.  Details about the competition will be finalized in early 2009.  CBO will be watching the results closely.

The Institute of Medicine of the National Academies of Sciences announced its new members this morning. I’m quite honored to be included in this group — along with Jose Escarce, who is on CBO’s Panel of Health Advisers. I view my inclusion as testimony to what the outstanding CBO health staff has taught me about health care and health policy, and look forward to continuing to learn from them and other innovators in the field.

While I’m on the topic of health care, I’d like to make a point related to the current turmoil in financial markets. Many observers have noted that addressing the problems in financial markets and the risks to the economy may displace health care reform on the policy agenda — and that may well be the case for some period of time. (As a small example, I know that over the past few months I have been spending less time on health care because the turmoil in financial markets and associated issues have consumed much more of our time and attention at CBO. This displacement is a matter of finite time and energy, not budgetary resources.)

Although it may not seem immediately relevant given our current difficulties, it will be crucial to address the nation’s looming fiscal gap — which is driven primarily by rising health care costs — as the economy eventually recovers from this current downturn. Indeed, our ability to address our current economic difficulties (through both financial market interventions and potential additional fiscal stimulus) would be severely impaired if investors were not so willing to invest substantial sums in Treasury securities without charging much higher interest rates. That willingness reflects the (currently accurate) view among investors that Treasury securities are extremely safe investments.

If we fail to put the nation on a sounder fiscal course over the next few decades, though, we will ultimately reach a point where investors would lose confidence and no longer be as willing to purchase Treasury debt at anything but exorbitant interest rates. If that were to occur, we would lack the kind of maneuvering room that we currently enjoy to address problems in the financial markets and the economy. So if you think the current economic crisis is serious, and it is, imagine what it would be like if we didn’t have the ability to undertake aggressive and innovative policy interventions because creditors were effectively unwilling to lend substantial additional sums to the Federal government…

Yesterday’s testimony on the effects of recent financial market turmoil on pension assets has generated a significant amount of interest, so I wanted to follow up on one topic: overinvestment in an employer’s stock.

Many participants in retirement plans appear to be taking on unnecessary risk by investing in individual stocks rather than a diversified portfolio. The result is that those workers assume excessive risk for which they do not receive a higher expected return. (Those workers may feel they have inside information or insights that will allow them to outperform the market with particular investment choices, but the evidence suggests that unless you’re Warren Buffett, trying to outguess the market usually doesn’t work.)  Investing excessively in one stock that also happens to be your employer’s stock is even riskier — if the company runs into trouble, both your retirement assets and your job may be in danger.

Despite those risks (again, for which workers don’t receive higher expected returns on their investments, on average), a significant number of 401(k) participants hold the bulk of their assets in company stock. According to calculations by the Employee Benefits Research Institute, 47 percent of 401(k) participants were enrolled in plans that offered company stock as an option as of the end of 2006. Of those participants, 7.3 percent held more than 90 percent of their assets in company stock, and over 15 percent held over half their assets in company stock. (See page 33 of EBRI Issue Brief 308, “401(k) Asset Allocation, Account Balances, and Loan Activity in 2006.”) At yesterday’s hearing, I didn’t make clear that the 7.3 percent figure applied only to those who were in plans offering company stock. So the overall share of 401(k) participants with 90 percent or more of their assets invested in company stock is more like .47*7.3=3.4 percent. It’s still too high.

The good news is that the trend is towards less investment in company stock. For example, in 1999 EBRI estimated that 19.1 percent of all 401(k) assets were held in company stock. (See figure 20 on page 26 of EBRI issue brief 308.) By 2006, that share had fallen to 11.1 percent, undoubtedly driven in part by the example of the collapse of Enron and other corporate failures. In addition, provisions of the Pension Protection Act of 2006 limit the amount of time that an employer may insist participants keep assets in company stock.

Despite these auspicious trends, there remains substantial scope to improve the balance of risk and return for participants in defined-contribution pension plans, including through increased use of low-cost diversified index funds.

CBO released its Monthly Budget Review today. Based on data from the Daily Treasury Statements, CBO estimates that the federal budget deficit was about $438 billion in fiscal year 2008, $276 billion more than the shortfall recorded in 2007. (The Treasury Department will report the actual deficit for fiscal year 2008 later this month.)

Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.

CBO estimates that receipts in 2008 were about $44 billion (or 1.7 percent) below receipts in 2007, falling from 18.8 percent of GDP in 2007 to about 17.7 percent of GDP in 2008. Corporate income taxes declined the most, falling by about $65 billion (18 percent), due largely to weakness in corporate earnings throughout the fiscal year. Individual income tax receipts declined by about $19 billion (or 1.6 percent) relative to receipts in fiscal year 2007, reflecting $62 billion in tax rebates (from the economic stimulus legislation) that were recorded as offsets to revenues. In contrast, receipts of social insurance (payroll) taxes rose by about $31 billion (or 3.5 percent), and other receipts increased by about $9 billion (or 5.4 percent).

Spending rose by about 8 percent. Contributing significantly to the growth in spending were outlays for tax rebates (those rebates that were recorded on the spending side of the budget because they exceeded the recipients’ income tax liability), for deposit insurance, and for national defense.