Congressional Budget Office
Douglas W. Elmendorf
Director’s Blog

Today (December 5), CBO released a letter at the request of House Majority Leader Hoyer analyzing the budgetary effects of two legislative proposals: S. 3715, the Auto Industry Emergency Bridge Loan Act, as introduced on November 20, 2008; and draft legislation released by the House Committee on Financial Services (and posted on that committee’s Web site) on November 17, 2008.

Both proposals would authorize the federal government to provide up to $25 billion in “bridge loans” to support ongoing operations of automobile manufacturers and component suppliers.  S. 3715 would rescind $7.5 billion of funds previously appropriated to the Department of Energy for loans to automakers and also appropriate $7.5 billion for the cost of “bridge loans” to support ongoing operations of eligible auto manufacturers and component suppliers. Repayments of bridge loans would be available to support new loans.

The draft legislation posted by the House Committee on Financial Services would require the Secretary of the Treasury to provide $25 billion in bridge loans to eligible auto manufacturers and component suppliers, to be administered under the Troubled Assets Relief Program (TARP) that was created by the Emergency Economic Stabilization Act of 2008 (Public Law 110-343).

Provisions related to the administration and financial terms of such loans are similar under the two proposals, but significant differences arise regarding their budgetary treatment and potential net impact on the federal budget.  In particular, the subsidy costs of loans under S. 3715 would be calculated on a present value basis following the requirements of the Federal Credit Reform Act (FCRA), while loans made under TARP (as directed by the draft House legislation) would be calculated on a slightly different basis.  Under TARP, subsidy costs would be calculated by adjusting the discounting called for in FCRA to account for the market risk associated with the loans. In contrast, FCRA discounting is done by using the relatively “risk-less” Treasury rate of borrowing. (That difference, and its impact on the net budget impact of the proposals is explained in more detail in the letter to Majority Leader Hoyer.)

Another key difference between the two proposals is that S. 3715 would allow loan repayments to be “revolved” into new loans. That provision would effectively raise the estimated subsidy rate of the initial loans under S. 3715 to 100 percent. That result occurs because repayments would automatically revolve into new loans without subsequent appropriation of any additional funding to cover the subsidy costs of those new loans, as would normally be required under FCRA. By making new loans with the repayments of the initial loans, the government would essentially be spending those receipts, thus adding to the subsidy costs of the initial loans.

A summary of CBO’s estimates for the two proposals is provided in the following table:

CBO also sent a letter today to Cong. John M. Spratt Jr., Chairman of the House Budget Committee, providing information on how two alternative scenarios to provide $34 billion in bridge loans to the auto industry would affect the federal budget. Under both scenarios, the loans would support firms’ ongoing operations and would carry interest rates of 5 percent for the first five years after disbursement and 9 percent thereafter. CBO’s estimates of the subsidy cost for providing $34 billion in bridge loans under the two scenarios specified by Chairman Spratt are summarized in the following table:

CBO estimates that the subsidy rate for bridge loans under standard credit reform accounting (following the requirements of FCRA) would be 50 percent. By comparison, we estimate a subsidy rate of 70 percent for providing such loans under TARP because that program’s accounting requires an adjustment to reflect market risk. Using those subsidy rates, CBO estimates a budget cost of $17.0 billion for the use of new budget authority (with FCRA accounting), and a net budget cost of $13.6 billion to $17.0 billion for use of existing TARP authority.

Yesterday, CBO released its Monthly Budget Review.  CBO estimates that the Treasury will report a federal budget deficit of $408 billion for the first two months of fiscal year 2009, $253 billion higher than the deficit recorded through November of last year.  This estimate includes $191 billion disbursed for the Troubled Assets Relief Program (TARP) during the first two months of the fiscal year.

CBO believes that the equity investments for that program should be recorded on a net present value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008, rather than on a cash basis as recorded by the Treasury.  CBO’s preliminary analysis suggests that the present value cost of the TARP transactions made through November totals about $50 billion, $141 billion less than the cash disbursement recorded in the budget by the Treasury.  The estimated cost accounts for subsidized interest rates and market risk, but also for the likelihood that the government will ultimately get much of its money back.  As a result, CBO’s estimates of outlays and the deficit are much lower than the amounts that will be reported by the Treasury. 

Evaluating TARP on a net present value basis, CBO estimates the federal deficit totaled $267 billion through November, compared with a deficit of $155 billion during the same period last year. Revenues are running about 6 percent below receipts during the same period last year—but even excluding the TARP payments and $14 billion in payments to Freddie Mac to cover its losses, outlays are up by about 13 percent (after adjusting for shifts in the timing of certain payments).

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…