Tag: federal budget

The Senate Bill Would Increase Health Spending

Ezra Klein quotes the Congressional Budget Office’s latest cost estimate of the Senate health care bill when he writes:

“CBO expects that the legislation would generate a reduction in the federal budgetary commitment to health care during the decade following 2019,” which is to say that this bill will cover 30 million people but the cost controls will, within a decade or so, leave us spending less on health care than if we’d done nothing.  That’s a pretty good deal. But it’s not a very well-understood deal.

Indeed, because that’s not what the CBO said.

First, the CBO said the “federal budgetary commitment to health care” would rise by $210 billion between 2010 and 2019 under the Senate bill.  Then, after 2019, it would fall from that higher level.  And it could fall quite a bit before returning to its current level.

Second, the “federal budgetary commitment to health care” is a concept that includes federal spending on health care and the tax revenue that the federal government forgoes due to health-care-related tax breaks, the largest being the exclusion for employer-sponsored insurance premiums.  If Congress creates a new $1 trillion health care entitlement and finances it with deficit spending or an income-tax hike, the “federal budgetary commitment to health care” rises by $1 trillion.  But if Congress funds it by eliminating $1 trillion of health-care-related tax breaks, the “federal budgetary commitment to health care” would be unchanged, even though Congress just increased government spending by $1 trillion.  That’s what the Senate bill’s tax on high-cost health plans does: by revoking part of the tax break for employer-sponsored insurance, it makes the projected growth in the “federal budgetary commitment to health care” appear smaller than the actual growth of government.

Third, the usual caveats about the Senate bill’s Medicare cuts, which the CBO says are questionable and Medicare’s chief actuary calls “doubtful” and “unrealistic,” apply.  If those spending cuts don’t materialize, the “federal budgetary commitment to health care” will be higher than the CBO projects.

Fourth, Medicare’s chief actuary also contradicts Klein’s claim that the Senate bill would “leave us spending less on health care than if we’d done nothing.”  The actuary estimated that national health expenditures would rise by $234 billion under the Senate bill.

And really, Klein’s claim is a little silly.  Even President Obama admits, “You can’t structure a bill where suddenly 30 million people have coverage and it costs nothing.”

Fannie, Freddie, Peter, and Barney

Last week, after Rep. Barney Frank (D-MA) said that holders of Fannie Mae and Freddie Mac’s debt shouldn’t be expected to be treated the same as holders of U.S. government debt, the U.S. Treasury took the “unusual” step of reiterating its commitment to back Fannie and Freddie’s debt.

If ever there was case against allowing a few hundred men and women to micromanage the economy, this is it.

Fannie and Freddie, which are under government control, are being used to help prop up the ailing housing market. If investors think there’s a chance Uncle Sam won’t back the mortgage giants’ debt, mortgage interest rates could rise and demand for housing dampen. Therefore, Frank’s comments caused a bit of a stir. However, with the government bailing out anything that walks or crawls, investors apparently weren’t too concerned with Frank’s comments as the spread between Treasury and Fannie bonds barely budged.

As I noted a couple weeks ago, the Treasury is in no hurry to add Fannie and Freddie’s debt and mortgage-backed securities to the budget ($1.6 trillion and $5 trillion respectively). Congress certainly isn’t interested in raising the debt ceiling to make room. And as Arnold Kling points out, putting Fannie and Freddie on the government’s books would actually force the government to do something about the doddering duo.

All of which points to what an unfunny joke budgeting is in Washington. Take a look at what current OMB director Peter Orszag had to say about the issue when he was head of the Congressional Budget Office:

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.

Note that Orszag wrote that statement less than two years ago. And since then, the bond between the government and the mortgage giants has only gotten tighter.

The same people that say Fannie and Freddie shouldn’t be on the government’s books are often the same people who once dismissed concerns that the two companies were headed toward financial ruin. In 2002, Orszag co-authored a paper at Fannie’s behest that concluded that “the probability of default by the GSEs is extremely small.”

Another one of those persons, Congressman Frank, has his fingerprints all over the housing meltdown. In 2003, a defiant Frank stated that “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis.” Frank couldn’t have been more wrong. Yet there he remains perched on his House Committee on Financial Services chairman’s seat, his every utterance so important that they can move interest rates.

Six Reasons to Downsize the Federal Government

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.

5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.

6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.

For more, see DownsizingGovernment.org.

Put Housing GSEs in the Budget and then Privatize

The two large housing government-sponsored enterprises, Fannie Mae and Freddie Mac, have been in government receivership since September 2008. The U.S. Treasury has given the housing GSEs $112 billion in cash infusions, and this past Christmas Eve it quietly announced it would cover all of Fannie and Freddie’s losses beyond the original $400 billion limit through 2012.

The president’s latest budget proposal continues to only count the cash infusions, which it projects to be $188 billion through 2020. On the other hand, the Congressional Budget Office also includes in its budget projections the subsidy cost of new loans or loan guarantees made by Fannie and Freddie, which results in a total projected hit of $370 billion through 2020.

The CBO’s rationale for including the subsidy cost is obvious:

[T]he Congressional Budget Office (CBO) concluded that the institutions had effectively become government entities whose operations should be included in the federal budget.

Is it not obvious to the administration?  Of course it is, but the administration doesn’t want the GSEs “on budget” because it will only make already dismal deficits look worse. It also hinders any effort to count the GSE’s combined $1.5 trillion in outstanding debt against the ever-increasing federal debt limit. Yesterday, Treasury Secretary Geithner waived the idea away when he told the Senate Budget Committee that “we do not believe it’s necessary to consolidate the full obligations of those entities onto the balance sheet of the federal government at this stage.”

Geithner also told Congress the administration will now wait till 2011 to propose an overhaul of Fannie and Freddie. The Associated Press noted the hypocrisy in the administration’s punt:

‘We want to make sure that we are proposing these changes at a time when we have a little bit more distance from the worst housing crisis in generations,’ Geithner said. That argument is exactly the opposite of the case Geithner is making for new financial regulations. Geithner is pressing Congress to move swiftly on new Wall Street rules, saying action must occur before memories of the financial crisis recede.

Geithner said he wanted measures that would ensure “the government is playing a less risky, but more constructive, role in supporting housing markets in the future.” But government “support” of the housing market is what fueled the housing bubble and subsequent damage to the economy. Why should the arsonist be trusted to put out the fire?

Unfortunately, policymakers get a lot of self-serving prompting from the housing industry, as I discuss in this Cato Policy Analysis. For example, the National Association of Realtors is currently shopping a plan on Capitol Hill that would turn Fannie and Freddie into government-chartered non-profits explicitly backed by the government. Instead, policymakers should begin the process of separating housing finance and state by developing a plan to privatize Fannie and Freddie.

A New Fed-Treasury Accord

Charles Plosser, President of the Federal Reserve Bank of Philadelphia, gave an important speech last week.  He mounted a strong defense of what is known as Fed independence. “Central bank independence means the central bank can make monetary policy decisions without fear of direct political interference.”

Toward the end of the speech, Plosser admitted the Fed had brought criticism down on itself by blurring the line between monetary and fiscal policy.  In the process, the central bank greatly expanded its balance sheet and substituted “less liquid, long-term assets, such as securities backed by mortgages guaranteed by Fannie Mae and Freddie Mac, for the short-term securities it typically held before the crisis.”

To extricate itself from conducting fiscal policy and get back to doing conventional monetary policy, Plosser called for a new Fed-Treasury Accord.  (He harkened back to the Accord of 1951, which ended the Fed’s wartime obligation to support the prices of Treasury bonds.)  Under the proposal, the Fed would swap out its illiquid assets for Treasury obligations.  Responsibility for public support of housing would revert to Treasury and be subject to Congressional appropriations.

Additionally, and very importantly, Plosser recommended ending or severely curtailing the Fed’s expanded lending authority, which enabled it to balloon its balance sheet and conduct fiscal policy. (That is the section 13(3) authority.) “Never again” is the message of Plosser’s speech.

It was a landmark speech by a high Fed official.

Obama Budget Still Goes to the Moon

The president’s new budget proposes to end NASA’s Constellation program, a Bush initiative intended to put humans back on the moon by 2020. But Obama’s $3.8 trillion budget still goes to the moon figuratively — if you stacked 3.8 trillion $1 bills, the pile would reach the moon with 20,000 miles to spare!

The president’s proposal to end the Constellation isn’t sitting well with those members of Congress who enjoy large NASA spending in their districts. From the Washington Post:

“The president’s proposed NASA budget begins the death march for the future of U.S. human spaceflight,” Sen. Richard C. Shelby (R-Ala.) said Monday. “If this budget is enacted, NASA will no longer be an agency of innovation and hard science. It will be the agency of pipe dreams and fairy tales.”

Rep. Pete Olson (R-Tex.) said, “This is a crippling blow to America’s human spaceflight program.”

Senator Shelby and Rep. Olson exaggerate –- the proposal would only end government human spaceflight to the moon. Private entrepreneurs are likely to continue pushing into space, especially if we reduce the regulatory and tax burdens.

The administration noted that the Constellation program was “over budget [and] behind schedule,” and that an independent review panel considered it “the least attractive approach to space exploration as compared to potential alternatives.” But this underscores an inherent flaw with a government operating with no legal or constitutional constraints on spending: Congress is generally more concerned with buying special interest support than national need.

While I give kudos to the Obama administration for proposing to end Constellation, they made the wrong decision by not putting the proceeds toward reducing the deficit. Instead, they are proposing that NASA receive a funding increase. A new GAO report on poor acquisition management at NASA, which has been on the GAO’s “high risk” list since 1990, shows why the budget increase is unwarranted.

From the GAO:

However, 9 of the 10 projects that have been in the implementation phase for several years experienced cost growth ranging from 8 to 68 percent, and launch delays of 8 to 33 months, in the past 3 years. These 10 projects had average development cost growth of almost $121.1 million—or 18.7 percent—and schedule growth of 15 months, and a total increase in development cost of over $1.2 billion, with over half of this total—or $706.6 million—occurring in the last year.

See this essay for more on cost overruns in government programs.

State and Local Subsidies

Earlier this week I criticized the U.S. Conference of Mayors for going to Washington and groveling for more federal handouts. Let me provide some more background for my criticisms with a look at federal budget data. The first chart shows that since 1960, total federal subsidies to state and local government have increased an astounding 1,173%.

Several readers have asked me what particular programs account for this large increase in state aid. The federal budget breaks down the total figures into categories. Not surprisingly, health subsidies — mainly Medicaid — account for almost half of the current total and are the driving force behind the massive overall increase:

However, there have been large increases in other activities as well. Here are the changes by federal budget function in state aid since 1960, in billions of 2010 dollars:

  • Health: $1.5 to $310.7 (+21,128%)
  • Education, Training, Employment & Social Services: $3.7 to $103.3 (+2,723%)
  • Community & Regional Development: $0.7 to $20.3 (+2,674%)
  • Other*: $0.7 to $12.0 (+1,707%)
  • Natural Resources & Environment: $0.7 to $7.8 (+966%)
  • Income Security: $19.0 to $113.8 (+498%)
  • Transportation: $22.0 to $73.5 (+235%)
  • General Government: $1.5 to $4.7 (+221%)
  • Administration of Justice*: $2.6 to $5.3 (+100%)
  • Agriculture: $1.5 to $1.0 (-32%)

*Administration of Justice begins in 1975. “Other” begins in 1965 and consists of grants for national defense, energy, social security, and veterans’ benefits and services.

All of these categories are at or near their high water mark in constant dollars with the exception of Natural Resources & Environment ($13.8 in 1980), Agriculture ($4.5 in 1985), and General Government ($26.9 in 1975).

Rather than being deprived, state and local governments have developed an unhealthy dependency on federal money. In a way, the states have become an extension of the federal government. This is at odds with the Constitution, which clearly intended for the federal government to have specific limited powers. As the 10th amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” There seems to be very little reserved to the states anymore, and even less to the people.

See these essays for more on constitutional basics and the desirability of fiscal federalism.