Budget Blog

January 6 - Today, the U.S. House of Representatives votes on the rules package that will govern House procedure for the 111^th Congress.  (Find here a section-by-section breakdown of the rules.)  Included in the rules package is an extension of pay-as-you-go rules (PAYGO) that require requires that the costs of new tax cuts or mandatory spending programs be offset with new revenue or reduced mandatory spending.  The new rule package modifies the previous PAYGO House rule by allowing offsets to occur between -  rather than only within - bills.

Another provision within the package would eliminate the Medicare trigger, a modification objected to by the Committee for a Responsible Federal Budget (CRFB). The Medicare trigger was created as part of the Medicare Modernization Act in 2003 and is enacted when for two consecutive years the program's trustees estimate that general revenue funding will exceed 45 percent of Medicare's total funding in any year within the next seven years. Said Maya MacGuineas, President of CRFB:

"Strengthening PAYGO would be a powerful sign that Congress is serious about becoming fiscally responsible - or at least preventing things from getting much worse.  Still, all budget rules can be gamed, bent, or ignored.  There are not substitutes for real political courage and a broad commitment to fiscal responsibility."

January 5 - In today's Washington Post, Senate Budget Committee Chairman Kent Conrad and Ranking Member Judd Gregg called on Congress to combine the passage of expected stimulus legislation with a "bipartisan commitment to begin addressing the long-term budget challenges confronting our nation." 

Noting that stimulus paid for through deficit spending is both necessary and appropriate at the present time, Conrad and Gregg said that to avoid the next economic crisis, the Congress must address long-term fiscal imbalances sooner rather than later.

"By acting now, we can make difficult but gradual changes to bend the cost curves of entitlement programs that will otherwise overwhelm our budget, as well as make needed reforms to our out-of-date and inefficient tax code. The longer we put off these reforms, the more draconian our choices will become and the more likely they are to be forced upon us."

December 24 - As the start date for the 111^th Congress and the Obama Administration approaches, interest groups and policymakers are beginning to negotiate what policies would constitute stimulus and how to package any stimulus proposal that would come before Congress.  The Washington Post reports that "smart growth" proponents and environmental groups are expressing concern that current stimulus proposals focus too strongly on traditional highway construction.  Observers have questioned whether "green collar" projects could begin sufficiently soon to count as short term stimulus, and President-elect Obama has said that stimulus projects must be "shovel-ready-projects" (which for the most part are highway construction).

Vice President-elect Joe Biden said on Tuesday that the stimulus would focus on creating 3 million jobs, 85% of which would be in the private sector.  Addressing the worry that some budget analysts have expressed regarding earmarked pet projects from lawmakers weighing down the stimulus, Biden said:

 "There will be no earmarks in this economic recovery plan.  I know it's the Christmas season, but President-elect Obama and I are absolutely determined that this economic recovery package will not become a Christmas tree."

December 23 - In the Financial Times "Economists Forum", Alistair Milne from City University, London points out that even after central banks have effectively lowered interest rates to the lowest possible level of zero, policymakers still have unorthodox tools to loosen monetary policy.

Milne notes that when the interest rate is zero, the Fed is not draining its reserves just to keep the overnight interest rate from falling below the target policy rate, thereby allowing the Fed to use its reserves to buy up securities. This policy is known as quantitative easing. Japan's central bankers followed one version of this policy during the Lost Decade by using central bank reserves to buy government bonds. Milne suggests that monetary policymakers, rather than buying government bonds that do little to increase liquidity, instead use reserves to purchase better quality illiquid and undervalued structured and mortgage-backed securities. He reasons:

"This eases bank funding constraints and so directly expands the stock of credit. Moreover, as the economy recovers, credit spreads will fall and so the central bank can make a profit. . . . . By setting credit spreads at appropriate levels the bank will put a floor under market values, restore credit market liquidity and economic activity and make a handsome profit to boot."

December 22 - In a recent paper, Heritage Foundation fellows Brian M. Riedl and Alison Acosta Fraser propose a number of policy steps the new administration could take in order to follow through on President-elect Obama's promise to rein in government spending. They point out that reducing government spending will require political effort, because while many presidential candidates plan to cut spending, few are successful, claiming:

"Virrtually all Presidents promise to rein in spending, but few succeed because every dollar of government spending--no matter how wasteful--will be strongly defended by its recipient as well as by the lawmakers who annually fund that spending. Thus, for you to restrain spending, you must not only identify lower-priority spending, but also spend political capital to enact your proposed reforms."

The authors write that scaling back planned stimulus plans would be a strong first step toward fulfilling the promise. Among their other proposals are defining more fully what a "net spending cut" means, devolving more programs to state and local governments, eliminating corporate welfare programs, enacting effective pay-as-you-go rules, cutting farm subsidies, reforming entitlement spending and eliminating "pork" projects from the federal budget. Finally, Riedl and Fraser urge Obama to avoid budgetary gimmicks, noting that declaring spending "emergency" distorts the actual federal budget totals.

December 19 - President-elect Obama is now considering a stimulus plan as large as $850 billion, according to the Washington Post. The package would likely include at least $100 billion in aid to state governments, and $350 billion for investments, including infrastructure, alternative energy, health IT, as well as food stamps and unemployment benefits. The package would also include large middle-class tax cuts--likely in the form of a rebate--and may also offer tax credits for job creation. The incoming administration is hopeful that a package could be ready for Obama to sign in the first days of his presidency.

December 17 - Yesterday, New York Governor David Patterson submitted to the New York State Assembly a state budget that contained between $4 to $6 billion in increased fees and taxes and $9 billion in spending cuts. Some provisions included in the budget proposal are increased fees on cell phone usage, digital content downloads, cigarettes, and non-diet beverages, and cuts in education and Medicaid spending. These provisions are designed to close the State's $15.4 billion budget shortfall, caused primarily by the economic crisis.