Budget Blog

July 2 - Labor markets continue to deteriorate in June. According to the Bureau of Labor Statistics, the unemployment rate edged up to 9.5% from 9.4% in May.  Monthly employment declined by 467,000, worse than in May but better than earlier in the year.  A decline in weekly hours suggests that hiring will not pick up soon.

Job losses were widespread but particularly evident for the auto and related industries.  Health care employment was one of the few major categories that increased.  

The data released today suggested that labor market deterioration has slowed from earlier in the year, but raised questions about the pace of improvement to be expected in the coming months. The reports contained positive and negative elements, and so it is difficult to draw conclusions.  The financial markets focused on the "bad" news (June employment losses were larger than expected and worse than May's), and overlooked the fact that recent deterioration, while disappointing, is an improvement over earlier in the year.  Additional "good" news released today by the Labor Department showed a gradually improving trend in weekly unemployment claims (smaller claims on a four week moving average basis), but it was also ignored by the financial markets.   

Policymakers are no doubt increasingly nervous on the basis of today's report. The unemployment rate is approaching the politically sensitive rate of 10%, which most experts expect to see this year - perhaps sooner rather than later.   Until the job market improves, it will be difficult for the administration to point to success from its stimulus package.  From the perspective of many economists, however, a lag is understandable and even to be expected based on recent experience.  In the previous two recessions, the U.S. has experienced "jobless recoveries" in the early phase of increased economic activity as firms rebuilt their balance sheets before taking on new hiring expenses.

Today, CRFB released Principle #3 of its health care reform series -- Making Medicare and Medicaid Sustainable. Demonstrating that Medicare and Medicaid will soon consume an enormous part of the US federal budget if not reformed, it focuses on the need for health care reform to focus on controlling their long-term costs. The paper discusses some of the options available to reduce costs, but warns that:

"enacting cost-saving policies in Medicare and Medicaid to pay for coverage expansion will leave these policies unavailable to mediate the unsustainable fiscal situation. Policies that save money one place to spend it somewhere else may be worthwhile, but they do nothing to help the overall fiscal picture."

CRFB also concluded by arguing that:

"the fact that we do not yet know how to make Medicare and Medicaid fully sustainable only strengthens the case that we must act now, as part of comprehensive health care reform, to begin to bring these programs under control."

July 1 - CBO recently released a letter on the potential effects of higher interest rates on the budget trajectory. AS CRFB warned in its Budget Update on the Long Term Budget Outlook, "an unanticipated uptick in interest rates -- which could easily result from fiscal pressures -- would further erode the budget situation."

CBO finds that if interest rates on 10-year Treasuries approximate the average level over the 1991-2000 period (6.6%) over the next decade, the deficit would increase by $1.3 trillion over the 10-year period -- more than the anticipated cost of the massive health care coverage expansion being considered by Congress.

If interest rates approximate the average level over the 1981-1990 period (10.5%) the deficit would increase by $5.3 trillion over the 10 year period.

Given the upwards pressure on interest rates that could result from the increased borrowing needs of the U.S., these scenarios are not unlikely, and would lead to massive increases in one of the most wasteful areas of the budget - interest costs.

June 30 - Yesterday, CRFB released a paper on CBO's Long Term Budget Outlook, which focused on the need for government to act promptly in order to remedy what is projected to be a dire economic future. The long term outlook -- made public by the CBO last week -- projects deficits to hit record levels, reaching 15 percent of GDP by 2035 and 45 percent by the end of the seventy-five year period. The CRFB paper discusses the sources of increased spending growth, focusing in particular on the rising cost of entitlement programs such as Social Security, Medicare, and Medicaid. Finally, CRFB argues for serious tax and spending changes, which if absent from future fiscal policy, could create an even more severe economic crisis.

June 26 - Can we measure the effects of the economic stimulus legislation?  We are just starting to see effects show up in U.S. economic data.

The initial direct effects of the stimulus legislation on personal income are estimated in monthly personal income and spending data released today by the Bureau of Economic Analysis (which produces the GDP numbers).

The BEA tells us that people had a lot more money in their pockets in April and May because of the stimulus legislation, which lowered personal taxes and increased payments to individuals by the government.   

	Average Q1 '09	April	May
With Stimulus	-	+1.3%	+1.6%
Without Stimulus	+0.5%	+0.9%	+0.2%

Did people save or spend the additional money?  (Economists call this the "multiplier" effect.) Today's data suggests that while they boosted spending, they may have increased their savings proportionately more.  However, it may be too soon to tell:  income stimulus often feeds through to spending with a lag, as confidence builds.  Stay tuned for more spending, confidence and savings data in the months ahead.  

June 26 - CBO has released a re-estimate of program subsidy rates for the TARP program.  It currently estimates an overall subsidy rate of 36%, down from the approximately 51% overall subsidy it estimated several months ago.  This means that, by CBO's calculation, the overall riskiness of the TARP program has decreased, and the government stands to recoup a larger share of its investment.  

However, subsidy rates for several TARP programs, including the Automotive Industry Financing Program (73%) and asset guarantees for Citigroup (64%), remain high, indicating that CBO expects the government to lose the majority of its investment under these programs.

Visitors can use CRFB's "Stimulus Watch" to view the program-by-program updated costs of TARP. 

June 25 - Today, CBO released its Long-Term Budget Outlook, projecting deficits will hit 7.5% of GDP by 2020, almost 15% by 2035, and well over 40% by the end of the 75-year budget window if we continue current policies. Driving these deficits is the rapid growth of Medicare, Medicaid, and to a lesser extent Social Security, along with the subsequent interest payments that result from high levels of debt sustained through continued borrowing.

A debate exists among experts, though, over the source of growth over these programs. OMB Director (and former CBO Director) Peter Orszag has been among those arguing that health care cost growth is the primary driver of projected entitlement costs, and that experts there has been an overemphasis on population aging.

In its 2007 release, The Long-Term Outlook for Health Care Spending, CBO displayed the following graph, showing that for Medicare and Medicaid, the growth of health care (beyond GDP growth) is a significantly larger factor than population aging - and in fact population aging explains only around 15% of the growth by 2080.

This chart attributes all of the "interaction effect," which explains nearly one third of the growth, to the light blue section. In its newest release, CBO allocates the interaction effect between the two effects, and finds that population aging contributes to closer to 30% of the growth in Medicare and Medicaid. When they look at a less distant year, 2035, they find population aging accounts for about 44% of the growth.

And all of this excludes the role of Social Security. Adding this program to the mix, population aging is responsible for around 44% of entitlement growth in 2080, and 64% in 2035.

The extent to which health care cost growth versus population aging drives entitlement growth is a question with important policy implications. To the extent the problem is health care, we should be devoting considerable efforts toward designing and implementing policies to slow health care cost growth. To the extent population aging is a driver, some changes to encourage greater and longer lasting labor force participation as well as higher birth rates and immigration may be possible, but the focus will have to be more on the traditional options of cutting spending and/or increasing taxes.

Of course, with a long-term outlook like this, we're going to have to do both.

June 25 - The Fed announced today that it would extend and modify many of its liquidity programs.  These changes followed upon the two day meeting of the Federal Open Market Committee (FOMC). 

The changes reflect improvements in some markets, redesign of specific facilities, but on the whole continuing fragility in most parts of the financial system.

The TALF (Term Asset-Backed Securities Loan Facility) will be left in place to run until the end of the year. The TALF is the most non-conventional facility of all, to support with considerable resources markets far afield of the Fed's usual domain and involving assets that never before had any relation to the Fed balance sheet (the auto, student loans, credit card, business equipment and commercial mortgage markets).

Depository institutions - The Fed is reducing the amount of fixed term loans auctioned to depository institutions (banks) through the TAF (the Term Auction Facility), slightly at first.  The TAF was the first special facility created in the crisis (essentially the discount window redesigned to provide credit through a more anonymous auction process.) Demand for TAF facilities has declined in recent auctions, partly a sign of improvement in the underlying marketplace.

Foreign currency swap arrangements -With the crisis being global, , foreign currency swaps have been crucial to ensure the smooth functioning of the world financial system.  Today, the Fed announced extension of its dollar swaps with 13 central banks and foreign currency swap arrangements with the major European central banks.

Primary dealers - The Fed also decided to suspend and/or shift the auction schedule for the Term Securities Lending Facility (TSLF), the facility providing basic Treasury securities liquidity to primary dealers which was established when Bear Sterns was on the verge of collapsing.  A related facility, the Primary Dealer Credit Facility (PDCF) however was extended to provide a liquidity back stop to primary dealers if needed, even though no credit is currently outstanding through the facility.    

Money market funds - In probably a positive sign, the  Fed did not extend authorization for the Money Market Investor Funding Facility (MMIFF), which expires on October 20, 2009.  The MMIFF was established to specifically address a panic in the money market mutual funds market when Lehman Brothers failed and the oldest fund "broke the buck" (ie, went below $1). 

The other facilities were extended through February 1, 2010, some with program modifications (the AMLF, or Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; the CPFF, or Commercial Paper Funding Facility).     

June 25 - OMB Director Peter Orszag testified this morning before the House Budget Committee regarding the Obama Administration's support of the Statutory PAYGO Act of 2009. According to Director Orszag, the new PAYGO law would require spending reductions or revenue increases for any new tax or entitlement legislation and would strengthen the overall budget process. Orszag also noted that PAYGO "tells Congress and the Administration that their minimum duty is not to make the existing multiyear structural deficit any worse than it already is."

At the same time, Orszag noted that four policy areas would be exempt under the new PAYGO legislation: the Medicare sustainable growth rate formula (SGR), the estate tax, the Alternative Minimum Tax (AMT), and the 2001 and 2003 income tax reductions. CRFB argued on June 9 however, that exempting these items from the PAYGO proposal largely undermined the purpose of the bill. Instead, CRFB proposed extending PAYGO to cover all non-discretionary non-emergency legislation and advocates for additional discretionary spending caps.

June 25, 2009 - Data released today suggests that the U.S. economy continues to contract.

Normally, the most watched for data is the quarterly GDP data, but there is not much news here. According to the Commerce Department, the economy contracted at an annual rate of 5.5% in the first quarter, a slight improvement over the estimate last month (a decline of 5.7%).  http://bea.gov/newsreleases/national/gdp/2009/pdf/gdp109f.pdf

We will get bits and pieces of the second quarter until the comprehensive initial GDP estimate comes out in July.  Most forecasters (and the Fed) expect the second quarter data will show that the pace of contraction has slowed.  

The most current news comes from the Department of Labor's weekly unemployment claims, released every Thursday.  New employment claims increased last week, but interpretation is complicated by end of school year labor force movements.  On a four week moving average basis (taking out the weekly noise is the best way to look at these numbers anyway), new unemployment claims were stable  - but at a high level (above the 600,000 level considered an important threshold).  Employment is expected to lag the pick-up in overall economic activity in the current business cycle. http://www.dol.gov/opa/media/press/eta/ui/eta20090707.htm