Congress

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."

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 4 - The Senate Committee on Banking held a hearing today to consider extending $34 billion in federal loans to domestic automakers.  Noting that the Big Three request for public funds already had increased from $25 billion to $34 billion in less than a week's time, Moody's Economy.com economist Mark Zandi tesified today that:

$34 billion and a plan may not be enough to return the automakers to viability.  Policymakers must prepare for this eventuality.  Under the most positive outlook the Big Three will need between $75 billion and $125 billion to avoid bankruptcy over the next two years.

Zandi also testified that he believes that the government will provide assistance to the Big Three in any event.  Without immediate government assistance the Big Three will certainly go into bankruptcy, whereupon the government will be forced to provide financing in bankruptcy proceedings anyway, as no private lender will provide bankruptcy financing. Other testimony came from Gene Dodaro (GAO), Ron Gettelfinger (UAW), Alan Mulally (Ford), Robert Nardelli (Chrysler), G. Richard Wagoner (GM), Keith Wandell (Johnson Controls) and James Fleming (CT Auto. Retailers Assoc.).

November 11 - Democratic representative Pete Stark, chair of the House Ways and Means Health Subcommittee, declared yesterday that Congress should waive its PAYGO rules to pass a fundamental reform of the healthcare system and to avoid massive Medicare payment cuts to physicians. Stark cited the waiving of PAYGO for other spending measures like the $700 billion dollar rescue package and Iraq war costs, and asked why large numbers of uninsured should not represent an equally urgent priority. US Budget Watch estimated that plan for health care reform put forward by the Obama campaign would add $52 to $106 billion to the deficit in 2013.