Congressional Budget Office
Director's Blog

Today CBO released an evaluation of the accuracy of its economic forecasts by comparing those forecasts with the economy’s actual performance and with the projections of other forecasters. The study examines the two-year ahead forecast accuracy and the five-year ahead forecast accuracy for a variety of macroeconomic variables, such as real GDP, inflation, and interest rates. Thirty-two CBO forecasts, those made early each year from 1976 to 2007, are included in the study.  Such evaluations help guide CBO’s efforts to improve the quality of its forecasts and also assist Members of Congress in their use of CBO’s estimates.

Since publishing its first macroeconomic forecast in 1976, CBO has compiled a forecasting track record that is comparable in quality with that of the Administration and that of the Blue Chip consensus. In particular, the accuracy of CBO’s two-year forecasts between 1982 and 2007 paralleled that of the forecasts published by the Blue Chip consensus and the Administration over the same period. The accuracy of CBO’s five-year projections also generally corresponded to that of other forecasters, although the Administration’s projections of types of income (such as wages and salaries, and profits) as a share of national output had slightly smaller errors. Comparing CBO’s forecasts with those of the Blue Chip consensus suggests that when the agency’s predictions of the economy’s performance missed by the largest margin, those errors probably reflected problems shared by other forecasters in predicting turning points in the business cycle.

CBO’s forecasting record provides a measure of the uncertainty underlying forecasts under normal circumstances. However, the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts exceeds the historical average.

Today CBO released a letter that contains an estimate of the change in federal costs, adjusted for the cost of market risk, that might result from enactment of the President’s proposal to prohibit new federal guarantees of student loans and to replace those guarantees with direct loans made by the Department of Education. The Federal Family Education Loan Program provides federal guarantees for loans made to students by private lenders and is the predominant source of loans for higher education; CBO projects that, under current law, guaranteed loans will account for 70 percent of all new direct and guaranteed student loans made over the next 10 years. Under the President’s proposal, the Department of Education, through the William D. Ford Direct Loan Program, would provide federal support for student loans only by lending money directly to students.

In its cost estimate last week for the Student Aid and Fiscal Responsibility Act of 2009, as approved by the House Committee on Education and Labor, which would incorporate the President’s proposal, CBO estimated that replacing new guarantees of student loans with direct lending would yield gross savings in federal direct (or mandatory) spending of about $87 billion over the 2010–2019 period. (Mandatory spending is governed by existing provisions of law and does not require future appropriations.) About $7 billion of those savings would represent a reduction in the administrative costs of the guaranteed loan program, which are recorded in the budget as mandatory spending. In contrast, most of the administrative costs for the direct loan program are funded in appropriation bills and recorded as discretionary spending. Thus, of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs, for an estimated net reduction in federal costs from the President’s proposal of about $80 billion over the 2010–2019 period.

Those estimates follow the standard loan-valuation procedure called for in the Federal Credit Reform Act of 1990 (FCRA). The law specifies that the cost of federal loans and loan guarantees be estimated as the net present value of the federal government’s cash flows, using the Treasury’s borrowing rates to discount those flows; that calculation does not include administrative costs, which are recorded in the budget year by year on a cash basis (that is, undiscounted). The FCRA methodology, however, does not include the cost to the government stemming from the risk that defaults will exceed the estimated rate, especially at times of market stress. CBO found that, after accounting for the cost of such risk, the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period—about $33 billion less than CBO’s estimate under the standard credit reform treatment.

Today CBO released a letter responding to a request from the Ranking Members of four House committees for additional information about the effects of health insurance coverage specifications reflected in the America’s Affordable Health Choices Act, which was released by the House Committee on Ways and Means on July 14, 2009. (For regular readers of our analysis, it’s been a busy weekend.)

CBO and the staff of the Joint Committee on Taxation (JCT) released a preliminary analysis of the provisions of this legislation related to health insurance coverage on July 14 and then released a further analysis that took into account the other parts of the legislation on July 17. Among other things, the coverage specifications would establish a mandate for most legal residents to obtain health insurance, significantly expand eligibility for Medicaid, regulate the pricing and terms of private health insurance policies, set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to reduce the cost of purchasing insurance, and offer a “public plan” option similar to Medicare through those exchanges. For reasons outlined in those earlier letters, our analysis to date does not represent a formal or complete cost estimate for the draft legislation.

Congressmen Camp, Barton, Kline, and Ryan asked a number of questions regarding the proposal. In response, today’s letter discusses: the effects of the proposal on enrollment in private coverage, in the new public plan, and in Medicaid; the effects of the proposal on private-sector insurance premiums and the labor market; the longer-term cost of the proposal; and the allocation of the proposal’s net budget impact between outlays and revenues. I won’t try to summarize the discussion here because the issues are complex and not conducive to a brief blog. The letter is, like all of our products, available on CBO’s web site.

Yesterday CBO released a letter to House Majority Leader Steny Hoyer analyzing some possible approaches for giving the President broad authority to make changes in the Medicare program. Under those approaches, any changes the President decided to implement would be based on recommendations from an advisory council and subject to Congressional disapproval. Expanding the authority of the President to effect change in the Medicare program might lead to significant long-term savings in federal spending on health care but would also entail shifting some power from the Congress to the executive branch.

In the letter CBO reviewed draft legislation transmitted to the Congress by the Administration on July 17, 2009, titled the Independent Medicare Advisory Council Act of 2009. CBO estimates that enacting the proposal, as drafted, would yield savings of $2 billion over the 2010–2019 period (with all of the savings realized in fiscal years 2016 through 2019) if the proposal was added to H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced in the House of Representatives. This estimate represents the expected value of the 10-year savings from the proposal: In CBO’s judgment, the probability is high that no savings would be realized, for reasons discussed in the letter, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

The letter also identifies ways in which such proposals could be structured to garner significantly more savings—especially in the years beyond 2019. In particular, if legislation were to provide an independent advisory council with broad authority, establish ambitious but feasible savings targets, and create a clear fall-back mechanism for instituting across-the-board reductions in net Medicare outlays, CBO believes such a council would identify steps that could eventually achieve annual savings equivalent to several percent of total spending on Medicare.

In this year’s discussion of health reform, many people have put forth the goals of “bending the curve” of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg:  “CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term.”  Let me explain our methodology for doing this and the limits of that methodology, beginning with the federal budget and then concluding with national health spending.

The health reform proposals being discussed this year generally include many specific changes to tax and spending policies. Although we and the staff of the Joint Committee on Taxation base our 10-year estimates of the budgetary effects of reform proposals on detailed examination of these changes, we cannot realistically conduct longer-term analysis at that level of detail. Therefore, we group the changes in a reform proposal into several broad categories and evaluate the rate at which the budgetary impact of each of those broad categories is likely to increase over time. Some elements of reform proposals, such as subsidies for people who purchase insurance through exchanges, tend to grow roughly in line with health care costs, although the allocation of those growing costs between enrollees and the government can push the growth rate somewhat higher or lower. Other elements of some proposals, like tax increases unrelated to health care, would generally grow along with increases in taxable incomes, although we aim to take into account specific aspects of legislation that can raise or lower that rate. Still other parts of proposals, such as changes in Medicare and Medicaid payment rates or practices, can have effects that increase at a range of rates at different points in time depending on the nature and extent of the changes. For all of these parts of reform proposals, we evaluate the impact of the legislation as written and do not assess the likelihood that policies will be changed later through subsequent legislation. 

After we have developed an estimate of the growth rate of the costs or savings in each broad category, we assess how those costs or savings would evolve from the end of the 10-year budget window through the following decade. The result is a very approximate sense of whether a piece of legislation is increasing or decreasing the federal budgetary commitment to health care or the federal budget deficit during the second decade and at the end of that decade.

We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.

So, how do we evaluate whether certain health reform proposals “bend the curve” in terms of the federal budgetary commitment to health care or the federal budget deficit? And what does “bend the curve” mean? If the projected budget deficit is lower 20 years from now under a reform proposal than it would be without any policy changes, then that curve is clearly being bent downward, on average, during the next twenty years; if the projected deficit is higher, then that curve is being bent upward. Would those downward or upward trajectories continue indefinitely?  That sort of extrapolation might seem natural, but we simply cannot tell whether it is appropriate. Although we think we can provide a rough indication of the level of federal health spending or the budget deficit 20 years ahead, we are not confident that we have an analytic basis for projecting their growth rates at that point, much less for evaluating whether those growth rates will continue in future years. Therefore, we are more confident talking about whether proposals would “lower” or “raise” the curve of the federal budget deficit or budgetary commitment to health care 10 to 20 years from now than we are discussing the shape of the curve in that time period or the level or slope of the curve beyond that period.

CBO does not analyze national health expenditures (NHE) as closely as we analyze the federal budget (although we are working to enhance our capabilities in this area). Accordingly, we cannot provide precise quantitative estimates of the effect of health reform proposals on NHE even within the first 10 years. However, we will try to offer a qualitative indication of whether proposals would be more likely to raise or lower NHE during the next couple of decades.  Expanding insurance coverage would raise NHE, because insured people generally receive more medical care than do uninsured people (see CBO’s Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 71-76). Yet, the increase in NHE would be much smaller than the increase in federal spending because some of that additional spending represents a shift in costs from other payers to the government (for example, new subsidies for people who would have purchased insurance anyway). At the same time, changes in Medicare or Medicaid that reduce federal spending and do not merely shift health costs to other payers would generally reduce NHE. For specific pieces of legislation, we will try our best to provide a very approximate sense of balance between these two opposing forces.

In sum, as health reform legislation is considered by the Congress, CBO will endeavor to offer a qualitative indication of whether certain legislation would be more likely to increase or decrease the federal budgetary commitment to health care, the federal budget deficit, and national health expenditures in the decade beyond the 10-year budget window. Whether these effects would persist in more-distant decades is not clear, and that uncertainty is an inherent feature of policy changes that could have substantial effects on such a large and growing share of the U.S. economy.

In the past few days, I’ve received many calls and e-mail messages from people around the country commenting on my participation in a meeting this past Monday at the White House.  Most of these people expressed their concern about CBO’s ability to carry out its responsibilities with its traditional independence and nonpartisanship.  I appreciate the interest in CBO’s work, so let me try to allay those fears.

The President asked me, and other experts in the room, for our insights into possible ways to reduce the nation’s health care spending.  The very capable staff at CBO has thought a lot about this subject, and I shared those thoughts with the President.  Although the audience was unique, my comments were no different from what we have said publicly on numerous other occasions.  The CBO staff and I have offered our thoughts on this subject to the Congress and the public in published reports and letters, and we have discussed them in many meetings with Members of Congress and their staffs of both political parties.  Across the range of topics we study, we deliberately spend a lot of time explaining our thinking to policymakers, because we believe that such openness is a responsibility of our agency and can help policymakers to reach better-informed policy decisions.  But we never adjust our analysis or conclusions to please our audience (as the reaction to various CBO reports amply demonstrates).

CBO will continue to do what it has always done—provide independent, nonpartisan analysis for the Congress, communicate that information as clearly as possible, and provide as much transparency as possible about our methodology and assumptions.  A visit to the White House won’t change that a bit!

This morning President Obama said that he had met with the Congressional Budget Office regarding cost savings in health reform legislation.  A number of people have asked me what happened, so here’s the story:

I was invited to the White House to meet with the President, his key budget and health advisers, and some outside experts.  The President asked me and the outside experts for our views about achieving cost savings in health reform.  I presented CBO’s assessment of the challenges of reducing federal health outlays and improving the long-term budget outlook while simultaneously expanding health insurance coverage–just as we had explained these challenges in a letter to Senator Conrad and Senator Gregg last month.  I also described CBO’s view of the effects of the health legislation we have seen so far, as I did last Thursday in a hearing at the Senate Budget Committee and a mark-up at the House Ways and Means Committee.  In addition, I discussed various policy options that could produce budgetary savings in the long run, drawing on CBO’s Budget Options for Health Care released in December, our letter to Senators Conrad and Gregg last month, and my comments last Thursday.  Other participants in the meeting expressed their own views on these various topics.

People have asked whether it was exciting to meet the President and be in the Oval Office:  Yes, and my kids will be jealous when they get back from summer camp and hear about it.  Of course, the setting of the conversation and the nature of the participants do not affect CBO’s analysis of health reform legislation.  We will continue to work with Members of Congress and their staffs, on both sides of the aisle, to provide cost estimates and other information as health reform legislation is considered.

Yesterday CBO released a preliminary analysis, conducted with the staff of the Joint Committee on Taxation (JCT), of H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced by several House committees on July 14. Earlier this week, CBO released a preliminary report on the health insurance coverage provisions of the bill; this latest report added analysis of the other provisions.

According to CBO’s and JCT’s assessment, enacting H.R. 3200 would result in a net increase in the federal budget deficit of $239 billion over the 2010-2019 period. That estimate reflects a projected 10-year cost of the bill’s insurance coverage provisions of $1,042 billion, partly offset by net spending changes that CBO estimates would save $219 billion over the same period, and by revenue provisions that JCT estimates would increase federal revenues by about $583 billion over those 10 years.

By the end of the 10-year period, in 2019, the coverage provisions would add $202 billion to the federal deficit, CBO and JCT estimate. That increase would be partially offset by net cost savings of $50 billion and additional revenues of $86 billion, resulting in a net increase in the deficit of an estimated $65 billion.

The figures released yesterday do not represent a complete cost estimate for the legislation. In particular, the estimated impact of the provisions related to health insurance coverage is based on specifications provided by the committee staff, rather than on a detailed analysis of the legislative language. (The estimates for other spending provisions reflect the specific legislative language. JCT has separately published its estimates of the effects of revenue provisions contained in H.R. 3200.) In addition, the figures do not include certain costs that the government would incur to administer the proposed changes and the impact of the bill’s provisions on other federal programs, and they do not reflect any modifications or amendments made after the bill was introduced. Nevertheless, this analysis reflects the major net budgetary effects of H.R. 3200.

CBO released a study today that examines alternatives to current Navy and Coast Guard long-term procurement strategies for their small surface ships known as small combatants. As articulated in their respective long-term shipbuilding plans, the Navy and the Coast Guard intend to purchase a total of 83 small combatants. CBO estimates these purchases would cost more than $47 billion over the next 20 years.

The Navy is building two versions of its new combat ship designed for operations near coastlines (the littoral zone). Also, the Coast Guard is building replacements for its existing classes of high-endurance cutters and medium-endurance cutters. As the designation “small combatant” implies, the Navy’s two versions of littoral combat ships (LCSs) and the Coast Guard’s national security cutters (NSCs) and offshore patrol cutters (OPCs) are designed to be significantly shorter in length, lighter in weight, and shallower in draft than most Navy surface warships (carriers, amphibious ships, cruisers, and destroyers).

Although all four types of ship are about the same size, they are designed to perform different missions. In general, The Navy’s LCSs are designed to have less range than Coast Guard cutters but to operate at much greater speeds and close to shore during wartime as part of a naval battle network. The Coast Guard ships are meant to operate independently at sea for long periods of time and at some distance from the shore and not to engage in major combat operations.

In the early stages of implementing the ship programs, however, the Navy and the Coast Guard have encountered various challenges—including cost overruns and construction problems. As a result of those delays and cost overruns, some members of the Congress and independent analysts have questioned whether the Navy and the Coast Guard need to buy four different types of small combatant and whether—in spite of the services’ well-documented reservations about using similar hull designs—the same type of hull could be employed for certain missions.

To explore that possibility, CBO examined three alternatives to the Navy’s and the Coast Guard’s current plans for these four ships.

• Option 1 explores the feasibility of having the Coast Guard buy a variant of the Navy’s LCS—to use as its offshore patrol cutter.
• Option 2 examines the effects of reducing the number of LCSs the Navy would buy and substituting instead a naval version of the Coast Guard’s national security cutter.
• Option 3 examines the advantages and disadvantages of having the Coast Guard buy more national security cutters rather than incur the costs of designing and building a new ship to perform the missions of an offshore patrol cutter.

According to CBO’s estimates, all three alternatives and the services’ plans would have similar costs, regardless of whether they are calculated in terms of acquisition costs or total life-cycle costs. CBO’s analysis also indicates that the three alternative plans would not necessarily be more cost-effective or provide more capability than the services’ existing plans. Specifically, even if the options addressed individual problems that the Navy and Coast Guard might confront with their small combatants, the options would also create new challenges.

Eric J. Labs of CBO’s National Security Division wrote this report. Eric has been at CBO for 14 years and holds a Ph.D. from MIT. With three children, two dogs, and two cats, Eric’s hobby is sleeping.

Today I had the opportunity to testify before the Senate Budget Committee about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080 (Percentage of GDP)

Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.