Congressional Budget Office
Director's Blog

CBO released an estimate of the budgetary impacts of H.R. 1, the American Recovery and Reinvestment Act of 2009, as amended and passed by the House of Representatives on January 28. Over the 2009-2019 period, CBO estimates that enacting H.R. 1 would increase budget deficits by about $820 billion.

CBO’s estimate for H.R. 1 as passed by the House of Representatives is about $3.7 billion greater over the 2009-2019 period than the corresponding amount shown in CBO’s January 26th cost estimate for the version of H.R. 1 that was introduced on that day. That difference is attributable to four provisions adopted by the House of Representatives. An amendment to increase funding for the Department of Transportation’s transit programs by $3 billion accounts for most of the added costs over the 2009-2019 period.

There are also some changes in the allocation of budgetary impact between revenue and outlays. CBO, in consultation with JCT, has concluded that the subsidy for health insurance assistance for the unemployed should be treated as an increase in outlays rather than a decrease in revenues. Although this treatment is different from that in the table provided in our estimate for H.R. 1 as introduced on January 26, the overall effect on the budget remains the same for each year. JCT has also adjusted its estimates of the mix of revenue losses and outlay increases associated with certain refundable tax credits; that change also has no effect on the budget totals for each year.

After testifying yesterday at the House Budget Committee on the state of the economy and fiscal stimulus, this morning I testified before the Senate Budget Committee on another key aspect of the current economic downturn–the ongoing crisis in the housing and financial markets.

Policymakers have responded to the turmoil with a set of unprecedented actions. Thus far, a systemic collapse of the financial system has not occurred, and conditions have improved noticeably in some financial markets. Nevertheless, according to some analysts, U.S. banks and thrift institutions could be facing more than $450 billion in additional estimated losses on their assets—on top of the approximately $500 billion that has already been recognized. The scale of those losses suggests that many financial institutions and markets will remain deeply troubled for some time, which will keep borrowing exceptionally costly for many borrowers and thereby dampen spending by households and businesses.

Challenging conditions seem likely to persist for some time in the housing and mortgage markets as well. Housing sales remain weak, and construction activity continues to decline. With the housing market’s large glut of vacant properties, the prices of homes are likely to fall considerably further, pushing the value of more borrowers’ homes below the value of their outstanding mortgages. As more of those “underwater” borrowers experience losses of income during the current recession, rates of delinquency and foreclosure on residential mortgage loans are likely to rise further.

In short, turmoil in the financial markets is likely to continue for some time, even with vigorous policy actions (and especially without them). A crucial and challenging question for policymakers is, What further actions can be taken to normalize the financial and housing markets so as to spur economic activity?

There are many options, none of them are perfect, and an effective policy probably requires a multifaceted approach that uses a range of tools to address the different aspects of financial distress. The costs to federal taxpayers of actions to reduce mortgage foreclosures and improve financial conditions are highly uncertain and may be large, but the economic consequences of doing nothing may be even greater.

My written testimony (link here) provides information on interventions implemented by the government to date and alternative strategies going forward.

To deal with the faltering financial system, analysts have proposed several, possibly complementary, strategies:

• One is to inject additional equity into institutions, perhaps by continuing the Capital Purchase Program under the TARP. This approach was widely supported by economists, often on the grounds that it would give the banking system the capacity to absorb losses and continue making loans without requiring the government to decide how much to pay for particular troubled assets.  However, the extent of losses and the fog of uncertainty about which institutions have suffered the losses may mean that further broad-based equity injections are not the most cost-effective way to proceed now.
• Another strategy is to deal with the troubled assets directly. This could be accomplished by the government buying assets, guaranteeing assets, or subsidizing the separation of assets into so-called “good banks” and “bad banks.” This approach could clarify the true condition of institutions’ balance sheets by removing the difficult-to-value assets, and allow bank managers to focus their attention on new lending rather than old problems. However, this approach would require the government to set a price for the assets on guarantees.
• Yet another strategy is for the government to increase its own lending to households and businesses. This could include developing new programs or expanding existing ones such as the Fed’s commitments to buy certain mortgage-backed securities and consumer-loan-backed securities. The basic idea is to provide public credit until the financial system is sufficiently healed to provide enough private credit.

This morning I testified before the House Budget Committee  on The State of the Economy and Issues in Developing an Effective Policy Response (click here for full text of my written testimony). My testimony discussed both the basis for CBO’s forecast (released earlier this month, click here for text) and reviewed the financial and nonfinancial developments that have occurred since that forecast was finalized. So far, the news has been generally consistent with the agency’s expectations– and does not alter the bleak outlook.

I touched on three key points this morning:

1. The economy is currently weathering a recession that started more than a year ago, and absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest– in duration and depth– since the Depression of the 1930s.
2. Most economists agree that both significant fiscal stimulus and additional financial and monetary policy approaches are needed.
3. H.R. 1, the American Recovery and Reinvestment Act of 2009, would, in CBO’s judgment, provide a substantial boost to economic activity over the next several years relative to what would occur without the legislation. (For the CBO cost estimate of H.R. 1, click here)

As the possibility of another round of fiscal stimulus is debated, it is not a surprise that employment effects of stimulus have emerged as a key measuring stick. According to CBO’s estimates, with enactment of H.R. 1, the number of jobs would be between 0.8 million and 2.1 million higher at the end of this year, 1.2 million to 3.6 million higher at the end of next year, and 0.7 million to 2.1 million higher at the end of 2011 than under current law.

CBO has released a cost estimate for H.R. 1, the American Recovery and Reinvestment Act of 2009, which was introduced today in the House of Representatives. A link to the full cost estimate can be found here.

As summarized in the cost estimate, H.R. 1 would specify appropriations for a wide range of federal programs and would increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also would reduce individual and corporate income tax collections and make a variety of other changes to tax laws.

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the provisions in Division B would reduce revenues by $76 billion in fiscal year 2009, by $131 billion in fiscal year 2010, and by a net of $212 billion over the 2009-2019 period.

In combining the spending and revenue effects of H.R. 1, CBO estimates that enacting the bill would increase federal budget deficits by $169 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period.

The budgetary impact of the bill stems primarily from three types of transactions: Direct payments to individuals (such as unemployment benefits), reductions in federal taxes, and purchases of goods and services (either by the federal government directly or indirectly via grants to states and local governments). CBO estimates that impacts from the first two categories of transactions would occur fairly rapidly. In the third category, CBO estimates slower rates of spending than historical full-year spending rates in 2009 for a number of reasons:

• The bill’s enactment would likely occur nearly half way through the fiscal year.
• Previous experience suggests that agencies have difficulty rapidly expanding existing programs while maintaining current services; the funding in H.R. 1 for some programs is substantially greater than the usual annual funding for those activities.
• Spending can be delayed by necessary lags for planning, soliciting bids, entering contracts, and conducting regulatory or environmental reviews.
• Agencies face additional challenges in spending funds for new programs quickly because of the time necessary to develop procedures and criteria, issue regulations, and review plans and proposals before money can be distributed.

Frequently in the past, in all types of federal programs, a noticeable lag has occurred between sharp increases in funding and resulting increases in outlays. Based on such experiences, CBO expects that federal agencies, states, and other recipients of funding would find it difficult to properly manage and oversee a rapid expansion of existing programs so as to spend added funds quickly as they expend their normal resources. The seasonal nature of some spending also affects the speed at which activities can be conducted; for example, major school repairs are generally scheduled during the summer to avoid disrupting classes.

The following table summarizes CBO’s and JCT’s estimates of the budget effects of H.R. 1.

This is the first cost estimate that CBO has prepared for H.R. 1 in its entirety. A previous preliminary estimate that has been widely cited addressed only the budgetary impacts of an earlier version of the provisions contained in Division A, at the request of the House Committee on Appropriations. 

CBO has since made small changes to our estimates of the portion of the bill that was included in that preliminary estimate, mostly to reflect amendments to the legislation since we prepared the last estimate. Based on information provided by the committee and discussions with numerous state officials, we also made small technical changes to that earlier estimate.  

Hello.  I’m Doug Elmendorf, the new director of the Congressional Budget Office.  I am honored to be appointed to this position and excited to be joining the talented and dedicated analysts here at CBO.

I want to begin by thanking Bob Sunshine, the deputy director of CBO, who has served as acting director since Peter Orszag resigned in November.  Bob has earned the admiration and appreciation of everyone at CBO for his dedicated service over many years and his sure-handed leadership during the past two months.

Perhaps I should tell you a little about me:  I have spent my career as an economist working on public policy.  After receiving my PhD at Harvard, I taught there for several years (including a course on American economic policy) and then moved to Washington.  My first job in Washington was as an analyst at CBO (and it’s great to be back).  Then, I worked in turn at the Federal Reserve Board, the White House Council of Economic Advisers, the Treasury Department, and again at the Federal Reserve.  Most recently, I was a senior fellow at the Brookings Institution.  In the course of these jobs and in my own research, I have spent a great deal of time thinking about budget policy, Social Security, Medicare, national health reform, the financial system, macroeconomic analysis and forecasting, economic volatility, and more.

More important, probably, is to remind you about the role of CBO.  Our mission is to provide information to the Congress to help it make effective budget and economic policy.  We are committed to providing information that is:

• Objective – representing not our personal opinions but the consensus and diversity of views of experts from around the country;
• Insightful – applying the best new evidence and innovative ideas as well as the lessons of experience;
• Timely – responding as quickly as possible to the needs of the Congress; and 
• Clearly presented and explained – so that policymakers and analysts understand the basis for our findings and have the opportunity to question our assumptions.

At this time of financial and economic crisis, and with many long-standing budgetary and economic challenges also demanding attention, policymakers will be making unusually difficult and consequential decisions.  We at CBO understand the responsibility we bear in this process and are looking forward to our further opportunity to assist the Congress in its efforts to enact good public policy.

By the way, many people have asked whether I intend to continue this blog, and I am happy to let you know that I will.  I hope the blog will continue to increase people’s understanding of our work at CBO.  Please keep reading.

CBO is required by law to report semiannually on OMB’s assessment of expenditures under the Troubled Asset Relief Program (TARP).  Today, CBO released the first of these reports.  (For more on the TARP program, this blog post from October includes CBO’s analysis of the financial rescue legislation).

Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP. On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment.

The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget. Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.

Decisions made today about national defense– whether they involve weapon systems, military compensation, or numbers of personnel– can have long-lasting effects on the composition of the nation’s armed forces and the budgetary resources needed to support them. CBO has published a series of reports over the past six years about its projections of the resources that might be needed over the long term to carry out the Administration’s plans as expressed in the Future Years Defense Program (FYDP). Yesterday CBO released a paper providing projections of the amount of budgetary resources might be needed in the long term to carry out current defense plans (as they are described in the 2009 FYDP).

As in recent similar CBO reports, today’s report projects that carrying out the plans proposed in the 2009 FYDP would require sustaining higher inflation-adjusted levels of spending than those that occurred at the peak of the defense buildup in the mid-1980s. Four key factors account for the projected high level of spending:

• Plans to purchase more new military equipment over the next several years and then to sustain that rate of procurement over the longer term;
• Plans to develop and produce weapons systems with new capabilities and rising estimated costs;
• Plans to increase the size of military forces, coupled with the increasing cost of pay and benefits for military and civilian personnel; and
• Plans to meet rising operations and maintenance costs for both aging equipment and newer, more complex equipment.

In CBO’s projection of DoD’s current FYDP, defense resources average about $549 billion annually (in 2009 dollars) from 2014 to 2026, or about 6 percent more than the $515 billion in total obligational authority (TOA) provided by the Congress for 2009. (The 2009 FYDP and CBO’s projections of its long-term implications exclude potential future supplemental or emergency appropriations; CBO’s projections include additional appropriations that have already been enacted).

Possible unbudgeted costs have the potential effect of increasing the projection of long-term demand for defense funding to an annual average of about $652 billion through 2026, or 26 percent more than the funding provided for 2009. CBO’s analysis includes several possible sources of unbudgeted costs: that the costs of weapon systems now under development would exceed early estimates; that medical costs might rise more rapidly than DoD has assumed; and that DoD would continue to conduct military operations overseas as part of the war on terrorism, albeit at reduced levels relative to current operations in Iraq and Afghanistan.

Costs for operations in Iraq, Afghanistan, and for other purposes related to the war on terrorism have been rising. In 2007, appropriations for those activities totaled $170 billion in 2007 dollars, or 28 percent of total funding for the Department of Defense. In 2008, the appropriations rose to $187 billion in 2008 dollars, or 28 percent of defense funding that year. (In both years, some of the supplemental and emergency funding was for purposes unrelated to military operations overseas: in 2007, $5 billion; in 2008, $7 billion.)

Under DoD’s current plans and CBO’s projections of them, defense resources would steadily decline in relation to the size of the economy. The share of the U.S. gross domestic product (GDP) allocated to defense spending declined from an annual average of 5.6 percent in the 1980s to 3.8 percent in the 1990s. If DoD’s current plans were carried out, defense spending would drop to 3.1 percent of GDP by 2013 and to 2.5 percent of GDP by 2026, excluding unbudgeted costs.

CBO’s report includes two alternatives to its projections for DoD’s plans: an “evolutionary” scenario (in which DoD would forgo or scale back acquisition of the new, advanced capabilities that the department associates with military transformation and instead pursue evolutionary upgrades to its current capabilities) and a “transformational” scenario (in which DoD would increase its emphasis on acquiring the advanced capabilities it associates with military transformation). Under those two scenarios, CBO projects that the long-term  demand for defense resources would be reduced by 7 percent and 4 percent, respectively, relative to its projection of the implications of the 2009 FYDP.

This morning CBO released the Budget and Economic Outlook: Fiscal Years 2009-2019.  This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year.  Because economic and budgetary circumstances have changed significantly in recent months, this report was preparedand released several weeks earlier than usual to aid the new Congress in its deliberations.

The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II.  CBO anticipates that the recession—which began about a year ago—will last well into 2009. That would make it the longest recession since World War II.  Under the standard assumption CBO uses for its estimates—namely, that current laws and policies regarding federal spending and taxation remain the same—we forecast the following:

• A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent, a steep decline from a historical perspective.
• A slow recovery in 2010, with real GDP growing by only 1.5 percent.
• An unemployment rate that will exceed 9 percent early in 2010; the unemployment rate has been that high only twice in the past 50 years (in 1975, for one month, and in 1982-1983).
• A continued decline in inflation, both because energy prices have been falling and because inflation excluding energy and food prices—the core rate—tends to ease during and immediately after a recession; for 2009, CBO anticipates that inflation, as measured by the consumer price index for all urban consumers (CPI-U), will be only 0.1 percent.
• A drop in the national average price of a home, as measured by the Federal Housing Finance Agency’s purchase-only index, of an additional 14 percent between the third quarter of 2008 and the second quarter of 2010; the imbalance between the supply of and demand for housing persists, as reflected in unusually high vacancy rates and a low volume of housing starts.
• A decrease of more than 1 percent in real consumption in 2009, followed by moderate growth in 2010; the rise in unemployment, the loss of wealth, and tight consumer credit will continue to restrain consumption— although lower commodity prices will ease those effects somewhat.
• A financial system that remains strained, although some credit markets have started to improve; it is too early to determine whether the government’s actions to date have been sufficient to put the system on a path to recovery.

The major slowdown in economic activity and the policy responses to the turmoil in the housing and financial markets have significantly affected the federal budget. As a share of the economy, the deficit for this year is anticipated to be the largest recorded since World War II. Under the rules governing CBO’s budget projections—that is, an assumption that federal laws and policies regarding spending and taxation remain unchanged—the agency’s baseline reflects these key points:

• CBO projects that the deficit this year will total $1.2 trillion, or 8.3 percent of GDP. Enactment of an economic stimulus package would add to that deficit. In CBO’s baseline, the deficit for 2010 falls to 4.9 percent of GDP, still high by historical standards.
• CBO expects federal revenues to decline by $166 billion, or 6.6 percent, from the amount in 2008. The combination of the recession and sharp drops in the value of assets—most significantly in publicly traded stock—is expected to lead to sizable declines in receipts, especially from individual and corporate income taxes. 
• According to CBO’s estimates, outlays this year will include more than $180 billion to reflect the present value of the net cost of transactions under the Troubled Asset Relief Program (TARP), which was created in the fall of 2008. (Broadly speaking, that cost is the purchase price minus the present value, adjusted for market risk, of any estimated future earnings from holding purchased assets and the proceeds from the eventual sale of them.) The TARP has the authority to enter into agreements to purchase assets totaling up to $700 billion outstanding at any one time, but the net cost over time will be much less than that amount.
• The deficit for 2009 also incorporates CBO’s estimate of the cost to the federal government of the recent takeover of Fannie Mae and Freddie Mac. Because those entities were created and chartered by the government, are responsible for implementing certain government policies, and are currently under the direct control of the federal government, CBO has concluded that their operations should be reflected in the federal budget. Recognizing that cost in 2009 adds about $240 billion (in discounted present-value terms) to the deficit this year, but that is not a measure of the amount of cash we expect the government to have to put in to those entities this year; that amount is only $18 billion.  Note that the Administration may not treat Fannie Mae and Freddie Mac this way in its budget presentation.  For comparison purposes, if those two entities were treated as being separate from the federal budget, CBO’s estimate of the deficit this year would be $966 billion—stil the highest, as a percent of GDP, since shortly after World War II.
• Economic factors have also boosted spending on programs such as those providing unemployment compensation and nutrition assistance as well as those with cost-of-living adjustments. (Such adjustments for 2009 are large because most of them are based on the growth in the consumer price index over the four quarters ending in the third quarter of 2008.)