CBO's 2011 - 2021 US Budget Deficit Projections

From the CBO summary, "The Budget and Economic Outlook: Fiscal Years 2011 to 2021":

sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation’s output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

Read the complete CBO summary here.

Read the complete 172 page CBO report here.

CBO's Legislative Cost Scoring Process Is Antiquated, Confusing And Misleading

CBO's process is antiquated, confusing and does not provide useful information to balance the budget. Imagine a household that only has a $1000 available, goes to a casino, and loses all the money playing the slot machines. The family then comes home to an empty pantry/refrigerator/freezer, goes to the grocery store, and uses its credit card to buy food. Under CBO analysis, food buying increases the household's deficit, but not the gambling. Any sensible person knows the problem was the gambling and not the food purchases.

CBO deficit scoring of new legislation including the new healthcare law is very similar. Laws, like the new Patient Protection and Affordable Care Act, aka Obamacare, are substantial increases in the government's spending, about a trillion dollars of new costs.

CBO offsets the legislation's increased cost with revenues generated from a payroll tax, general tax increases, government medical program cost savings, such as in Medicare, penalties on employers for not providing healthcare or providing the wrong kind of healthcare, penalties on individuals for not obtaining healthcare, etc.

Congress can pass all of the revenue and cost reducing items in the new health law and others by themselves, without the trillion dollar cost-increasing provisions of the new healthcare law.

Imagine that Congress authorized and spends $X billion dollars to build an automobile bridge across the Grand Canyon. Imagine that to pay for it, Congress puts a nation national sales tax on pencils and CBO projects that the expected pencil tax revenues will equal the expected bridge building costs. Instead of being CBO deficit neutral, as CBO would state, the US really wasted an opportunity to use the new pencil tax revenue to reduce the deficit and the bridge is deficit increasing. Just like the gambling and not the food increased the family's debt in the previous example.

There are many ways for Congress to generate revenue and reduce costs. New government entitlement programs and program mandates are not required. CBO's scoring process forces Congress to link new programs with unrelated cost savings and revenue increases. CBO's scoring process allows Congress to waste deficit reduction on increased spending on new programs.

If Congress had just passed the revenue and cost reduction portions of the new healthcare law, instead of passing revenue neutral or slightly deficit reducing legislation, CBO would have probably projected about a trillion dollars in deficit reduction over the next ten years.

In effect, the passage of the new healthcare law that costs the government close to a trillion dollars is a lost opportunity to use the entire amount of those available cost reduction and revenue increases towards reducing the deficit.

CBO's cost scoring analysis misleads Congress, the media and the public because it unnecessarily links revenue production sources with costs increases. The process hides the true cost and negative budgetary impact of new government programs.

I also posted the above as a comment to The Wall Street Journal opinion piece, "The CBO's Fuzzy ObamaCare Math: Of course raising taxes and slashing Medicare will make the deficit look smaller" by Betsy McCaughey.

Why CBO Projects A Substantially Higher Cost For Healthcare Repeal Than Original Deficit Reductions

Donald Marron posted on his blog an explanation as to why repeal of healthcare cost $230 billion when CBO's original projections said the law reduced the deficit by $143 billion.

Donald Marron, a former CBO acting director and a former member of the President's Council of Economic Advisers, knows more than most people and most bloggers about the inner workings of CBO cost projections.

He wrote in his blog post, "Why Does It Cost $230 Billion to Repeal Health Reform?":

The main reason is that the 10-year budget window moved. The health debate started in 2009, so CBO used a 10-year window that ran from 2010 to 2019. It’s now 2011, so the repeal law will be judged against a 10-year window that runs from 2012 to 2021.***Bottom line: CBO estimated that the original legislation would reduce deficits by $143 billion over 2010-2019. CBO now estimates that repeal would increase deficits by $145 billion over the same period; the slight difference reflects the education provisions in the original legislation, the 2010 and 2011 costs that can’t be avoided, and the December 2010 changes to the law. The jump from $145 billion to $230 billion then reflects the addition of two years to the budget window.

Read Don Marron's complete blog post here.

Repeal Of The New Heathcare Law Will Not Increase The Deficit, Just As Its Passage Did Not Reduce The Deficit, Despite CBO's Opinion To The Contrary

Despite CBO's projections to the contrary, repeal of Obamacare will not increase the deficit, just as the original enactment of the new healthcare legislation did not reduce the deficit.

CBO projected expected revenues and costs of the new healthcare legislation under the assumption of a static economy, and it will use the same methodology to project the revenues and expenses of a repeal of Obamacare.

CBO does not model tax revenues. It uses the projections of the Joint Committee on Taxation (JCT). JCT uses a static model of the economy when modeling the effects of tax rates on tax revenue. JCT assumes individuals and corporations minimize taxes and modify behavior, but tax law changes do not change the projected growth rates of the US economy.

From page 19 of "Inside the JCT Revenue Estimating Process" JCT states:

"Macroeconomic" Revenue Estimates

• standard JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not in turn ‘move the needle' of the entire US economy
• This is termed the "Fixed GNP Constraint"
• Generally assumes that total labor supply and investment are fixed
• For example, we assume that a surtax on labor income will not cause taxpayers to retire early, or simply to work less hard

Unrealistically, CBO, in relying on JCT tax revenue estimates, uses estimates that the new taxes and new mandated employer costs in the new healthcare law do not change GDP growth, consumption, workforce participation rates, tax revenue estimates, or capital investment amounts. All of which will probably be lower under the new healthcare law due to increased taxes, penalties, and increased employer costs of employees.

When macro-economic economists model tax or price changes, they use more realistic models like dynamic stochastic general equilibrium (DSGE) models and not static models. DSGE models attempt to accurately reflect behavioral changes caused by tax, cost and price changes. DSGE models of the new healthcare reform law would show that the new law slows economic growth, slows employment growth, and that tax revenue will be lower than expected.

In other words, a more accurate macro-economic model of the US economy would show that repeal of the new healthcare law would increase GDP growth, increase capital investment, increase workforce participation, increase consumption and increase tax revenues. Repeal would not increase the deficit and may actually reduce the deficit more than the new healthcare law due to stronger economic growth after repeal.

See my two earlier posts about the shortcomings of CBO deficit estimates when there are tax changes:

"ObamaCare Highlights Weaknesses Of CBO Cost Estimating Process"

"A Bias Towards Tax Increases In NY Times, CBO, JTC Budget Calculators"

Cost Estimate for HR 4853, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

CBO Cost Estimate for HR 4853, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is available here. From 2011-2015, the deficit will increase by $893 billion and from 2011-2020 the deficit will increase by $858 billion.

Cost Estimate for HR 4853

Also see my previous post, "CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth."

$25 Billion Tarp Costs Way Below Initial Estimates

From the "Report on the Troubled Asset Relief Program—November 2010" prepared by the CBO:

CBO estimates that the cost to the federal government of the TARP's transactions (also referred to as the subsidy cost), including grants that have not been made yet for mortgage programs, will amount to $25 billion (see Table 1). That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding foreclosures. Other transactions with financial institutions will, taken together, yield a net gain to the federal government, CBO estimates.

CBO's current estimate of the cost of the TARP's transactions is substantially less than the $66 billion estimate incorporated in the agency's latest baseline budget projections (issued in August 2010) and the $109 billion estimate shown in the agency's previous report on the TARP (issued in March 2010). The reduction in estimated cost over the course of this year stems from several developments: additional repurchases of preferred stock by recipients of TARP funds; a lower estimated cost for assistance to AIG and to the automotive industry; lower expected participation in mortgage programs; and the elimination of the opportunity to use TARP funds for new purposes (because of the passage of time and the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203). CBO's current estimate is also well below OMB's latest estimate, $113 billion, because the market value of assets held by the government has increased and several recipients of TARP funds — most notably General Motors and AIG — have significantly restructured the Treasury’s investment since May 31, 2010, the date used as the basis for OMB's analysis.

The complete report is available from CBO here or on Scribd here or embedded below.

CBO Report on the Troubled Asset Relief Program November 2010

ObamaCare Will Decrease Workforce Labor And Increase Healthcare Spending On Previously Uninsured Says CBO

From CBO Director Doug Elmendorf's October 22, 2010, presentation, "Economic Effects of the March Health Legislation" at the Schaeffer Center of the University of Southern California:

• The legislation will reduce the amount of labor used in the economy by roughly half a percent, primarily by reducing the amount of labor that workers choose to supply.


• The legislation will increase spending on health care for people who would have been uninsured in the absence of the legislation.


• The legislation will decrease spending on health care for people who would be insured with or without the legislation. The magnitude of that decrease, and the extent to which it will be achieved through greater efficiencies in the delivery of care or through reductions in access to care or quality of care, are unclear.

See the complete slide presentation here, on Scribd or embedded below.

CBO Economic Effects of New Healthcare

Was CBO Pressured During The Health Care Debate To Hide Important Information From Congress?

[UPDATE: On September 14, 2010, Keith Hennessey retracted his post that CBO was pressured. See Hennessey's retraction "Retracting one of my CBO health care posts".]

Keith Hennessey thinks that the Congressional Budget Office was pressured to hide important information during the health care bill debate. CBO's recent data (PDF page 24, document page 6) shows that the new health care law will increase federal entitlement spending by $401 billion over the next decade, and will increase taxes by $525 billion over that same time period. Hennessey writes in his blog:

Based on CBO’s normal scoring practices and the intense scrutiny of both CBO and this legislation, this cannot possibly have been an oversight. I would bet heavily that CBO was pressured not to show this information.

If I’m right, CBO should have resisted this pressure and provided a picture that was both more complete and consistent with how they usually score legislation.

Deficits matter. So do spending and revenues. If they remain in place, these laws will make government spending $401 B larger this decade. By reducing the budget deficit through tax increases, these bills will shift some of the fiscal burden from the future to the present. By increasing government spending, these bills will increase the cost of government on the private sector that pays for it. That latter point is an important piece of information that Congress should have had when they voted.

I am generally a fan of CBO, and please don’t group me with the bashers who say they did everything wrong. This, however, was a failure.

Keith Hennessey served as Deputy Assistant to the President for Economic Policy and Deputy Director of the National Economic Council at the White House from August 2002 through the end of 2007. In 2008 and the first three weeks of 2009, he was Assistant to the President for Economic Policy and Director of the National Economic Council, a position now held by Dr. Larry Summers for President Obama.

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