Yesterday, the Congressional Budget Office (CBO) released its annual Budget and Economic Outlook for fiscal years 2012 to 2022. Its baseline budget for FY 2012 is for a deficit of $1.08 trillion, with smaller deficits thereafter (e.g., deficits of $585 billion in FY 2013, $345 billion in FY 2014, $269 billion in FY 2015…). Much of this assumes that current tax policies expire on December 31 of this year. Total budget deficits under this baseline are $3.07 trillion over the next 10 years.

CBO also provides an alternative fiscal scenario where current tax policies are extended, the alternative minimum tax is indexed to inflation, Medicare payments are held constant at current levels and sequestered cuts as part of the Budget Control Act of 2011 are not put into place. Under this scenario, total budget deficits are estimated to add up to $10.98 trillion between FY 2013 and FY 2022.

In making these assumptions, it is important to keep the underlying economic projections in mind. CBO has forecast real GDP growth of 2.0 percent in 2012 and 1.1 percent in 2013. It then assumes an average growth rate of 4.1 percent for the years of 2014 to 2017. Inflation is expected to be modest, at 1.2 percent in 2012 and below 2 percent in all other years. The unemployment rate is assumed to be mostly unchanged from current levels and is estimated to be 8.9 percent in the fourth quarter of 2012. We do not reach “full employment” for several years, with the forecasted unemployment rate being 5.6 percent by 2017.

Overall, CBO’s baseline analysis paints a picture where economic growth will be modest at best and where the nation’s fiscal budgetary challenges will only become more serious with time. Hard choices will need to be made to address these fiscal imbalances, with budget deficits in each of the next 10 years under both the baseline and alternate scenarios.

It is also clear that these budgetary discussions will need to focus on both discretionary and mandatory spending in the years ahead. Limiting the conversation to discretionary cuts only will not achieve the savings needed to get us ahead. For instance, defense spending is expected to fall from 4.7 percent of the GDP in FY 2011 to 3.0 percent by FY 2022. Likewise, nondefense discretionary will go from 4.3 percent to 3.3 percent over the same time period.

Meanwhile, mandatory spending – while essentially remaining around 13.5 percent of GDP over the next 10 years – will become an ever-increasing share of domestic spending. Entitlement spending (not including interest on the debt) will grow from $2 trillion today to $3.5 trillion in FY 2022, and interest payments more than double from $227 billion to $624 billion over the same time period.

Chad Moutray is chief economist, National Association of Manufacturers

During a hearing before the House Budget Committee on Thursday, February 10, CBO Director Douglas Elmendorf, made a startlingly honest admission – one that may have just changed the entire debate over the Patient Protection and Affordable Care Act (PPACA).  In an exchange with Chairman Paul Ryan, Mr. Elmendorf divulged what most objective health policy analysts have been saying all along: PPACA will cost jobs – an estimated 800,000 of them in the next ten years.

Now that the bill is law, and as then Speaker Nancy Pelosi put it, “We can find out what’s in it,” what have we found.

• It will not decrease insurance costs as claimed.  In fact, costs are rising.
• It will not be budget neutral as claimed.  Double counting phantom savings doesn’t add up.
• It will not allow us to keep our plans if we like them as claimed.
• It increases taxes on all Americans.
• It will end up costing 800,000 Americans their jobs.

At the time, we were told we could not afford to miss the opportunity to pass healthcare reform and that our country and the economy could not afford the status quo. The NAM supports reforming healthcare, but this law misses the mark and places our healthcare system on an unsound foundation.  That’s why the Manufacturers and many other associations supported repealing this law – America can’t afford not to.

Joe Trauger is the NAM vice president for human resources policy

The abstract from a new American Enterprise Institute paper by Charles Calomiris, “The Political Lessons of Depression-Era Banking Reform“:

Ironically, the primary motivations for the main bank regulatory reforms in the 1930s (Regulation Q, the separation of investment banking from commercial banking, and the creation of federal deposit insurance) were to preserve and enhance two of the most disastrous policies that contributed to the severity and depth of the Great Depression-–unit banking and the real bills doctrine. Other regulatory changes, affecting the allocation of power between the Fed and the Treasury, were intended to reduce the independence of the Fed, while giving the opposite impression.

The ill-conceived banking legislation of the 1930s took very little time to pass, but a great deal of time to disappear. The overarching lesson is that the aftermath of crises are moments of high risk in public policy. The Great Depression provoked banking reform legislation that was quick, comprehensive, and unusually responsive to popular opinion. Each of these three aspects increases the risk that regulation will have adverse consequences.

Click here to read the full paper as an Adobe Acrobat PDF.

Calomiris’ colleague at AEI, Peter Wallison, examines more recent history in financial regulation in today’s Wall Street Journal, “Fannie and Freddie Amnesia“:

Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.

The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government’s cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.

Indeed, the Treasury removed the $400 billion cap that limited federal investment in the GSEs. So, potentially more to come.

The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.

As we’ve noted before, Wallison, a former White House and Treasury official, predicted the collapse of Fannie and Freddie years before the actual events. The foresight makes him well worth attending to on other regulatory issues.

Mickey Kaus, a reform-minded Democrat and commentator from California, congratulates Congressional Democrats for passing the health care legislation. From “Not So Sudden Victory“:

Whatever CBO says or doesn’t say, I don’t for one minute believe that the bill’s new, highly subsidized system of insurance “exchanges”– allowing millions of less affluent citizens to gain access to ever-more-complicated medical technology–will “bend the curve” of health care costs downwards or help the nation’s deficit situation. I’d be surprised if even a third of the Democrats who voted for the bill believe it. I suspect most of them support the bill for the same reasons most Democrats do–as a crucial step in preventing trivial and superficial economic contrasts from translating into ultimate and profound life and death decisions.

They–we–know there will almost certainly be a big additional bill to pay down the road. It will be even bigger if, as we can hope and expect, government attempts to restrict potentially useful treatments in the name of economy prove unsustainably unpopular. But it will be easier to pay this bill once everyone is in the same system–when old people can’t argue that their care is being cut in order to insure the young, etc.. We will all be figuring out how to pay for ourselves.

Kaus is challenging Sen. Barbara Boxer (D-CA) in the Democratic primary, running for the sake of argument, as it were. We’ve always appreciated his good humor, abhorrence of cant and reform-mindedness.

In a letter to Senator Orrin Hatch (R-UT), the Congressional Budget Office reports that tort reform could save about $11 billion in national health care costs in 2009, or about 0.5 percent of national health care spending.

This letter responds to your request for an updated analysis of the effects of proposals to limit costs related to medical malpractice (“tort reform”). Tort reform could affect costs for health care both directly and indirectly: directly, by lowering premiums for medical liability insurance; and indirectly, by reducing the use of diagnostic tests and other health care services when providers recommend those services principally to reduce their potential exposure to lawsuits. Because of mixed evidence about whether tort reform affects the utilization of health care services, past analyses by the Congressional Budget Office (CBO) have focused on the impact of tort reform on premiums for malpractice insurance. However, more recent research has provided additional evidence to suggest that lowering the cost of medical malpractice tends to reduce the use of health care services. CBO has updated its estimate of the budgetary effects of proposals for tort reform to reflect that new information.

Sen. Hatch issued a statement, “Tort Reform Key to Affordable Healthcare“: ““I think this response from the CBO confirms that there is a growing problem regarding the costs of health care lawsuits. In years past, the CBO mainly focused on the cost doctors’ malpractice insurance premiums and did not adequately address the tendency of doctors to use ‘defensive medicine,’ which does little to promote patient health and serves only to help doctors avoid being sued.”

• Deseret News, “CBO says Hatch is right, tort reform could save $11 billion“
• Washington Post, “CBO: Medical Malpractice Reforms Could Save Up to $54 Billion“
• American Association of Neurological Surgeons and Congress of Neurological Surgeons, “Congressional Budget Office Confirms Medical Liability Reform Will Save Billions“
• Fox News, “Tort Reform Reduces Federal Deficit, Congressional Analysts Say“

CNN reports: “The Senate Finance Committee will vote on its long-awaited health care bill next Tuesday, Majority Leader Harry Reid announced on the Senate floor Thursday.”

Charles Krauthammer on Fox News All Stars last night did a good job in describing some of the presentational ploys used in the bill’s depiction by Congress. Via National Review Online, The Corner:

Two items here. One of them is the $120 billion assumed of income from what are called “fees” of the big players in health care — the health insurers, the drug companies, the guys who do diagnostics and who produce the medical equipment.

 

The fee is a tax, and the tax, $120 billion, is going to end up out of your pocket and mine, because every penny of it will be in higher insurance, higher costs for drugs, for stents — any kind of medical devices — and for diagnostics. Everybody will pay.

 

But it’s hidden. It is a cowardly way to do a tax. You do it on the industry and it is passed on.

 

Secondly, there are individual mandates. People are going to be shelling out a huge amount every year on insurance, and those who don’t are going to have to pay a fine, also a tax, but under another name.

 

There are huge costs in here, which are all hidden, and that’s why it looks OK.

As expected, today the Office of Management and Budget announced that its 10-year estimate of the federal deficit had risen from a total of $7.2 trillion to $9 trillion. From OMB Director Peter Orszag, writing on the Mid-Session Review:

[With] regard to the out-year deficits, the changes are primarily driven by changes in our economic assumptions. In line with the current consensus among professional forecasters, the Administration’s economic projections show that we inherited a deeper recession than projected in February. These revisions are based on new data on the severity of the recession that weren’t available last winter.
As a result of a deeper-than-expected recession, certain spending programs (such as unemployment insurance and food stamps) are projected to automatically increase and revenues are projected to automatically decline, compared to our previous projection.  Although these effects help to ameliorate the economic downturn by stimulating demand, they also lead to higher medium-term deficits both directly and indirectly (through higher interest costs on a higher level of public debt). Over the next 10 years, the net impact is to add $2 trillion to the projected deficit, compared to our last projection made based on February’s economic assumptions. That brings the projected 10-year deficit for 2010-2019 to $9.05 trillion – in line with CBO’s June projection.

• Washington Post, “White House Sharply Increases Projections of Future Deficits“
• Reuters, “SCENARIOS: Impact of U.S. budget reports“

Yet the CBO today reduced its 10-year deficit forecast to $7 trillion. As Fox News summarizes:

In a reflection of how colossal Uncle Sam’s credit card balance has become, two top budget offices on Tuesday gave long-term deficit projections that were $2 trillion apart.

The discrepancy underscored how difficult it is to peg the path of the U.S. economy. But with a $2 trillion margin-of-error, it also showed how unwieldy the figures have become.

The Congressional Budget Office predicted deficits over the next decade will add up to $7.1 trillion. The White House Office of Management and Budget earlier increased its 10-year-budget projection to more than $9 trillion, an increase of about $2 trillion.

Here’s the CBO’s latest Budget and Economic Outlook. The opening paragraph is a startler:

The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2009 will total $1.6 trillion, which, at 11.2 percent of gross domestic product (GDP), will be the highest since World War II.

Somebody better hurry up and determine which “moral equivalent of war” we happen to be fighting.

Washington Post, “Lawmakers Warned About Health Costs“:

Congress’s chief budget analyst delivered a devastating assessment yesterday of the health-care proposals drafted by congressional Democrats, fueling an insurrection among fiscal conservatives in the House and pushing negotiators in the Senate to redouble efforts to draw up a new plan that more effectively restrains federal spending.

Washington Times, “CBO: Health care reform to increase federal cost“:

Congress’ budget watchdog warned Thursday that Democrats’ health care bills would not lower skyrocketing costs and would drive up government spending, undermining one of President Obama’s chief arguments for the overhaul.

Washington Examiner, “Obamacare will break the bank.”

Meanwhile, in Bakersfield…

The point being that not everything in America revolves around a CBO analysis, even one that destroys the case for a sweeping health care bill. The rest of the country has other things on its mind, including the effect of the skills gap on crop dusting.

A useful exercise for Inside-the-Beltway types, yours truly included, is to scroll through the front pages of newspapers posted every day at the Newseum’s website. The world does not revolve around Washington. The Quilter’s Hall of Fame kicked off its threefold anniversary Thursday in Marion, Ind. Darn right that’s front-page news.

That said, CBO Director Elemendorf’s comments to the Senate Budget Committee are still well worth reading. The word “unsustainable” is used.

White House advisor David Axelrod and Sen. Charles Grassley (R-IA) appeared on ABC’s This Week this morning to discuss health care and the carbon cap-control-command-and-trade legislation.  Sen. Grassley, ranking Republican on the Senate Finance Committee, was very good on the Waxman-Markey bill. Host George Stephanopolous cited a CBO analysis and supporters’ talking point to argue that the bill did not represent that big of an economic hit. Grassley:

I’ll tell you, earlier this year, we had economists telling us that when you filter all of these increases in energy through every step of the economy, manufacturing a product or whatever services might come, we have come out with about $3,000 for a family of four.

Now I won’t argue $175 versus $3,000 because that’s not the most important issue. You’ve got to look at what is happening to our economy if we put this very strong tax on energy. The people that have been complaining for 10 years about the outsourcing of manufacturing jobs to China are the very same ones pushing cap and trade.

And you’re going to find signs on manufacturing doors, if this bill passes, that says moved — gone to China. So what we have to do is make sure China, the number one emitter of CO2, not the United States, China is. And India right along with them.

We’ve got to have an international agreement so that we have a level playing field for American manufacturing so we don’t outsource any more jobs. This should be done in a way that affects China the same way it affects the United States.

Because if the United States moves ahead by itself, we’re not only going to lose those jobs, but the point is, after 30 or 40 years, we’re going to reduce CO2 by less than 1 percent.

Speaking of the CBO, its economic projects stop at 2020, just as the tougher anti-energy provisions really kick in. Seems like an inadequate effort.

Heritage  had other analyses challenging the CBO’s study:

24 June 2009
CBO Grossly Underestimates Cost of Cap and Trade
By David Kreutzer, Ph.D., Karen Campbell, Ph.D., and Nicolas D. Loris
WebMemo #2503
The CBO analysis of Waxman-Markey fails to take into account all the adverse effects that will ripple through the U.S. economy if cap and trade becomes law.

24 June 2009
The High Cost of Cap and Trade: Why the EPA and CBO Are Wrong