James Pethokoukis

Politics and policy from inside Washington

Surprise! Gaming CBO rules masks how healthcare reform may actually make deficit worse

Dec 23, 2009 21:23 UTC

[See update at bottom] A group of Republican senators, led by Jeff Sessions and Judd Gregg, are accusing the Democrats of double-counting Medicare tax hikes and spending cuts as both extending the solvency of the program and paying for expanded healthcare coverage. So they asked the CBO for its opinion. Here is the CBO’s response:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs. Trust fund accounting shows the magnitude of the savings within the trust fund, and those savings indeed improve the solvency of that fund; however, that accounting ignores the burden that would be faced by the rest of the government later in redeeming the bonds held by the trust fund. Unified budget accounting shows that the majority of the HI trust fund savings would be used to pay for other spending under the PPACA and would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits. To describe the full amount of HI trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position. [Bold is mine-JP]

Me: Basically, the government is taking money out of Medicare’s Hospital Insurance trust fund, replacing it with IOUs and then spending it. But the CBO doesn’t score such intra-governmental transfers as the same sort of debt as when a Treasury bond is issued. But it is an obligation just the same. If not for this accounting quirk, the Senate health bill seemingly would be scored as increasing the budget deficit by $170 billion or so over the next decade (itself a funny number since taxes come first, then benefits) instead of cutting the deficit by $130 billion.  This is a similar shell game played by the government when it uses Social Security surpluses to mask the true depth of the budget deficit. I don’t see how supposed Dem budget hawks like Mark Warner and Kent Conrad and Evan Bayh can go along with this. This is just as bad as the shunting $250 billion in doctor payments into a different bill to hold down the official cost of ObamaCare.

The Centers Medicaid & Medicaid Services made a similar statement a couple of weeks back on Medicare funding:

The combination of lower Part A costs and higher tax revenues results in a lower Federal deficit based on budget accounting rules. However, trust fund accounting considers the same lower expenditures and additional revenues as extending the exhaustion date of the Part A trust fund. In practice, the improved Part A financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.

UPDATE: Douglas Holtz-Eakin, a former CBO director, adds his two cents:

I read the CBO and they made the point exactly right: money can only be spent once.  The D’s are (again) trying to use dollars twice.  The first time (Bennet) amendment said they would not reduce Medicare benefits, but used medicare savings to fund subsidies.  Now they are saying they will put the money in the trust fund (and spend it on medicare) but use it to fund subsidies.  It is fundamentally dishonest.


For the love of Pete, lets stop talking about it and fire all of Congress and the President, NOW, not later.

Posted by Ralph Kelley | Report as abusive

Watch out for (yield) curves: Kudlow vs. Goldman

Dec 23, 2009 17:54 UTC

The super-steep yield curve is hinting at a powerful recovery in 2010, so says Larry Kudlow:

When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss — such as a credit crunch and a recession.

The inverted curve is abnormal, the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That’s as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.

The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly predicted big trouble ahead. Right now it is forecasting a much stronger economy in 2010 than most people think possible. So there could be a mini boom next year, with real GDP growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today’s 10 percent.

Unless it isn’t, as David Goldman predicts:

The yield curve is at record steepness. I think that’s an overreaction. In fact, the steep yield curve in the present environment is NOT a harbinger of recovery — it’s a brake on recovery because it encourages banks to own Treasuries rather than risky assets.

Goldman then goes on to list 9 other reasons why he doesn’t think the recovery will be particularly strong.


I have always liked Larry Kudlow’s optimistic view of the future and, frankly, I see nothing wrong with his analysis of the current yield curve. David Goldman, on the other hand, is a classic bond trader, forever bearish and always looking for clouds on the horizon, however small, to justify heading indoors. As for this current recession being “different”, as in “It’s different this time” – oh please. The equity rally of the late 90′s, the real-estate boom of the mid-00′s, virtually all the pundits said it was different this time. Of course they were all proven wrong, spectacularly so. Bet on inertia, bet on human nature, bet on optimism: Larry Kudlow has it right, once again.

Posted by gotthardbahn | Report as abusive

Why surtaxes are foolish

Dec 23, 2009 17:33 UTC

A surtax to pay for healthcare? Not good. Former Bush White House economist Alan Viard explains:

First, it would significantly increase marginal tax rates for the affected households, giving them greater incentives to reduce their taxable income through various avoidance strategies. Even with moderate responsiveness to incentives, the revenue generated by the surtax would be significantly smaller than the burden that it would impose on affected taxpayers.

Second, the surtax would significantly increase the marginal tax rate on saving and investment by the affected households, whether done through corporate or noncorporate firms. The impact would be magnified because these households, despite their small numbers, account for a large portion of national saving. The resulting drag on capital accumulation would lower real wages for workers throughout the economy.

Third, the proposed surtax reflects an unsustainable approach to tax and fiscal policy. As commentators across the political spectrum have recognized, the existing fiscal imbalance cannot be addressed without imposing sacrifices on a broad segment of the population. Any new spending programs, such as those in H.R. 3962, will impose additional burdens. By linking these programs to a tax imposed on only 0.3 percent of the population, the bill obscures that fiscal reality. If the programs in H.R. 3962 are worthwhile, they are worth paying for in an open and broad-based manner.