Shutdown Coming? – With most March Madness brackets in shambles, the new office pool of choice in Washington involves wagering on if the federal government will shut down. The current stopgap measure funding government operations expires on April 8 and whether an agreement can be reached on federal spending for the rest of the fiscal year before then depends on who you talk to, and when. While lieutenants who aren't in the room on both sides trade smackdowns publicly, the negotiations quietly continue and are reportedly progressing. There are also signs that Republicans in the House are reaching out to moderate Democrats on a possible deal. So, are the fireworks a sign that compromise is impossible, or are they providing cover as a deal is being hammered out? We should know by next week.

On to the Next Budget – Lawmakers may not yet be finished with Fiscal Year 2011 spending, but they must soon contend with the FY 2012 budget. House Budget Committee Chair Paul Ryan (R-WI) is expected to unveil his budget blueprint nearly next week. The new budget proposal will broaden the debate beyond the discretionary spending cuts dominating the discussion over 2011 appropriations as it will include changes to entitlements. The Ryan blueprint will not be alone, the Republican Study Committee, compromised of the most conservative members of the House, also will soon release a budget plan and more may follow from other groups.

Blue Dogs Offer Benchmarks for Fiscal Reform – The Blue Dog Coalition of moderate and conservative House Democrats today offered a framework to guide congressional efforts to put the U.S. on a sustainable fiscal course. The principles include stabilizing the debt at 60 percent of GDP in the near future and placing all areas of the budget on the table including tax reform, entitlements, and budget process reform. CRFB called the benchmarks “bold and balanced” in a release and Fiscal Commission co-chairs Erskine Bowles and Alan Simpson praised the “courage and vision” of the Blue Dogs in a joint statement.

New Senators Hit the Roof Over Debt Ceiling – Most of the freshman senators who rode into DC on the Tea Party wave have been relatively quiet so far, but they are indicating they won’t be backbenchers when it comes to raising the debt limit. Sen. Marco Rubio (R-FL) penned a Wall Street Journal op-ed saying he won’t vote to increase the statutory limit “unless it is the last one we ever authorize and is accompanied by a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid.” He also calls for a comprehensive plan to reduce the debt that includes a statutory cap limiting it to 60 percent of GDP. Sen. Jerry Moran (R-KS) sent a letter to President Obama stating that he will vote “no” because the White House has not led on addressing the national debt. And Sen. Mike Lee (R-UT) has threatened to filibuster a debt ceiling increase unless Democrats agree to a balanced budget amendment. The debt limit could be reached as early as April, but the Treasury likely can take steps to put it off a little longer.

Things That Make You Say HAMP – The House on Tuesday voted to terminate the Home Affordable Modification Program (HAMP), which helps lower mortgage payments for some homeowners in need of assistance. The vote is a part of the House Republican effort to conduct at least one vote a week to cut federal spending. CBO estimates the bill will save $1.4 billion over ten years.

GOP Wants BBA – Senate Republicans tomorrow plan to unveil a consensus Balanced Budget Amendment that would mandate that the president submit a balanced budget each year, require a 2/3 vote of Congress to run a deficit in a given year and limit expenditures to 18 percent of GDP. Senate Republican leader Mitch McConnell (R-KY) wants a vote on the proposal to accompany a vote to increase the debt limit. The House Balanced Budget Amendment Caucus is also gearing up to push for a similar amendment in that chamber.

Hearing a lot about the Deficit – Several hearings on Capitol Hill today dealt with budget issues. The House Budget Committee held its annual “Member’s Day” hearing where members of Congress testify. While lawmakers usually take advantage of the opportunity to plug for spending projects to be included in the budget that will aid their districts, many legislators used the forum to call for fiscal restraint. Meanwhile, a House Ways and Means Committee hearing addressed how growing budget deficits and national debt are impeding job growth. And the Health Subcommittee of the House Energy and Commerce Committee examined the budgetary impact of the health care reform law.

Back in December, we had surmised that due to recent developments with Citigroup, GM, and AIG, CBO's cost estimate of TARP would come down further from the $25 billion it estimated in November. Well, that turned out to be correct yesterday when CBO released an updated cost estimate of TARP, putting the total cost of the program at $19 billion over ten years.

This report follows a trend over the past two years of declining deficit impact projections for TARP. The highest CBO cost estimate, in April 2009, came after the Obama Administration added foreclosure prevention programs, more auto assistance, investment partnerships, and more AIG assistance to the bank and auto assistance programs that had been in place previously. CBO put the price tag at $356 billion. Then, the next three reports, in June 2009, March 2010, and November 2010 put the deficit impact at $158 billion, $109 billion, and $25 billion respectively, a sharp decline over that year and a half period.

Most of the reduction in the cost estimate from November comes from lower than anticipated subsidy costs for auto industry assistance. A comparison of the past three cost estimates, broken down by category, is presented below.

^{*This total includes a 50 percent subsidy rate for $45 billion in remaining TARP authority that hadn't been spent yet. Excluding these funds would leave a cost estimate of $86 billion.} 

Here are some of the developments that have occurred since November's cost estimate that may have played a part in the change of the cost estimate:

• Auto industry assistance: Treasury sold a lot of GM common stock, reducing its ownership stake in the company from 60 percent in November to 33 percent now. In addition, they have received a $2.1 billion repayment of preferred stock from GM and a $2.7 billion disposition from Ally Financial (formerly GMAC). Apparently, some of these moves were unanticipated by CBO, since--as we showed above--this is the largest area of change in the cost estimate.
• Bank programs: Citigroup finished repaying Treasury's equity stake in the company under the CPP. In addition, many more CPP repayments have been received, the largest being Fifth Third's $3.4 billion repayment in February. All of these developments have reduced the amount outstanding in CPP by $20 billion since November and have reduced CBO's cost estimate of CPP by $1 billion. It is still projected to be the most profitable part of TARP by far.
• AIG assistance: Treasury has put into action the AIG "exit plan" established in September, which has led to a repayment of the Federal Reserve's line of credit, the Treasury receiving two AIG subsidiaries, and the Treasury holding 92 percent of AIG's common stock. So far, Treasury has received $9 billion back from AIG, all from payments from the subsidiaries. Although CBO didn't change their cost estimate for AIG this time, this may be the area with the largest potential for future changes in the deficit impact.

Other programs, such as the Public-Private Investment Program and the mortgage programs, have been largely unchanged since November except for a few small repayments in PPIP.

We'll keep an eye on future developments with TARP on Stimulus.org.

Today, Bill Galston of Brookings wrote a public letter in The New Republic arguing that, while there are many pressing national issues, deficit reduction should still be one that President Obama focuses on. Further, rather than demonizing Ryan's budget next week, President Obama should lead the charge for negotiating an alternative deficit reduction package. As Galston writes:

As soon as the FY2011 budget fight concludes, Congressman Paul Ryan, the chair of the House Budget Committee, is all but certain to propose an FY2012 budget that addresses major issues outside the narrow ambit of discretionary domestic spending. If that proposal tracks his prior thinking, it will contain many ideas that you and most Democrats (including the author of this letter) will find unacceptable. (And if past Republican reaction to Ryan's "Roadmap" is any guide, many of them will have cold feet as well.)

However it is received, the publication of Ryan's proposal is your moment of truth. One option will be to denounce his plan as an assault on seniors and on all that is holy. This is a play that our party knows how to run, and we could probably gain significant yardage if we do. Many outside the White House (and no doubt some inside) will be urging you to do just that. If you do, any chance of progress on basic fiscal issues before next year's presidential election will vanish. Maybe that's what you want; I hope not.

Your other option, the road less travelled, is bolder and riskier. You could respond by saying that while Ryan's proposal is unacceptable, it raises some issues that we must now take up. You could endorse the sentiments that 64 senators and 10 former chairs of the CEA have expressed, and you could declare your willingness to participate in the bipartisan discussions they recommend once the necessary preparatory work has been done. And you could begin the process (which only you can do) of educating the people about not only the dimensions of the fiscal challenge we face, but also its principal causes. The sooner they understand that we can't regain control of our fiscal destiny by cutting appropriations for foreign aid and NPR, the better.

Read the full article here

Today, The National Journal debuted its Economic Insiders Poll, a "periodic poll of veteran experts on the policy and political dynamics of key issues in the economy." This group of policy experts from across the political spectrum responded to questions about current events related to the US economy, with all responses kept anonymous. Included in the group were CRFB Board Members Alice Rivlin, Doug Holtz-Eakin, William Hoagland, and Robert Reischauer.  

Particularly revealing was the group's response when asked to choose what they thought the US economy needed most urgently out of the following options: immediate discretionary spending cuts, agreement on a credible deficit-reduction plan over the next 5-10 years, substantial investment in infrastructure, deregulation, and fundamental tax reform. Out of 44 votes, 48 percent considered agreement on a credible deficit-reduction plan to be the most important.

The detailed results were:

This poll once again shows how urgent a comprehensive deficit-reduction plan is for our economic future. When will leaders in Washington finally get the message and start focusing on this critical issue?

Click here for the entire National Journal article and a full list of poll participants.

In Bloom – Spring is officially here, though the weather would have one think otherwise. Frigid temperatures and even a little snow in the Washington, DC area early Sunday are indicative of how Washington often seems to resist the trends. Yet the inexorable change of seasons is upon us. The snow is already gone and the Cherry Blossoms are blooming. The Cherry Blossoms are a uniquely Washington tradition, drawing tourists by the thousands to experience their beauty and the promise of renewal that they represent. Unfortunately another spring tradition in DC is already in full blossom--posturing and inaction on the federal budget--and this bloom of gloom is plentiful this year. Friday, which fittingly is April Fools Day, will mark the halfway point of the fiscal year without a spending plan and it is unclear if one will be reached soon.

A Budding Compromise? – The Wall Street Journal reports that Democrats are preparing a proposal to fund the government for the rest of FY 2011 that would result in total cuts of about $30 billion from current levels. It is not lost on progressives that this is roughly the level of cuts proposed by House Budget Committee Chair Paul Ryan (R-WI) back in early February, but their adversaries would not consider this a victory either. Conservatives are insistent on double the cuts and are not interested in compromise. The Tea Party will rally in Washington this week to keep the pressure on to hold the line. Any spending compromise will require lawmakers from both parties to buck their respective bases to approve it. Will this process show that there is a constituency for fiscal collaboration? Or will compromise be nipped in the bud? According to a recent Pew Research poll, the public thinks the deficit debate so far has been “generally rude and disrespectful” and that neither side has very good ideas for addressing our fiscal problems. Sounds like voters are ready for a new approach. It may seem like cooperation is impossible in this environment, but stranger things have happened (e.g. VCU in the Final Four).

Sowing the Seeds for Next Year – The 2012 budget debate will blossom soon; Rep. Ryan is expected to unveil his budget blueprint by early next month. His counterpart on the other side of the Capitol, Senate Budget Committee Chair Kent Conrad (D-ND), is holding off on his proposal to see if the so-called “Gang of Six” that he is a part of can agree on a comprehensive plan that he could incorporate. Entitlements, which have been absent from the 2011 spending discussion, will definitely be in the 2012 mix. House Republican leaders have promised that their budget plan will include entitlement reform and the recommendations from the Fiscal Commission, which the Senate group is using as the basis for its negotiations, also included entitlements. Meanwhile, a moderate group, Third Way, argues that Democrats should embrace entitlement reform, instead of fighting it.

Will Social Security Reform Flower? – Democrats are split over how to deal with Social Security, though Senate Majority Leader Harry Reid (D-NV) has been quite adamant that it should be left alone and the Democratic Congressional Campaign Committee is ramping up efforts targeting GOP lawmakers on the issue. But the fact hat one aspect of the vital program, the Social Security Disability Insurance program, is on a course to become insolvent within a few years may spur action. In a paper last week, CRFB argued that whether you view Social Security as part of the federal budget or a stand-alone program, the prescription for fixing it is the same and the time is now to do so. See some ideas for Social Security reform here.

Putting Taxes in the Mix – Rep. Chaka Fattah (D-PA) proposes a one percent tax on financial transactions, arguing that it could eliminate the debt in ten years. Meanwhile, interest groups on the right are fighting any form of revenue increase. However, a recent Washington Post/ABC News poll finds that a majority of respondents say that the best way to reduce the deficit is with a combination of spending cuts and tax increases. CRFB has long said that everything, including revenues, will have to be on the table in reducing the debt, and that tax reform can help put the country on a sustainable fiscal course. A paper from the Pew Fiscal Analysis Initiative illustrates that relying on just spending cuts, or just tax increases for that matter, is unrealistic and how a comprehensive approach is more sensible. The Center on Budget and Policy Priorities also suggests a balanced plan in a new paper, specifically targeting tax expenditures. See an explanation of these tax breaks and some ideas for reforming them here.

Budget Process Reform Ideas Sprout – Republican leaders in the Senate are pushing for a vote on a balanced budget amendment as a prerequisite for voting to increase the debt limit, and the caucus is reportedly unifying behind a proposal that would require the president to submit a balanced budget each year, would require a 2/3 vote of Congress to run a deficit in a given year and limit expenditures to 18 percent of GDP. The statutory debt limit may be reached as early as next month. Also, in today’s Politico, former Senator Pete Domenici and former CBO and OMB director Alice Rivlin call for new, enforceable budget rules to rein in debt. The Peterson-Pew Commission on Budget Reform offered ideas for major budget process reform in the report, Getting Back in the Black.

Key Upcoming Dates

March 30

• House Budget Committee hears "Member's Day" testimony from Members of Congress at 10 am.

• House Ways and Means Committee hearing on impediments to job creation, including deficits and debt, at 10 am.

March 31

• Weekly unemployment claims data released by the Department of Labor BLS.

April 1

• Department of Labor releases March employment figures.

April 8

• The current continuing resolution (CR) funding government operations expires. Congress must adopt spending bills funding the federal government for the rest of FY 2011 by then or pass another stopgap measure.

April 15

• Statutory deadline for Congress to enact a Fiscal Year 2012 Budget Resolution.

April 15 - May 31

• Period in which Treasury Secretary Geithner says the U.S. will likely reach the debt ceiling.