In a recent economic study, André Meier, Giancarlo Corsetti, and Gernot Müller found that announcing significant fiscal retrenchment (ie deficit reduction) can "actually enhance the effectiveness of today’s fiscal stimulus." This is an argument we have made before, and in fact, we started a whole club of people who agree with us.

As the writes explain (emphasis added):

the anticipation of a future spending reversal generally raises the expansionary impact of today’s fiscal stimulus through its effect on long-term real interest rates... Consequently, the future spending cuts boost current demand… But, for a positive effect to be obtained, spending cuts need to be implemented with suitable delay and/or at least with some gradualism.

The authors go on to explain that:

The effectiveness of short-run fiscal stimulus depends not only on the specific fiscal measures taken today, but also the on medium-term fiscal outlook, notably the government’s expected strategy for fiscal consolidation… to the extent that credible consolidation plans attenuate concerns about default risk, current long-term interest rates would ease above and beyond the effects captured in our analysis, further boosting current demand. …

The authors also explore the ideal timing and composition of fiscal consolidation plans, and the interactions stimulus and consolidation should have with monetary policy. Ultimately, they conclude (emphasis added):

Our results suggest that current stimulus and credible plans for medium-term expenditure restraint are complementary elements of a strategy to move the economy out of a deep recession. While care should be taken not to program very early spending cuts when monetary policy is constrained by the zero lower bound, this does not call into question the general case for identifying upfront credible consolidation measures.

To see a list of members of the Announcement Effect Club -- or nominate a member -- click here.

Once again, a president is trying to get rid of a “small” scholarship program tucked away in the Department of Education. And once again, the attempt is likely to be futile.

 In another indication of how broken the budget process is, Republicans and Democrats alike have tried to eliminate this $42 million program, first established in the mid-1980s--only to see it funded year after year. The problem seems to be the program’s name: “The Robert C. Byrd Honors Scholarship Program.”

So far, it’s been impossible to eliminate the program, named after the longtime chairman of the Senate Appropriations Committee. House Republicans tried; so did President George W. Bush and now Obama is trying to dump the program for a second year. The Robert Byrd program sends money to states to fund $1,500 merit-based scholarships for students. The administration argues that the grants are available to only a small "elite" group of students, who would likely be able to go to college even if they did not receive the scholarships.

Not only have lawmakers and presidents failed to slash the program, but in 2009, Congress went so far as to create another scholarship named after Byrd’s late wife, Erma. The Erma Byrd Scholarship Program provides scholarships to student “pursuing a course of study that will lead to a career in industrial health and safety occupations, including mine safety.” It received $1.5 million in Fiscal Year 2010.

Congress must get serious about cutting the deficit and gaining control of the soaring federal debt. Every program and parochial interest must be on the table. And that means that policymakers will have to resist the temptation to respond every time someone like Byrd cries foul when a pet project is targeted.

Earlier this week, four Fed lending facilities came to a close (see Fed release here), as previously announced, in light of improved conditions in financial markets. Among the expiring programs included the Commercial Paper Funding Facility, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Primary Dealer Credit Facility, and the Term Securities Lending Facility (links will direct you to a full description of each program at Stimulus.org).

Created between March and October 2008, these four programs added a total of roughly $850 billion in liquidity for financial markets during their peak levels reached in September and October 2008, when the deterioration in financial markets was most acute. However, since April 2009 lending through these facilities has largely tapered off. 

Fed documents and releases show that, together, these four programs could have added up to $2.15 trillion in liquidity if financial markets and participants had required such injections. Yet, programs such as the Commercial Paper Funding Facility never lent out anywhere near the $1.8 trillion it could have.

These four programs contributed to the Fed's extraordinary and unprecedented actions taken to provide support to specific parts of financial markets, in contrast to the Fed's usual approach in providing credit to the entire market.

Additional Fed programs will be expiring in the coming weeks, including the Term Auction Facility, the Term-Asset Backed Securities Loan Facility, and all mortgages purchases. CRFB will continue to track the lending and expiration of Fed programs at Stimulus.org.   

A few months ago, we pointed out that the Administration was cheating in its Mid-Session Review budget baseline. Essentially it was taking policies which President Obama had signed into law as temporary, under the stimulus bill, and assuming them as permanent. The implication being that, if the policies were a part of the baseline, they wouldn't need to be paid for when enacted.

Well, the Administration is at it again in their FY 2011 budget submission, but this time they are doing a better job of hiding it.

But let's start from the beginning:

Traditionally, proposed policy changes are measured from what is called a "current law" baseline. This baseline essentially looks at the law, the way it is written, and attempts to project tax and spending paths over the next decade. Budget scorers then measure the magnitude of policy changes by estimating how far they will cause taxes and/or spending (and deficits) to diverge from that baseline.

The Administration has argued, though, that this current law baseline is unfair. It assumes all the Bush tax cuts will suddenly expire at the end of 2010 -- even though this would result in significantly higher taxes in 2011; it assumes policy makers won't prevent the Alternative Minimum Tax (AMT) from hitting middle-class tax payers -- even though they have been for years; and it assumes that, a month from now, Medicare will pay physicians 21 percent less than it does now -- even though no politician would let this happen.

Because of this, the Administration says it should be able to measure its policies off of a "current policy" baseline. We disagree; if President Obama wants to extend the Bush tax cuts -- the same ones which he criticized the Bush Administration for not paying for -- he should have to offset them, or else fess up to using them to increase our debt.

But let's accept, for the sake of argument, that the Administration should be allowed to budget from a current policy baseline. Even in that case, they are cheating.

The Administration is taking two tax provisions from the 2009 stimulus bill -- expansions of the child tax credit and the EITC -- and claiming them as part of the "current policy" Bush tax cuts. And they are doing something similar for Pell grants: assuming that they will receive sufficient funding to pay out the maximum grant level set in the stimulus bill.

The Administration didn't inherit these policies, they created them. And worse, still, they created them as explicitly temporary, under a stimulus bill which they claimed was meant only to help bring us out of this recession.

Yet the White House wants to continue these policies, and they don't want to pay for them. So what do they do? They hide these policies in their baseline, in the hopes that they won't have to. With the Pell Grants, at least they admit to this in their "Bridge From Budget Enforcement Act Baseline to Baseline Projection of Current Policy" (Table S-7). For the tax cuts, as Bob Williams of TPC points out, they don't show this until "footnote 5 on page 170 of Analytical Perspectives."

So how much money is involved here? Well, putting these measures into the baseline makes the President's tax cuts for families appear to cost $143 billion over ten years, when they actually cost $241 (excluding the Bush tax cuts). And it makes his Pell Grants expansion appear to cost $69 billion, when it actually costs $187 billion.

Over ten years, we estimate these baseline adjustments to cost about $266 billion, including interest. That's nearly as much as the Administration saves from its 3-year non-security discretionary spending freeze (including interest savings). It is actually slightly more over five years.

Of course, at the end of the day, this $25 - $30 billion a year isn't going to break the budget. But it's a significant chunk of change. And if the Administration is really going to get serious about putting our fiscal house in order, an honest budget would be good place to start.

Today, CRFB released our Analysis of the President's FY 2011 Budget. We will be following-up here at The Bottom Line with shorter analyses discussing specific aspects of the budget. This is the first:

President Obama's proposed freeze on non-security discretionary spending is leaving some agencies and programs feeling colder than others. In fact, some aren't chilly at all.

In presenting the FY 2011 budget Monday, the Obama Administration emphasized that they weren't proposing to freeze individual program funding levels, but instead, would request increases for some programs and cuts for others. For instance, education programs emerged as a big winner. Obama proposed a $3 billion increase for elementary and secondary education programs, to $28 billion. The programs would receive an additional $1 billion if Congress reauthorizes those programs this year. 

Transportation programs also emerged as a priority, with the Administration calling for a new $4 billion National Infrastructure Innovation and Finance Fund, which would provide merit-based grants for transportation programs. Congress failed to pass a long-term reauthorization for surface transportation programs last year. The Administration also requested a $1 billion increase for the National Institutes of Health, to $32 billion.

The budget also contains cuts. However, the cuts were spread among several departments. The exception to this is the $4 billion (36%) cut to the Commerce Department; however, this is entirely the result of a $6 billion reduction in funding for the 2010 census -- which will have been already completed by 2011. The Justice Department is also slated to receive a $3.4 billion (12.4%) funding cut in 2011, as a result of the cancellation of the Crime Victims' Fund.

An example of an agency receiving a small cut is the EPA, which would see a $118 million cut -- to $10 billion -- if the Obama budget were implemented. Obama also takes aim at programs that Congress traditionally uses for earmarked projects. The Administration would cut $565 million from the Army Corps of Engineers, making its FY 2011 request $4.9 billion. The budget also includes a $129 million cut in funding for water and wastewater projects, a traditional pot that is often tapped by Congress for earmarks. Of course, Congress may be reluctant to cut funding for programs that members use for earmarks. In fact, many of the budget's cuts were proposed by the Administration last year and rejected by Congress.

Defense programs are outside the freeze and Obama proposes a $18.2 billion increase for Pentagon programs. The funding boost, which would increase the Defense budget to $548.9 billion, does not include a $33 billion request from the Administration for FY 2010 to pay for the war. The Department of Homeland Security, also outside the freeze, would receive $43.6 billion, a $5.2 billion increase.

^{* Includes over $41 billion of requested supplemental funding.}

Click here to read our full anaylsis of the President's Budget, and be sure to check back to The Bottom Line over the next week for more analysis of the President's Budget.

UPDATE: Web chat is beginning and is now live.

Today at noon (9am Pacific), CRFB Policy Director Marc Goldwein will be participating in a live web-chat to answer questions about the President's FY 2011 budget. The chat will be run through Politico and the New America Foundation. 

To watch or participate in the chat, return to this blog post around noon, where the chat window will appear below. You can also submit questions in advance using our comment field.

On Friday evening, the FDIC reported that it has taken over an additional five banks (American Marine Bank, First Regional Bank, Community Bank and Trust, Marshall Bank, Florida Community Bank, First National Bank of Georgia) for a cost to the FDIC of about $1.9 billion. This brings the total number of failed banks since the beggning of 2008 to 181. Total deposits of all failed banks now equal $8.7 billion for 2010 and $380 billion since the beginning of 2008, all at an estimated cost to the FDIC of about $61 billion. Visit Stimulus.org for more details and a full list of FDIC bank closings.

In a blog post, this weekend, White House Communications Director Dan Pfeiffer outlined some of the terminations, reductions, and savings to be expected in this year's budget, and bragged about the Administration's success rate in convincing Congress to enact its cuts from last year's budget. According to Pfeiffer, "Congress approved cuts that produced a net discretionary savings of $6.8 billion, nearly 60 percent of the discretionary cuts proposed."

No doubt, 60 percent is impressive. And according to our own anaysis (about which we will be releasing more detail next week), the Administration actually did a little better than that -- Congress eventually approved about two thirds of the Administration's cuts. But what that means, exactly, depends on how you slice the numbers.

The 60 percent (or two thirds) success rate of savings is based on dollars. So if the Administration proposed $11.5 billion in discretionary savings, that means they achieved roughly $7 to $7.5 billion.

Interestingly, though, the vast majority of these savings come from a few large cuts in a single agency; an agency, which, by the way, will not be subject to the Administration's proposed spending freeze -- Defense.

Ending the F-22 Raptor, alone, saved $2.9 billion. Throw in the future combat systems, search and rescue helicopter, multiple kill vehicle program, transformational satellite, presidential helicopter and aircraft carrier build schedule and we are talking about $6.7 billion. That is already 58% of all the proposed cuts.

If we look at the Administration's success rate based on the number of programs, rather than dollars, it's somewhat less impressive. According to our analysis, The Congress accepted in full roughly 29% of proposed cuts, and made even larger cuts in another 4%. Meanwhile, 30% were rejected completely, and in another 16% of cases, the Congress actually did the reverse of what was requested -- increasing rather than reducing spending on the program. And 17% of the President's cuts were partially accepted, to some degree, while the remaining 4% must await a report or other rule before a final decision is made. So very broadly -- one third of cuts were accepted, just under one half were rejected, and the remaining fifth saw something in between.

(Thanks to Stephen Dinan of the Washington Times for help with compiling some of these numbers)

These still are impressive stats, to say the least. But if policy makers want to maintain a discretionary spending freeze while limiting cuts to important and worthwhile programs, they are going to have to be more aggressive in eliminating lower-priority spending.

In the coming days, we will be releasing both a full analysis of the President's Budget, and a shorter analysis of his spending cuts. For the time being, though, here are some of the cuts Pfeiffer tells us to expect in the budget:

• Consolidating 38 Education programs into 11.  The current program structure at the Department of Education is fragmented and ineffective. The Department operates dozens of grant programs that impose narrow requirements on districts and fail to demand better outcomes or build a knowledge base of what works. Some of these programs have little evidence of success, while others are demonstrably failing to improve student achievement. As part of the Administration’s Elementary and Secondary Education Act (ESEA) reauthorization proposal, the Budget therefore proposes to consolidate 38 K-12 programs into 11 new programs that give states and districts more flexibility about means but impose greater accountability for outcomes.
• Cutting Save America’s Treasures and Preserve America grant programs at the National Park Service. Save America’s Treasures program was started to mark the millennium and was supposed to last for two years. Both programs lack rigorous performance metrics and evaluation efforts so the benefits are unclear.
• Eliminate the Advanced Earned Income Tax Credit (AEITC). EITC eligible taxpayers with children may file a form with their employers and receive a portion of their EITC throughout the year in their paychecks. Only a tiny number of EITC eligible taxpayers claim the AEITC; 3 percent, or 514,000 taxpayers according to the Government Accountability Office. And the error rate for the program is high: 80 percent of recipients did not comply with at least one program requirement. This ineffective and prone-to-error program should be eliminated.
• Terminate the Brownfields Economic Development Initiative. While a consistent supporter of the brownfield clean-up on the campaign trail and a strong advocate for expanding economic opportunity in urban areas, the President proposes to eliminate BEDI, a small program duplicative of larger programs. Instead, the Administration consolidates its support for the brownfield clean-up – funding larger programs and thereby reducing overhead costs.
• End Abandoned Mine Lands Payments to Certified States. The Abandoned Mine Land program was established to restore abandoned coal mine lands. Changes to this program allowed these funds to go to states and tribes who already have cleaned up these mine. Paying states and tribes to clean up mines that are already cleaned up was not the intention of this program, and is why it is being terminated.

* * * * *

Related Posts

On the President's Spending Cuts....

What Happened to the President's Spending Cuts?

Obama Partial Discretionary Spending Freeze : A Small First Step

Contestant #1 In Our Spending Challenge

CRFB decided to fact check the exchange between President Obama and Congressman Hensarling at the Republican retreat. Here is the transcript with our comments.

First Congressman Hensarling (emphasis added):

Mr. President, a year ago I had an opportunity to speak to you about the national debt. And something that you and I have in common is we both have small children. And I left that conversation really feeling you're sincere commitment to ensuring that our children, our nation's children do not inherit an unconscionable debt. We know that under current law that government -- the cost of government is due to grow from 20 percent of our economy to 40 percent of our economy right about the time our children are leaving college and getting that first job.

In 2009, the government actually cost 24.7 percent of GDP. But that number is uncharacteristically high due to the recession—during most of the 2000s spending was below the 20 percent of GDP number cited by the Congressman. In terms of government growth, Hensarling is right that it will eventually hit 40 percent of GDP -- but this is not projected to occur "about the time [his] children are leaving college." Under current law, CBO projects government spending will reach 40 percent around 2070. Under a current policy baseline*, which makes some seemingly more realistic assumptions, it would hit that level around 2050.

Mr. President, shortly after that conversation a year ago, the Republicans proposed a budget that ensured that government did not grow beyond the historical standard of 20 percent of GDP. It was a budget that actually froze immediately non-defense discretionary spending. It spent $5 trillion less than ultimately what was enacted into law. And unfortunately, I believe that budget was ignored.”

It is true, they did propose a budget, which froze “non-defense, non-veterans’ benefits, and non-homeland security” discretionary spending activities (the same as the Obama freeze except the President starts a year later, goes for three rather than five years, and includes international affairs in the exemptions), although it wasn't quite as austere as he suggested. The budget would have brought spending down from 22.8% in 2010 to a low of 20.6% in 2012 and 2013, and it would have then hovered around 20.7% for the rest of the decade. The Republican alternative budget proposed spending $36,913 trillion over 10 years, or $4.8 trillion less that the Obama budget proposed-though the President's budget was not (and never is) what was enacted into law.

And since that budget was ignored, what were the old annual deficits under Republicans have now become the monthly deficits under Democrats. The national debt has increased 30 percent.

Not quite. Since January 21st (Obama’s inauguration) of 2009, debt held by the public has increased from $6.3 trillion to $7.8 trillion – an increase of around 23 percent. 

Now, Mr. President, I know you believe -- and I understand the argument; I respect the view -- that the spending is necessary due to the recession. Many of us believe, frankly, it's part of the problem, not part of the solution, but I understand and I respect your view. But this is what I don't understand, Mr. President. After that discussion, your administration proposed a budget that would triple the national debt over the next 10 years.

Almost true. According to CBO estimates, debt would hit $17.3 trillion in 2019 under the President's FY 2010 budget. That is 270% bigger as the $6.3 trillion debt when the President took office. It is worth noting, however, that debt was already scheduled to increase significantly under current law, and would have increased by more than the President's budget if Congress simply chose to continue a number of expiring policies that were already in place (for example the 2001/2003 tax cuts, the AMT patch) without paying for them.

Surely you don't believe 10 years from now we will still be mired in this recession. It proposed new entitlement spending and moved the – the cost of government to almost 24.5 percent of the economy.

This is true; CBO estimated spending in the Obama budget would increase to 24.5 percent of GDP in 2019. That compares to 22.3 percent of GDP under the current law baseline estimates at the time.

Now, very soon, Mr. President, you're due to submit a new budget and my question...

OBAMA: “Jeb, I know there's a question in there somewhere, because you're making a whole bunch of assertions, half of which I disagree with. And I'm having to sit here listening to them. At some point, I know you're going to let me answer.”

HENSARLING: “That's the question. You are soon to submit a new budget, Mr. President. Will that new budget, like your old budget, triple the national debt and continue to take us down the path of increasing the cost of government to almost 25 percent of our economy? That's the question, Mr. President.”

OBAMA: “All right. Jeb, with all due respect, I've just got to take this last question as an example of how it's very hard to have the kind of bipartisan work that we're going to do, because the whole question was structured as a talking point for running -- running a campaign. Now, look, let's talk about the budget, once again, because I'll go through it with you line by line. The fact of the matter is, is that when we came into office, the deficit was $1.3 trillion. $1.3 trillion.”

This is consistent with OMB "current policy" estimates, and not far off of CBO's current law estimates. CBO’s January baseline, published not long before the President took office, estimated a deficit of $1.19 trillion in 2009. That said, there have been some major technical readjustments since between the January baseline and the final deficit calculation (particularly regarding the treatment of Fannie Mae and Freddie Mac), so this figure may not be useful for "apples-to-apples" comparisons. We will discuss this more in a future blog post.

So -- so when you say that suddenly I've got a monthly budget that is higher than the annual -- or a monthly deficit that's higher than the annual deficit left by Republicans, that's factually just not true, and you know it's not true. And what is true is that we came in already with a $1.3 trillion deficit before I had passed any law. What is true is, we came in with $8 trillion worth of debt over the next decade.

Not under standard CBO practice, but it depends on your baseline. Under CBO's current law baseline, in its January assessment, cumulative deficits between 2010 and 2019 were projected to be $3.1 trillion; or $4.1 trillion between 2009 and 2018. Under the "current policy" baseline from the President's budget, though, cumulative deficits between 2010 and 2019 are actually $9.3 trillion.

[This] had nothing to do with anything that we had done. It had to do with the fact that in 2000, when there was a budget surplus of $200 billion, you had a Republican administration and a Republican Congress, and we had two tax cuts that weren't paid for, you had a prescription drug plan -- the biggest entitlement plan, by the way, in several decades -- that was passed, without it being paid for, you had two wars that were done through supplementals, and then you had $3 trillion projected because of the lost revenue of this recession. That's $8 trillion.

The President's claim here, essentially, is that deficits over the next decade will be entirely the result of revenue loss from the recession and of continuing policies from the Bush Administration. These numbers seem plausible, although we need to check into it further. CBO's cumulative economic adjustments since since September of 2008 have reduced revenues by roughly $2.8 trillion over ten years; continuing all the 2001/2003 tax cuts (including the interaction effect with AMT patches) would reduce revenues (and increase refundable outlays) by around $3.2 trillion; the wars in Iraq and Afghanistan will cost more than $850 billion over the next decade -- even if we reduce the number of troops to 60,000 by 2015; and  we have seen estimates that Medicare Part D would add as much as $750 billion to the deficit over the next decade. When interest costs from past and future borrowing as a result of these policies is included, the numbers would likely reach the $8 trillion claimed by the President.

Of course, this does not alleviate the current President and Congress from dealing with these problems. Although President Obama cannot be held responsible for the economic recession or the policies of the previous administration, the same is not true with regards to the continuation of these policies. This is particularly true for the tax cuts which are scheduled to expire at the end of 2010 -- but most of which President Obama is proposing to renew without offsetting.

Now, we increased it by $1 trillion because of the spending that we had to make on the stimulus.

This is roughly true. The CBO estimates that the American Recovery and Reinvestment Act will cost around $860 billion. With interest costs, this will likely exceed $1.3 trillion.