The Bottom Line

October 3, 2014

The Federal Reserve's efforts to help the economy recover through quantitative easing (QE), twisting, and tapering have made front page news without fail. Although it has gotten less attention, the Treasury Department has also been changing the way it finances the national debt to take advantage of lower interest rates, inadvertently counteracting some of the intended effect of the Fed's policies on the economy. That's exactly what a new Brookings working paper by Robin Greenwood, Samuel Hanson, Joshua Rudolph, and Lawrence Summers argues: during the past 5 years, the Fed and the Treasury have been "rowing in opposite directions."

In 2008, the Fed reduced interest rates to near zero in an attempt to help the economy grow. But nominal interest rates cannot go below zero, so conventional monetary tools stopped working. To further stimulate the economy, the Fed took extraordinary measures and began purchasing long-term government bonds and government guaranteed debt (like Mortgage Backed Securities, or MBS). These measures reduced the amount of long-term debt available for public investors and lowered long-term rates.

But while the Fed was engaging in these unconventional transactions, the Treasury was selling more long-term debt to lengthen the average maturity of the national debt, thereby locking in today's low rates and mitigating the risks of higher interest rates in the future, essentially providing a partial counterbalance to the Fed’s policies.

October 3, 2014
Republicans look to change budget rules in 2015

If Republicans win a majority in the U.S. Senate this November, they may push to have the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) use dynamic estimates in official scoring of legislation, according to press reports. Dynamic estimates, which include the economic effects of proposed legislation, would provide useful information to lawmakers. Trying to determine these effects, however, is an uncertain science.

Analysis of the potential dynamic effects of legislation could provide policymakers with useful information in evaluating legislation. However, incorporating dynamic analysis into official budgetary scores of legislation could be problematic for a variety of reasons and could lead to Congress enacting legislation that increases the deficit. While such analysis could be beneficial to understanding the full implications of legislation, it should only be provided as supplementary information and not part of the official score.

In brief, dynamic estimates incorporate the effect that legislation would have on macroeconomic variables such as Gross Domestic Product, employment, and inflation. Current scoring conventions only include microeconomic changes. To learn more about dynamic scoring, read our report: Understanding Dynamic Scoring.

October 2, 2014

A new paper by Donald Marron of the Urban Institute brings a new idea to the table in the debate over accounting methods for federal lending programs. The paper proposes an approach Marron argues corrects the downsides he describes in both current Federal Credit Reform Act (FCRA) budget accounting standards and fair-value accounting. His approach is called "expected returns," and it is a third way that maintains some of the benefits of both approaches.

Simply put, expected returns accounting calculates a yearly expected value on a loan by comparing the government's returns net of defaults to its borrowing costs (interest on the new federal debt that funds the loan). This method, the paper argues, is a more accurate picture of the actual fiscal effects of the loan over many years in contrast to showing the lifetime effect of a loan in one year as FCRA and fair-value do. This presentation allows for the accounting of any taxpayer subsidies over market rates, an important point made by fair-value. Expected returns accounting departs from both approaches by spreading the score over time when net returns or losses are expected.

Below is an example of a $1,000 dollar loan at below market interest rates from the paper. The government loses $35 in the first year because the loan is below market rates, but it gains money in later years as its returns exceed borrowing costs.

October 2, 2014

Two weeks ago, we discussed results from two different Accountable Care Organization (ACO) programs in Medicare, which showed an improvement in quality but only modest savings so far. But ACOs are still in their early stages, giving policymakers plenty of opportunities to learn lessons on how to fine-tune them to better serve Medicare beneficiaries and taxpayers. Last week, Reps. Diane Black (R-TN) and Peter Welch (D-VT) released a bill (H.R. 5558) to do just that, establishing greater incentives for high-quality, low-cost care from providers and more engagement with patients. Many of these goals are consistent with policy options that were discussed at the Dartmouth Medicare conference, co-sponsored by Fix the Debt, where experts emphasized ways to achieve more coordinated care and better patient engagement.

The bill would make a number of changes to give ACOs greater flexibility to accomplish their goals, specifically:

    • Providing regulatory relief for ACOs that use two-sided risk models and that make greater use of telehealth and remote patient monitoring;
    • Authorizing reduced cost-sharing for primary care services; and
    • Allowing ACOs to establish other incentive programs for patients to ensure their own wellness.

In addition, beneficiaries would be prospectively assigned an in-network primary care physician, who would be required to give beneficiaries information about the ACO at initial check-ups.

October 1, 2014
14 Facts about FY 2014

The calendar turns over for the federal government today as FY 2015 is underway. Unlike last year, which started with the government being shut down for the first two-and-a-half weeks, a continuing resolution will fund the government through December 11 mostly at FY 2014 levels. The drama-free start to FY 2015 was set up by the chaos of early FY 2014, as the government shutdown led to a budget conference that set spending levels for the next two years.

It's not clear how FY 2015 will unfold with midterm elections next month, but we can take a look back at what happened in the year that just finished. Here are 14 important facts about FY 2014.

October 1, 2014

With the Disability Insurance trust fund running out of money in two years, time is running out to discuss a smart solution to the program's imbalance.  Earlier this month, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) announced the formation of the SSDI Solutions Initiative to identify concrete, practical strategies for reforming the program to make it work better for beneficiaries, taxpayers, and the economy.

The SSDI Solutions Initiative took the first step toward identifying ideas to improve the SSDI program last week by issuing a call for papers, seeking ideas to improve disability insurance. Disability experts can respond to the call for papers by submitting a paper proposal by November 1. First drafts of the papers will be due April 1, 2015, and final drafts will be due on June 15, with presentations made at a conference in mid-2015. Proposals should be sent to info@ssdisolutions.org.

Authors with innovative ideas or variations on existing SSDI reform ideas are encouraged to submit their proposals. The SSDI Solutions Initiative will accept papers on a number of areas related to SSDI, but they are particularly looking at 8 different categories:

    1. Improving the Disability Determination Process
    2. Modernizing Determination Criteria and Program Eligibility
    3. Strengthening Program Integrity and Management
    4. Improving Incentives and Support for Beneficiaries to Return to Work
    5. Encouraging Disabled Workers to Remain in the Workforce
    6. Improving SSDI Program Interaction with Other Federal, State, Local, and/or Private Programs
    7. Moving Beyond the Current "All or Nothing" System of Awarding Benefits
    8. Encouraging Employers to Support Disabled Workers
September 29, 2014

Congress might not be too popular these days, but quietly a week and a half ago, they passed a small but important bill that could pave the way for Medicare delivery system reforms. Just before leaving town, the House and the Senate each passed the Improving Medicare Post-Acute Care Transformation, or IMPACT, Act of 2014 (H.R. 4994), by unanimous consent.

The National Law Review framed it appropriately:

The bill would enact data standardization across various post-acute care settings which could feed into various site-neutral and bundled payment initiatives. These initiatives could take a number of forms including independent legislation that targets the post-acute care sector, inclusion in broader payment reform efforts like the Medicare physician payment formula (SGR), and/or in efforts out of the Centers for Medicare and Medicaid Services (CMS) via demonstration authority. As we have noted in the past, post-acute care remains one of the top areas where health policy experts anticipate promising Congressional action this and next year. For example, post-acute care has been a priority for Senate Finance Committee Chairman Ron Wyden and is an area ripe for significant delivery and payment reforms.

The bill itself has little impact on the budget, increasing spending by $222 million to satisfy the new data requirements, offset by penalties for Skilled Nursing Facilities (SNFs) that don't satisfy the reporting requirements and reductions in caps on payments to beneficiaries in hospice care. The bill overall would save money but rather than use the net savings to reduce the debt, it adds $195 million to the "Medicare Improvement Fund," which hasn't actually funded Medicare improvements but serves as a sort of piggy bank to pay for doc fixes and other health policies.

September 29, 2014

Few topics elicit more yawns than a deep dive into accounting standards. Yet, there may be good reasons to grab a cup of coffee and pay attention to the way our government does its bookkeeping. As a National Affairs article by Jason Delisle and Jason Richwine and a Congressional Budget Office (CBO) report on federal mortgage guarantees remind us, accounting methods can make a big difference for budget projections.

According to the official method for evaluating credit programs spelled out in the Federal Credit Reform Act (FCRA) of 1990, the federal government earns healthy profits from its federal student loan portfolio and the single-family loan guarantee program, to the tune of $184 billion and $63 billion respectively. But as we have explained before, there are different methods to evaluate the budgetary impact of federal programs. Using a different accounting method, known as fair-value accounting, CBO projects that these programs could actually cost the government $95 billion and $2 billion respectively. (Click here to read more about fair-value accounting.)

September 29, 2014
Medicare Shortfall Demands Attention

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

At Dartmouth College in New Hampshire, there was recently a gathering of major healthcare public policy experts, senior staff of congressional health committees, and people concerned about both the health of Medicare and the health of the nation’s fiscal situation.

It was a small group with a specific goal: To come up with some doable proposals that are bipartisan in nature and can be used both to improve the delivery of Medicare to seniors and to reduce its unsustainable cost path, which is a large driver of the nation’s debt.

It was called “The Dartmouth Summit.”

September 25, 2014

Despite partisan differences in Washington, there's actually considerable bipartisan consensus around many elements of tax reform. That's the conclusion of a new report by the Center for American Progress (CAP). The report includes two dozen specific policies to raise $1.4 trillion of revenue over ten years that have been proposed by both Republicans and Democrats, although notably the proposals from Republicans were part of a fundamental tax reform plan that was revenue-neutral overall. Most of the consensus policies come from the President's budget and House Ways and Means Chairman Dave Camp's (R-MI) Tax Reform Act of 2014.

The report outlines a number of reductions in tax expenditures and other policies to raise revenue. On the corporate side, policies include eliminating accelerated depreciation, requiring businesses to write off half of advertising costs over ten years, eliminating last-in first-out accounting, implementing a big bank tax, and restricting earnings stripping and transfer pricing manipulation. The corporate income tax policies raise over $750 billion over ten years.

On the individual side, policies include limiting the benefit of exclusions and deductions for high earners, increasing rates on capital gains and dividends, reducing the mortgage interest deduction, and eliminating the break for "like-kind" exchanges. The report also proposed a few tax cuts through an expanded Earned Income Tax Credit (EITC); in particular, the report would extend the 2009 EITC expansions for married couples and families with three or more children and expand the credit for childless workers. On net, the individual tax policies would raise more than $550 billion, although the report suggests that the EITC expansions could be paired with some of these policies to form a revenue-neutral package.

September 24, 2014

Some lawmakers appear poised to push an unpaid-for permanent "doc fix" during this year's lame-duck session of Congress, potentially adding nearly $200 billion to the debt, according to a CQ Roll Call article. Although some lawmakers are looking for offsets, adding the cost to the debt is misguided, especially with so many health care options available which can improve the health care system while also lowering costs.

With a number of deadlines approaching, the lame-duck session after the midterm elections promises to be busy. Lawmakers will have to deal with appropriations again with the current continuing resolution set to expire on December 11, and decide whether to renew a host of predominantly business tax breaks -- known as "tax extenders" -- and whether to continue increased Medicaid payment rates to primary care physicians.

So far, the Senate Finance Committee has passed a two-year extension of almost all of the tax extenders at an $85 billion price tag. Adding a permanent doc fix would increase the cost of the bill to between $200 and $300 billion. Instead, lawmakers should offset the costs of both these bills (and/or pare them down) rather than bundling them together in a fiscally irresponsible giveaway bonanza to special interests.

September 24, 2014

Treasury Secretary Jacob Lew proposed administrative rules this week that would limit the benefits of tax inversions, where companies move their headquarters overseas for tax reasons. The rules target abusive practices where deals were often structured solely to skirt U.S. tax law. They eliminate some incentive for companies to invert, but many of the basic incentives to invert will remain until fundamental tax reform passes Congress and is signed by the President. 

Recent months have seen a wave of actual and proposed corporate "tax inversions," where U.S. companies merge with a foreign corporation to move their headquarters overseas and avoid the high statutory U.S. tax rate on corporate income. Inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years. The Obama Administration had been pushing for legislation to address the issue, but after Congress left town for campaign season without addressing the issue, the Treasury Department moved forward in areas where they believe they have clear legal authority.

While the proposal reduces some benefits to inversions and may cause some companies to rethink their plans, inversions are a small symptom of an outdated tax code.

September 24, 2014

A new bipartisan bill seeks to drive down prescription drug costs for consumers and the federal government.

The Fair Access for Safe and Timely Generics Act or FAST Generics Act (H.R. 5657) was introduced late last week by Rep. Steve Stivers (R-OH) and Rep. Peter Welch (D-VT). It's goal is to close a loophole in drug safety rules (Risk Evaluation and Mitigation Strategies, or REMS) that allows name-brand drug manufactures to withhold access to some drug samples from generic manufactures, who generally use these samples to help produce safe and cheaper generic versions of drugs.

This bill comes on the heels of a report by Matrix Global Advisors that estimated:

[the] delay [in] generic market entry for these products totals $5.4 billion in lost savings to the U.S. health care system annually. The federal government bears a third of this burden, or $1.8 billion… Among government health care programs, Medicare, which accounts for nearly 26 percent of total U.S. prescription drug spending, experiences lost savings of $1.4 billion annually. The economic cost to Medicaid (both federal and state) totals $400 million.

A version of this policy proposal was also contained in a 2012 bill (S. 2516) by Senator Tom Harkin (D-IA), which CBO estimated at the time would reduce deficits by $753 million over ten years.

September 23, 2014

The Urban Institute last week released its eighth annual Kids’ Share report summarizing data and trends in federal, state, and local spending on children. The report’s findings highlight a troubling trend: unless we reign in growth in entitlement programs and control the debt, spending on entitlements and interest payments will squeeze out funding for most other programs in the next decade, including investments in children. As a result, spending in all other programs will decrease as a percentage of the total federal budget.

In 2013, the federal government spent $464 billion on children, mostly through Medicaid, tax provisions – such as the Earned Income Tax Credit (EITC), the child tax credit, and the dependent exemption – and the Supplemental Nutritional Assistance Program (SNAP, formerly known as food stamps).

Spending on Children in FY 2013
 

While federal funding for children increased slightly from the $460 billion (in 2013 dollars) spent in 2012, it is still 7 percent below the $499 billion spent in 2010, although that peak reflects some temporary spending in the 2009 stimulus. But trends show that under current law children’s programs will face significant pressure in the future.

September 22, 2014

As we have been reporting, many reforms to the Social Security Disability Insurance (SSDI) program could improve its effectiveness, fairness, and sustainability. One potential area for improvement is program integrity. The Office of the Inspector General (OIG) recently published a report on preventing and detecting fraud in the Social Security Disability Insurance (SSDI) system. The report summarizes existing recommendations to reduce fraud in light of recent cases in New York, Puerto Rico, and West Virginia.

Over the past decade, the number of SSDI applications, awards, and beneficiaries has increased substantially as baby boomers have reached an age range with a higher probability of disability. Benefit payments have increased, but revenue coming into the system has not. As a result, the Disability Insurance Trust Fund is projected to run out of funds in late 2016.

The increase in applications and beneficiaries poses organizational challenges for the Social Security Administration (SSA), which must review applications in a reasonable timeframe while preventing fraud. The report outlines vulnerabilities and recommendations throughout the benefit process.

September 19, 2014

The resolution setting next year's budget continues this year's levels of war spending, despite the fact that the federal government was supposed to spend much less after reducing troop levels in Afghanistan. It contains war spending at an annualized level $26 billion higher than requested by the President. Even if some funds are spent on operations against the Islamic State terrorist group, billions are still being appropriated above what is needed for overseas operations without a clear purpose.

Broadly, the continuing resolution extends last year's spending level of $1.012 trillion for regular discretionary spending. (See our blog House Resolution Continues Last Year’s Spending, Mostly for the exceptions). In addition, Congress designates an amount for Overseas Contingency Operations (OCO) not restricted by the same discretionary spending caps. The resolution continues OCO funding at the FY 2014 level of $92 billion, $26 billion higher on an annual basis than the Administration's $66 billion request.

Since the resolution only covers two-and-a-half months, continuing spending at the FY14 rate would provide about $5 billion more than requested for the length of the CR. The decision to continue funding for OCO at the last year's levels could be even more significant if Congress continues this policy when revisiting a long-term CR or omnibus bill after this CR expires in December.

September 19, 2014

A new paper suggests that tax cuts that add to the deficit provide little boost to economic growth and may actually hinder it. Last week, the Tax Policy Center (TPC) put out a paper entitled “Effects of Income Tax Changes on Economic Growth,” summarizing the academic literature.  According to the authors, Bill Gale from Brookings and Andrew Samwick from Dartmouth, the net economic impact of a deficit-financed income tax cut is either small or negative, with the negative effects of additional debt likely overwhelming the economic benefit of lower rates, particularly over the long term.

Tax cuts have the potential to grow the economy, but their benefit depends on how they are structured and financed. For tax changes to promote growth, changes should encourage work and investment through lower rates, efficiently encourage new economic activity (rather than providing a windfall for previous investments), reduce economic distortions, and create minimal (if any) increases in the budget deficit.

The key question is, how do you pay for tax cuts?  If tax cuts are deficit-financed, the negative economic effects of debt will crowd out investment, which can outweigh any positive growth impact from the tax cut. CBO has found that an “Alternative Fiscal Scenario” representing roughly a $2 trillion increase in deficits over ten years would lead to a 7.5 percent smaller economy in 25 years, while a deficit reduction plan of $4 trillion would increase the size of the economy by 2 percent. Increased revenue has been a key part of many bipartisan plans for deficit reduction, including Simpson-Bowles and Domenici-Rivlin.

Importantly, however, the lack of growth from deficit-financed tax cuts is distinct from the effects of either tax reform, which pairs rate reductions with base broadening, or tax cuts that are financed through simultaneous spending reductions to reduce government consumption. Using base broadening to pay for lower rates avoids crowding out other investment, but would likely temper the economic gains because some base broadening can push up effective marginal tax rates on taxpayers who were taking advantage of the closed loopholes.

September 18, 2014

In a commentary published today in Roll Call, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) argue Congress should take a closer look at Social Security Disability Insurance (SSDI).

As they explain, the looming 2016 deadline, when the program’s trust fund is projected to become insolvent and result in an immediate across-the-board cut in benefits, will force Congressional action. Given the importance of the SSDI program, they worry about the dangers of waiting until the last minute. They are calling for a constructive debate on SSDI well in advance of the insolvency date, saying "if policymakers wait until the last minute to start cobbling together solutions, they could make things far worse."

In an effort to help inform the debate on potential reforms to the SSDI system, they joined forces to launch the bipartisan McCrery-Pomeroy SSDI Solutions Initiative.

September 18, 2014

Retirement saving policy took center stage Tuesday on Capitol Hill and in the policy world. The Senate Finance Committee held a hearing to discuss ways to improve savings incentives and policies, and Third Way proposed one way to do so.

The Senate Finance hearing featured five witnesses from a broad array of perspectives. All agreed that the current system could be improved. Many witnesses agreed on simplifying retirement account rules, expanding the number of small businesses that offer retirement plans, and promoting the benefits of auto-enroll plans where workers are automatically enrolled in their company's retirement plan until they opt out. Beyond that recommendation, witnesses and lawmakers had serious disagreements how retirement savings should be improved.

The witnesses were:

    • John Bogle, Founder and former CEO of Vanguard
    • Brian Reid, Chief Economist of the Investment Company Institute
    • Scott Betts, Senior Vice President of the National Benefit Services
    • Brigitte Madrian, professor at the Harvard Kennedy School
    • Andrew Biggs, Resident Scholar at the American Enterprise Institute

Chairman Ron Wyden (D-OR) started the hearing by noting skewed tax incentives for retirement saving. As he explained, these incentives cost the federal government $140 billion per year, yet millions of Americans do not have adequate retirement savings. He noted that some taxpayers use the tax-free accounts to accumulate multimillion dollar balances, a practice that has attracted attention in recent years. Ranking Member Orrin Hatch (R-UT) described the bipartisan history of support for retirement tax incentives and hoped that lawmakers could continue without resorting to partisan slogans.

The witnesses disagreed on the effectiveness of current tax incentives.

September 17, 2014

The Centers for Medicare and Medicaid Services released some mixed news on Tuesday for health care reformers -- the results of two different Medicare Accountable Care Organization (ACO) programs in 2013. Twenty-three Pioneer ACOs and 220 ACOs in the Medicare Shared Savings Program (MSSP) generated somewhat modest savings of $372 million for Medicare while qualifying for shared savings payments of $445 million. Both programs performed better on quality benchmarks and patient experience compared to fee-for-service (FFS) Medicare. ACOs are one model that many reformers hope will provide a path forward for better coordinated, higher quality, and more affordable care delivery.

The Pioneer ACOs involve organizations and providers that are more experienced in coordinating care, so they are already on the second year of the program and have more ambitious savings targets. The Pioneers may share in savings if they exceed those targets but also face risk if they fail to meet them, unlike most MSSP ACOs. Overall, Pioneer ACOs saved $96 million, $41 million for the Medicare trust funds, and qualified for $68 million of shared savings payments. Eleven of the 23 ACOs qualified for those payments, while 3 had losses.

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