With health care spending a central topic in budget discussions, the actuaries at the Centers for Medicare and Medicaid Services (CMS) have released a timely report on the growth of National Health Expenditures (NHE). In the report, published in Health Affairs, CMS finds that total health care spending (both private and public spending) in the U.S. in 2011 reached $2.7 trillion, or about 17.9 percent of GDP. This comes out to roughly $8,700 per person.

Compared to the prior year, this is an increase of 3.9 percent and the third year in a row that health care cost growth has not increased above this level. This increase is also in line with the growth of GDP -- about 4 percent in 2011 -- meaning that the NHE as a share of GDP has remained the same. While lawmakers debate rising health care costs, this report would appear to suggest health care costs are actually slowing relative to the previous decades which averaged increases of 7.8 percent per year. But will this slowdown last?

Last summer, we discussed this question when the actuaries released their projections for the next decade on health care cost growth. At that time, they projected health care cost growth would increase on average 5.7 percent annually from 2011-2021, but only about 0.9 percentage points faster than GDP. For context, the Independent Payment Advisory Board's target growth rate for Medicare spending is GDP plus 1 percent, and health care spending growth has often well exceeded this target in the past. This week’s report sheds more light on some of the reasons for this slower growth, and provides some more clues as to whether this trend is a temporary consequence o the recession or whether it will continue over the long term.

While the recession ended in June 2009, its effect persisted into 2011 with continued levels of high unemployment, and therefore a decline in health insurance coverage. The CMS actuaries point out this is typical of economic downturns, although was more pronounced than prior economic cycles. The impact on insurance coverage was one of the biggest contributors to the slower growth in NHE. When people lack coverage they tend to seek less medical care, resulting in a reduction in use and intensity of services. Together with a decline in the amount and mix of investment in structures and equipment, this decrease has been a major factor in slower health care cost growth. As the economy recovers and unemployment trends downward, it is unclear how much longer this will continue to affect the growth rate.

Some have pointed to the Affordable Care Act as a source of slower growth, potentially even having a longer term effect. However, the actuaries find that the ACA’s influence on NHE was minimal and had no discernible impact in 2011. Other factors in the CMS report include slower growth in the use of hospital services and physician and clinical services in the volume of prescription drugs dispensed. What remains uncertain is how new cost containment pilots will have an impact and how providers will respond to them. Richard Foster, Chief Actuary for CMS, remains optimistic:

The jury is still out whether all the innovations we’re testing will have much impact…I am optimistic. There’s a lot of potential. More and more health care providers understand that the future cannot be like the past, in which health spending almost always grew faster than the gross domestic product.

This is not the first time we’ve seen this kind of slowdown in health care cost growth. Most recently in the 1990s, the expansion of managed care and Health Maintenance Organizations (HMOs) along with Medicare provider cuts slowed the average annual growth of NHE slightly. However, this was short-lived as the backlash against managed care produced a reversal in this pattern in the latter part of the decade.

^{Source: Centers for Medicare and Medicaid Services}

The 2011 growth rate is a sign of an encouraging trend, but history shows us that trends can easily reverse in the years ahead. Over the next two decades, CBO forecasts that the overall aging of the population will account for the majority of the growth in major health programs, but thereafter health care cost growth will become the lead driver of federal health care spending. Already, despite slower growth for other payers, the federal government’s share of NHE has increased to 28 percent of total health spending compared to 23 percent in 2007.

If the current NHE trend continues to slow, this may improve projections for federal health expenditures, but the experience of the 1990s teaches us we cannot take it for granted. Lawmakers should not use the current trend as a reason for complacence. Long-term reforms to federal health programs and health care spending more broadly will be needed to not only bring down future deficits, but to ensure the sustainability of these programs for generations to come.

Last week, as reported on our "Debt Ceiling Watch" blog, the U.S. reached the statutory debt limit, and the Treasury Department began using extraordinary measures to postpone defaulting on our debt. Secretary Geithner has warned there is approximately $200 billion in headroom using these measures until we default on our debt. With the clock ticking, the Bipartisan Policy Center has released a very detailed and timely analysis of the debt limit and when the so-called “X Date” (or default date) could occur. The report is authored by Steve Bell, Loren Adler, Shai Akabas and Brian Collins .

In their report, the authors highlight examples of the current extraordinary measures which the Treasury is currently taking to delay default. As we’ve discussed in great detail before, these include borrowing from the Federal Employees’ Retirement System G-Fund, the Exchange Stabilization Fund, interest payments and cash receipts to the Civil Service Fund and Postal Fund, and maturing securities in the Civil Services Fund and Postal Fund. BPC notes that these measures will not last as long as they did during the debt ceiling standoff in the summer of 2011. At that time, the Treasury was able to delay by over two and a half months. Unfortunately, the timing of this debt limit falls in the beginning of the year, which is a worse month for government finances than the summer.

After the Treasury depletes its extraordinary measures, the authors explain that the government will only be left with daily cash revenue and cash on hand. The BPC concludes that the “X date” -- when both extraordinary measures, daily revenue, and cash on hand are all exhausted -- will occur sometime between February 15 and March 1. This means the US will default on its outstanding obligations around the same time that the sequester is scheduled to take effect (March 1) and less than a month before the current Continuing Resolution funding the government expires (March 27).

Since there is no precedent for defaulting on our debt, the BPC walks through several scenarios for what could happen if lawmakers cannot agree to raise the debt ceiling. Under one scenario, the Treasury might choose to pay some bills and not others, causing a great deal of uncertainty and questions of fairness. This would lead to prioritizing some payments over others, and could even mean not making Social Security payments, Medicare payments, and taxpayer refunds. Under another scenario, the Treasury might wait until it has collected enough daily revenue to pay off a day’s worth of payments. The report goes into further detail, analyzing daily expenditures and revenue during the projected default time frame. The breakdown demonstrates how much more the U.S. will have in obligations each day than they will have in revenue, making it difficult to even pay off one day’s worth of spending with two days’ worth of revenue.

Above all, the most serious risk of these sudden cuts to spending obligations will be the impact on the economy. BPC’s analysis warns of high interest rates, additional credit rating downgrades, and the potential for serious harm to the entire global financial system. Last year, the Government Accountability Office found that higher interest rates caused by the debt ceiling debate and last-minute solution cost $1.3 billion in 2011. As lawmakers continue to delay a deal on raising the debt ceiling, we face a repeat of incurring unnecessary borrowing expenses while jeopardizing the economy. What’s even more detrimental this time is that the potential debt ceiling breach will coincide with the sequester going into effect. The BPC report assumes the sequester will not go off, but should lawmakers not act on both issues, that would add insult to injury in terms of the economic impact and uncertainty of federal payments.

To get us through the next few years, the BPC projects the debt limit will need to be raised by $1.1 trillion through the end of this year or $2.1 through the end of 2014. After yet another disappointing round of budget negotiations last week, the BPC analysis reminds us why it is critical that lawmakers use the next few weeks wisely to come together in a bipartisan manner to raise the debt ceiling and enact a plan to bring down deficits in the future.

For more information, you can find our primer on the debt ceiling here.

Should Old Reluctance Be Forgot? – A new year and a new Congress have been ushered in. However, hopes for putting behind the fighting and foot-dragging of the past are fading as quickly as the Redskins playoff hopes. The stage is set for a series of budget battles this year with both sides already laying down their markers. While the players and owners in the NHL may have settled their differences, the fiscal cliff deal did little to settle the budget disputes in Washington. Be prepared for more budget drama in 2013.

Fiscal Cliff Avoided, but Issues Remain – Washington briefly went over the fiscal cliff on New Year’s Day, but Congress approved of an agreement pulling the country back from the cliff, if only temporarily. While the deal addressed the tax components of the equation, renewing tax cuts for families earning under $450,000 and extending a series of tax breaks, it put off the across-the-board spending cuts known as the sequester for two months, guaranteeing yet another budget battle. At the same time, the deal did little to address the country’s fiscal problems, as we pointed out, saving only $650 billion over ten years compared to current policy and actually costing $4.6 trillion over that same period according to the official current law baseline that assumed all the tax cuts would expire. While the deal lessened the short-term economic impact of the cliff by more than half, the unsustainable long-term debt trajectory was barely dented. Former Fiscal Commission co-chairs Alan Simpson and Erskine Bowles called the deal a “missed opportunity” to get a comprehensive plan to address the debt even though the cliff was set up to compel both sides to forge such a plan. The fiscal cliff is the latest in a long line of missed opportunities to seriously deal with the national debt. The Fix the Debt Campaign advises everyone to “Hold Your Applause” for the deal since there is still much work to be done.

Debt Ceiling Déjà Vu? – The U.S. officially hit the statutory debt limit as the new year dawned. The Treasury Department is using “extraordinary measures” to stave off a default. Such actions should be sufficient until around the end of February, at which time the debt ceiling will have to be raised in order to prevent a national default. Republicans want to use the debt limit to enact spending cuts at least equal to the amount of the debt ceiling increase while President Obama has said he will not negotiate over the debt limit, expecting a clean increase to avoid an economic calamity. Keep track of debt ceiling developments here, and read our primer for a refresher on the topic.

Dropping the Budget Ball – Even though we are a quarter of the way through fiscal year 2013, the spending picture for the year is not yet fully resolved. A stopgap measure funding the federal government expires on March 27. While House and Senate lawmakers are working to craft a spending package for the remainder of the year, a government shutdown may be threatened over the issue of spending cuts. On top of that, debate over the FY 2014 budget will soon begin. The White House has already said that it has delayed the budget process because of the fiscal cliff and the upcoming negotiations, meaning it could miss the standard deadline of the first Monday in February to present its proposal. Fixing the dysfunctional budget process remains a necessity. On a somewhat related note, the House approved continuing the ban on earmarks.

Tax Reform on the Agenda – The fiscal cliff deal was not the last word on taxes. Congress plans to take up a fundamental rewrite of the tax code this year. Democrats want to raise additional revenue by limiting or eliminating deductions and other preferences known as tax expenditures, while Republicans want reform to be revenue-neutral. CRFB shows how fundamental tax reform can reduce rates and the deficit by dealing with tax expenditures.

Sandy Aid Moves – Last week, Congress approved legislation authorizing $9.7 billion in additional flood insurance for victims of Hurricane Sandy. Next week the House is expected to take up a larger $51 billion package that includes funding for Sandy recovery and rebuilding efforts as well as projects to mitigate the effects of future disasters. Whether any of the funding should be offset will be a matter of some dispute. This is yet another example of the need for Congress to improve how it budgets for disasters.

Key Upcoming Dates (all times are ET)

January 16

• Dept. of Labor's Bureau of Labor Statistics releases December 2012 Consumer Price Index data.

January 21

• President Obama publicly sworn in for his second term (a private swearing in will occur on Sunday the 20th, the technical inauguration date).

January 30

• Bureau of Economic Analysis releases advance estimate of 2012 4th quarter and annual GDP.

February 1

• Dept. of Labor's Bureau of Labor Statistics releases January 2013 employment data.

February 4

• By law, the President's budget must be submitted by the first Monday in February, occurring February 4 this year.

February 21

• Dept. of Labor's Bureau of Labor Statistics releases January 2013 Consumer Price Index data.

February 28

• Bureau of Economic Analysis releases second estimate of 2012 4th quarter and annual GDP.

March 1

• Across-the-board cuts to defense and non-defense discretionary spending prescribed in the Budget Control Act, known as "sequestration," will take effect.

March 8

• Dept. of Labor's Bureau of Labor Statistics releases February 2013 employment data.

March 27

• Current continuing resolution (CR) funding the federal government expires.

March 28

• Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.

So far, we have analyzed the fiscal cliff deal by looking at the good, the bad, and the ugly in the package, showing what the deal does to the budget, and estimating the short-term economic impact of the deal. This blog will look at the potential impact of the deal over the long term.

Just as it did in the medium term, the American Taxpayer Relief Act will significantly increase deficits and debt relative to current law. Previously, the drastic amount of deficit reduction in the fiscal cliff combined with the ever-increasing reach of the Alternative Minimum Tax and health insurance excise tax over the long term had debt actually being paid off by 2070 under current law (2060 including a drawdown of war spending). Now, debt is stabilized in the medium term but on a clear upward path over the long term, since most of the tax cuts have been extended and the reach of the AMT has been limited. Relative to current policy, the expiration of some of the tax cuts will slightly reduce deficits and debt.

As you can see below, under both current law (including the war drawdown) and the two versions of current policy presented (CRFB Realistic and CBO's Alternative Fiscal Scenario), debt as a share of GDP would rise significantly over the long term, well exceeding the size of the economy by the 2030s in all three scenarios.

^{Source: CBO, CRFB calculations
Note: Both current law scenarios include a drawdown of war spending.}

Please note that these estimates are based off of CBO's economic assumptions from their August baseline, which include both the severe short-term impact of the fiscal cliff and the mildly positive longer-term impact of the deficit reduction in current law. Both aspects would likely change when CBO updates these assumptions in their next baseline.

The deal has made current law and current policy converge greatly, but there are still some differences in assumptions. They include:

• Tax Cuts: While most of the tax cuts in the deal are permanent, the 2009 refundable tax credit expansions and "tax extenders" are set to expire after five years and one year, respectively. Current law assumes that they expire as scheduled while the other two scenarios assume they are permanently extended.
• Health Care Spending: The "doc fix" that prevented a 27 percent cut to Medicare physician payments will only last for a year. Current law assumes that there will be no extension of the doc fix, while the other two scenarios assume that it is extended permanently. Over the long term, health care cost growth in current law basically assumes that the Affordable Care Act is successful in achieving its cost containment goals through 2030. The AFS assumes that it is only successful through 2022. CRFB Realistic assumes a growth path in between current law and the AFS.
• Discretionary and Other Mandatory Spending: While current law assumes that the sequester will go off in two months as scheduled, both AFS and the CRFB Realistic scenario assume that it is permanently repealed. Also, while this version of current law and CRFB Realistic assume that war spending is drawn down as planned, the AFS assumes that it increases with inflation. Over the long term, both current law and CRFB Realistic assume that these categories of spending (discretionary and other mandatory) stay constant as a percent of GDP after 2022, while the AFS assumes that they increase over five years and stay at their 40-year historical average beyond 2022 (an annual difference of about 2.4 percent of GDP).
• Long-Term Revenue: Both current law and CRFB Realistic allow certain features of the tax code--particularly, the health insurance excise tax applying to more and more insurance plans over time and the tendency for wages to increase faster than prices (to which tax brackets are indexed)--to push up revenue as a percent of GDP over time. By contrast, the AFS freezes revenue at its 2022 share of GDP. This difference becomes quite substantial over the long term.

The new estimates of the long-term budget outlook show that our fiscal path is unsustainable, regardless of the assumptions. We will need to do much more, especially on health care spending, to change that reality.

Update: CBO confirmed our numbers today, finding a remaining fiscal contraction of about 1 1/4 percent.

The American Taxpayer Relief Act which President Obama just signed into law has averted much of the fiscal cliff while enacting a small amount of deficit reduction. Of course, the short-term purpose of avoiding the cliff was to prevent immediate austerity measures from damaging the economy. We have already described how ATRA would affect the budget, but how did it do on softening the economic harm?

Remember that the fiscal cliff had several components -- some of which were fully addressed and others which were not or only partially addressed. The components of the cliff were:

• The 2001/2003/2010 tax cuts
• The Alternative Minimum Tax (AMT) patch
• The across-the-board spending sequester
• The 27 percent scheduled cut in Medicare physician payments
• The payroll tax cut and unemployment benefits beyond 26 weeks
• The various "tax extenders"
• The taxes from the Affordable Care Act that were scheduled to go into effect in 2013

The first two items were extended permanently, with the exception of tax cuts for essentially the top one percent of earners. The physician payment cuts, unemployment benefits, and tax extenders were all extended for a year. The sequester was delayed for two months. The payroll tax cut, or some equivalent, was discussed as a possibility, but ultimately was allowed to expire. Finally, the ACA taxes went into effect as scheduled.

CBO's pre-deal estimate of the economic effect of the fiscal cliff through 2013 was 2.9 percent of GDP. Using the numbers in that same report, we estimate that the ATRA will reduce the amount of fiscal drag by slightly more than one-half to about 1.3 percent of GDP. Most of the remaining economic impact comes from the ten months of remaining sequestration and the expiration of the payroll tax cut.

But both parties have indicated that they would prefer to repeal the sequester for at least 2013, if not longer. Of course, it remains to be seen how lawmakers plan to replace the sequester. Assuming that they replace it with cuts that take place beyond 2013, the fiscal cliff related drag would be further reduced to 0.7 percent of GDP, the remaining drag being mostly from the payroll tax cut expiration.

^{Source: CBO, CRFB calculations}

There are a few things to note about these calculations. One is that this only looks at 2013, thus ignoring the potential effect of the unemployment benefit/tax extender/doc fix cliff now scheduled for the end of the 2013. That cliff would be much more mild overall than this cliff, but would still have an effect in 2014. The second is that the 1.3 percent number does not represent the total fiscal drag or stimulus from the federal government in 2013, since it does not take into account policies outside of what we label the fiscal cliff (other stimulus in effect or winding down, the discretionary spending caps, or other deficit reduction previously put into place, for example). Finally, this does not account for any increased or reduced uncertainty as a result of the deal or effects related to the failure to adequately tackle our long-term debt problem.

In short, out of a 2.9 percent of GDP economic impact in 2013, lawmakers have permanently averted 1.6 percent of the harm and have the potential to avoid an additional 0.6 percent of it.

After a tense few days, or weeks for that matter, lawmakers have enacted a fiscal cliff package -- the American Taxpayer Relief Act. With budget negotiations likely laying low for a few days, we turn our attention to where the deal leaves the budget. We previously analyzed the budgetary effect of each provision of the deal relative to both current law and current policy. In this blog, we will go into more detail on what the budget will look like after the deal.

Where the bill leaves the budget, however, depends heavily on assumptions made about the future. We look at two scenarios in detail: new current law projections and CRFB Realistic projections. The graph below shows debt under each scenario pre- and post-deal, while the text and tables further down go into more detail.

^{Source: CBO, CRFB calculations}

As we said yesterday, though this package will avert much of the short-term economic effects of the fiscal cliff as a result of temporarily waiving the sequester and renewing most of the tax cuts, it will not halt the longer-term trend of rising debt and the associated economic threats. The 2001/2003/2010 tax cuts and AMT patch will be permanently extended, while the sequester, unemployment benefits, tax extenders, and doc fix will be at least temporarily extended (see a table of the provisions and their budgetary impact here). The deal will add about $4.6 trillion to the debt relative to current law, although it does save $650 billion relative to current policy.

Debt under Current Law Projections

The current law scenario which previously had debt on a downward path now has converged significantly toward the unsustainable current policy path, since current law now includes an extension of most of the 2001/2003/2010 tax cuts and a permanent AMT patch. The current law scenario, however, still allows the sequester to take effect in two months; the tax extenders, Medicare doc fix, and unemployment benefits to expire in one year; and the 2009 refundable tax credit expansions to lapse in five years. Our estimate of what current law projections (including a drawdown of war spending) would show is presented in the table below.

Under current law with a war drawdown, debt would reach a size equal to 73 percent of the economy by 2022, about where it was at the end of 2012, and likely higher levels over the long term.

^{Source: CBO, CRFB calculations}

Debt Under CRFB Realistic Projections

This picture is worse if you look at the CRFB Realistic Baseline. In contrast to current law, this baseline assumes the sequester is permanently repealed, annual doc fixes continue, the refundable tax credits are extended permanently, and war spending draws down as scheduled rather than increasing with inflation. Our Realistic Baseline also assumes that the tax extenders and unemployment benefits expire as scheduled at the end of 2013.

Under CRFB Realistic, debt will likely reach a size equal to 79 percent of the economy by 2022, and much higher levels over the long-term.

^{Source: CBO, CRFB calculations}

One could also argue that the tax extenders could realistically be extended in perpetuity (as their name indicates) without being offset. If that happens, revenue would fall, and spending would increase due to higher interest payments on the debt. Under this scenario, debt will likely reach a size of more than 80 percent of the economy by 2022, and much higher levels beyond that.

It is clear that none of these scenarios are very favorable for the economy over the long term. Stabilizing the debt within a decade is the bare minimum for achieving fiscal sustainability, since changing demographics and rising health care costs will swamp the budget over the next few decades.

Still, there is further opportunity for action, especially given that some parts of the deal are temporary. This package is just the first phase of fiscal negotiations that will pick up again very soon to deal with these outstanding issues. Hopefully, lawmakers will agree on a sufficient and long term deal to stop reckless last-minute deal making.

Stay tuned for more analysis of the fiscal cliff deal throughout the week!

Last night, the Senate voted on and approved a package to avert most components of the fiscal cliff, which we took a preliminary review of last night. Today, however, there are many more details to review now that the legislation is available and JCT has estimated the revenue effects.

In short, the package would permanently extend most of the 2001/2003/2010 tax cuts for incomes below $400,000/$450,000 while letting the ordinary rate above that threshold rise to 39.6 percent and the capital gains and dividends rates to 20 percent; it would increase the estate tax rate from 35 to 40 percent; it would permanently patch the AMT; and it would extend various “tax extenders” for 2012 and 2013. On the spending side, the package would delay the sequester for two months, enact a doc fix for a year, extend unemployment benefits for a year, extend the farm bill for a year, and enact about $50 billion in spending and revenue offsets to pay for the sequester delay and doc fix.

Based on more recent estimates, CRFB estimates that the entire package would increase deficits by about $4.6 trillion over the next ten years compared to current law projections (assuming everything expires or activates as called for) but would decrease deficits and debt by about $650 billion compared to more realistic current policy projections. These revised estimates continue to show that debt would remain on a upward path over the next ten years -- reaching 79 percent of GDP by 2022 – if policymakers are unable to offset a repeal of the sequester and Sustainable Growth Rate. That would be a slight improvement over the CRFB Realistic Projections, which show debt rising to over 81 percent by 2022. Clearly, lawmakers will need to go further, however, to put in place much more savings.

Below is our effort to roughly estimate the parameters of the deal.

Savings and Costs in the Fiscal Cliff Package

So what’s to like and dislike about the deal? Below we explain:

The Good

• Avoids most of the abrupt economic harm from the fiscal cliff by extending or delaying most provisions
• Raises $620 billion in gross revenues relative to current policy, which would contribute to reducing the deficit compared to current policy
• Sets the precedent that extending the sequester has to be paid for and strengthens the precedent that the doc fix should be waived only along with offsetting health provisions
• Leaves in place the ability for lawmakers to discuss further and more meaningful deficit reduction measures in the coming weeks in order to avoid sequestration in the beginning of March

The Bad

• Does not put in place the measures necessary to stabilize the debt as a share of the economy, let alone reduce it
• Does not include any serious entitlement reforms or set up a clear process for considering such reforms even though rising health costs remain our largest single fiscal challenge on Social Security is on a road toward insolvency
• Does not include a process to enact pro-growth and revenue generating tax reforms
• Does not specifically offset the costs of the tax extenders or UI benefits, setting a bad precedent for future extensions

The Ugly

• Uses a tax timing gimmick to pay for part of the sequester. Specifically, it raises $12 billion by allowing people to convert certain retirement accounts to "Roth" accounts so that they can pay their taxes now instead of later
• Cuts taxes by almost $4 trillion relative to current law projections, with a permanent resolution to the 01/03/10 tax cuts and AMT enacted on a deficit-financed basis even when deficit reduction needs have not been met
• Represents an incredible failed opportunity by missing what Erskine Bowles calls a “magic moment” to put in place a comprehensive plan that would simultaneously avoid the fiscal cliff and more importantly enact the spending cuts, tax reforms, and entitlement reforms necessary to truly control rising debt

CRFB hopes that lawmakers will return the table very quickly in the new year to enact savings sufficient in size and scope to solve the country's debt problems.

While most of the country is focused on the fiscal cliff, The New York Times is reporting on another cliff, this one involving the farm bill. Unlike the fiscal cliff, this one involves policies that will increase spending and deficits. If Congress is unable to agree on a farm bill before the end of the year, we would revert back to 1949 law, the last time the government made a permanent farm law. As a result, Washington would be required to purchase milk at more than twice the current market price to set a price floor for producers.

According to the article, milk prices are estimated to double as a result of the price floor. Producers are not happy about this because even though they will benefit significantly from the government's purchases, the hit to consumer demand would be huge. Obviously, consumers would lose big as well and the government would have to increase spending unnecessarily. It's a situation that no one wants. One interesting side note -- if we go over both the fiscal cliff and the farm cliff, the sequester will cut farm programs across the board by about eight percent. It's unclear how this interaction would affect the milk program, but it could dampen some of the negative effects.

So where are we with the farm bill? The Senate passed a farm bill in June that would save $23 billion. The House has not yet brought the farm bill to the floor, but one version that would save $35 billion passed the Agriculture Committee later this summer. Both bills would replace direct payments with a shallow loss program, which would guarantee farmers a certain amount of gross revenue. Although the two bills have slight differences in the design of this new crop insurance program, the combined effect of these policies would save roughly $20 billion over the next decade. One major difference between the two bills is in nutrition programs. In particular, the House Agriculture Committee version restricts categorical eligibility in food stamps--where recipients of benefits in other low-income programs automatically qualify for the program--to cash assistance programs only, saving an additional $12 billion over the Senate version. Overall, these bills are a step in the right direction, but more savings could be gotten in farm programs, and lawmakers should be vigilant that the shallow loss programs do not become overly expensive.

^{Source: CBO} 

Ultimately, the change to food stamps is a major barrier to passage. The measure is seemingly unable to pass the House because Democrats object to those changes, and enough Republicans object to the level of spending in the bill that it cannot pass on strict party lines. House Speaker John Boehner (R-OH) has said that he would not include the farm bill in a fiscal cliff deal, another barrier to its passage. Given the focus on that deal and the limited time until the end of the year, a farm bill will probably not pass in the remaining days of this Congress. That leaves the liklihood of a stop-gap measure for the milk program, thereby pushing off the farm bill to the new Congress and adding it to the growing list of to-do items.

We've talked before about the rational behind implementing the chained CPI, that the current index (CPI-W) does not incorporate substitution effects and therefore overstates inflation. And it turns out a good number of economists agree with us.

A new survey from the University of Chicago's Booth School finds that a great number of economists believe the current measure of CPI used to index Social Security benefits leads to greater benefits that under a true cost-of-living index. This survey indicates implies the use of a slower growing index for COLAs, perhaps the chained CPI.

It's not surprising then that policy experts and lawmakers from both sides of aisle have indicated support for chained CPI. Just today Senator Mark Warner (D-VA) spoke on the floor of the Senate today in support of the chained CPI. He noted that many groups along the political spectrum from the Heritage Foundation, to the Center of American Progress, to the Fiscal Commission has supported chained CPI. Said Warner:

Why do economists support the chained CPI? Because it honors a commitment to  maintain the purchasing power of spending and revenue policies. It provides savings across the budget -- not just in entitlement programs but across other areas.It raises revenues and it contributes meaningfully to the long-term fiscal sustainability of the programs that we want to protect.

Because across the government we have indexed things to inflation - the tax code, entitlement programs, all are indexed -- their rise and decrease is based on inflation. So again, this tool while not perfect, all these groups have said it needs to be part of any reform.

Warner is not the only influential lawmaker to declare support for the policy maker. Chained CPI has appeared in the most recent proposals from both the White House and Congressional Republicans. House Minority Leader Nancy Pelosi (D-CA) said today that chained CPI would strengthen Social Security. With support building for the proposal, we hope it will be found in the final deal.

Click here to see a speech from Warner on the chained CPI.