Administration Claims Extra TARP Cash Is Deficit Reduction

This morning, a Wall Street Journal article reported that the White House intends to use some of the remaining TARP cash for deficit reduction, while also keeping some funds available for emergencies.

The article reported that the Administration is also expected to lower the ten-year cost of the program from $341 billion, as reported in OMB’s Mid-Session Review, to $200 billion. This reduction is a result of two factors: lower expected spending and more optimistic assumptions regarding payback rates.

Based on CRFB calculations at Stimulus.org, the TARP program currently has $385 billion outstanding, for a cost of around $160 billion. Because new TARP investments are likely to have economic returns, $40 in costs can probably be leveraged to spend around $80 billion on new TARP programs.

(We arrive at this figure by assuming that the remaining $23 billion for the Home Affordable Modification Program – which does not have an economic return – is spent; that would leave an additional $20 billion which, if spent similarly to existing TARP funds, would allow for around $60 billion in additional investments.)

The article also stated that an additional $50 billion in TARP investments is expected to be repaid in the next 12 to 18 months, which could further increase available funds for new investments.

While we do not believe the government should be spending TARP money that it doesn’t need to, stating that leftover TARP cash will be used for deficit reduction is a bit misleading. True, the OMB now projects the program to cost $140 billion less than they did previously. But their new projections would only be $20 billion lower than CBO’s. Moreover, we have a hard time accepting that not spending more is a form of deficit reduction – it’s merely a form of not making the deficit worse.

It is encouraging that the White House is starting to talk about real policies to reduce the budget deficit. But to really get serious, we need to look at the structural deficit, relying on permanent policy changes rather than one-time policies whose effects will not extend beyond this year.

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