What is the Real Fiscal Challenge?

Busting the Budget: Healthcare Costs or Entitlement Programs

On Monday, September 15th, six experts in fiscal policy and healthcare policy debated the nature of the nation’s pending fiscal crisis at the National Press Club. Moderated by TaxVox editor Howard Gleckman, the event featured Henry Aaron and Alice Rivlin of the Brookings Institution, Julie Barnes and Maya MacGuineas of the New America Foundation, Robert Greenstein of the Center for Budget and Policy Priorities, and Eugene Steuerle of the Peterson Foundation.

Henry Aaron warned that long-term deficit projections would be unsustainable, but argued that two questions must be answered: what causes these deficits and what should the solution be? Although the answers need not be the same, Aaron explained that healthcare cost growth is both the primary driver, and should be the primary solution. He offered 5 conclusions:

* Projected deficits are large and unsustainable.
* Spending cuts and Social Security reform can help reduce them a little bit, and should be undertaken.
* Healthcare spending, and the taxes needed to pay for them, should continue to grow faster than GDP.
* Healthcare cost growth can be slowed considerably, greatly reducing the projected deficit.
* The problem of future deficits is not an entitlement problem, but a problem of large and growing costs in the overall healthcare system.

Alice Rivlin then suggested that the panelists were in fact debating the wrong question. Rather than arguing over whether closing the fiscal gap should focus on entitlements reform or healthcare reform or tax reform, they should recognize that all three are important. Rivlin explained the there are really two problems driving entitlement growth – demographics and healthcare cost growth. Because of demographics, Social Security costs will rise rapidly over the next two decades and then begin to level off. Medicare and Medicaid, on the other hand, will rise steadily indefinitely. This means that Social Security is important in the short-term, while healthcare entitlements drive the deficit further into the future. Rivlin suggested five main solutions to the looming fiscal crisis:

* Encourage people to work longer by both reforming Social Security and changing rules and incentives in private pensions.
* Encourage more efficient distribution of medical care, using Medicare and Medicaid to lead payment system reform.
* Move toward universal healthcare coverage with spending controls.
* Shift healthcare expenses to the private sector where possible.
* Reform the tax code to make it more equitable and efficient so that it can bring in the needed revenue without being overly burdensome to the economy.

Assorted

Treasury’s Financial-Bailout Proposal to Congress

Bold ideas for solving America’s financial mess

Diamond and Kashyap on the Recent Financial Upheavals

The end of central bank independence, a continuing saga

Where did we go wrong?

Some Observations on the Ongoing Crisis: Causes and Opportunity Cost Again

Modern Financial Systemic Risk: A Primer

Chief Financial Plumber

Can Pakistan live within its means?

The government decided on Friday to eliminate subsidies on oil and gas and to phase out the subsidy on electricity by June 2009 under a plan to stabilise the economy.

Announcing an economic package at a press conference, Finance Minister Naveed Qamar said it was aimed at bringing about macroeconomic stability, narrowing down the fiscal and current account deficits and minimising pressures on foreign exchange reserves.

The finance minister, who was accompanied by State Bank Governor Dr Shamshad Akhtar, said Pakistan would not seek any new assistance from IMF, but international financial institutions and donors could monitor implementation of the package.

“We are not going into an IMF programme,” he said, adding that the “home-grown” package had been worked out in consultation with different stakeholders, including the World Bank, IMF and ADB.

”I can safely announce today... we have eliminated the entire fuel subsidy and there is no additional subsidy today that is going out of the budget to subsidise fuel,” Mr Qamar added.

He said the subsidy on gas had also been withdrawn and the actual cost of gas would now be passed on to consumers.

He admitted that the passing on of subsidies to consumers would add to people’s hardship, but said the government had to stabilise macro-economic indicators which had deteriorated because of the policies of the previous government. He said the government was trying to be close to the fiscal deficit of around 4.7 per cent.

The finance minister said that various measures had been proposed to minimise government spending, but did not elaborate. However, he said the government was looking at PSDP allocations.

”We can only spend what we have in the kitty and suggest a drastic cut in the development sector,” he added.

Admitting that excessive borrowings from the SBP had led to inflation, Mr Qamar said the government had decided to launch non-bank borrowing schemes, including PIBs and commercial papers, in order to curb inflation.

-All fuel subsidies withdrawn

Related;
IMF might bail Pakistan out

New Zealand the model

Willem Buiter talks about the New Zealand model of public financial management;

It is a near-universal rule of time management that the urgent but not necessarily terribly important takes precedence over the important but not terribly urgent. Economic policy making is no exception to this rule. I was therefore pleasantly surprised to read in the papers that Peter Orszag, Director of the Congressional Budget Office (CBO) said on September 9 that “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget”. The CBO is the (non-partisan) federal agency within the legislative branch of the US government that acts as a congressional budget watchdog and among whose responsibilities is the projection of the budgetary consequences of proposed legislation.

Why does it matter that the revenues, outlays, assets and liabilities of Fannie and Freddie be put into/onto the budget and balance sheet of the US Treasury? It won’t help or hinder the resolution of the current financial crisis. What is does, is strike a blow for accountability for the use of public funds. It enhances the quality of the information available to the Congress and to the public at large about the federal government’s financial exposure (including its contingent exposures) and about future expected or planned sources and uses of funds. Without high-quality information and without transparency, there can be no accountability for the use of tax payers’ money. Peter Orszag therefore struck a blow for good governance, for better government and for checks and balances....

The only government in the world that gets close to providing all the relevant information to have a go at constructing its comprehensive balance sheet is the government of New Zealand. Since 1989, the Public Finance Act 1989 (PFA) requires the New Zealand government to pursue its policy objectives in accordance with the following principles of responsible fiscal management:

* Maintaining debt at a prudent level by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenue.
* Achieving and maintaining net worth at levels which provide a buffer against factors which may adversely impact on net worth in the future.
* Managing prudently the fiscal risks facing the Government, and;
* Pursuing policies which are consistent with a reasonable degree of predictability about the level and stability of taxes for future years.

That’s rather waffly, but the implementation of these principles is anything but. The PFA requires the government to present, in each financial year, two reports outlining Government’s fiscal policy: the Budget Policy Statement (BPS) and the Fiscal Strategy Report (FSR). The BPS has a short run focus setting out policy goals that will guide the Government’s Budget decisions and priorities. The FSR is presented with the Budget and must state the Government’s long term objectives for fiscal policy over a period of at least 10 years and the Government’s short term intentions for fiscal policy over a period of three years. The FSR must also provide projections of fiscal variables to show progress towards meeting the long term objectives (Progress Outlooks).

In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.

Added to this are serious attempts to value such contingent liabilities as guarantees, and to calculate the fair value of such contingent political commitments as social security retirement benefits.

What IMF thinks about Fannie Mae and Freddie Mac rescue

"We welcome Secretary Paulson's announcement of decisive action through a four-part program to remedy the difficult financial situation of Fannie Mae and Freddie Mac. These institutions are central to the U.S. mortgage and housing markets. This action will help support these markets and, by extension, the economic and financial outlook.

"While we are still studying the details of the plan, a key feature is the provision of explicit Treasury support of their regular business activities. This is expected to allow a modest and temporary increase in the portfolios of these institutions over the next 15 months that will support the wider availability of mortgage financing. At the same time, protection has been built in to limit moral hazard. The management of the institutions is being replaced and Treasury injections will be senior to other shareholders who have already faced significant losses.

"Looking further to the future, it will be important that the corporate governance of Fannie and Freddie is fundamentally restructured, in order to facilitate competition and market discipline. As we and others have long recognized, a key difficulty has been that these privately-owned entities with some public policy objectives have used the low funding costs from a perceived implicit government guarantee to build their portfolios, thereby benefiting their shareholders. The Treasury plan allows time to build widespread consensus for important reforms to these institutions, while ensuring meanwhile market stability and support for the economic recovery."

Related;
What's the Legal Basis for the Freddie/Fannie Takeover?

Palin, on the Ongoing Financial Crisis;

Saturday in Colorado Springs, Colo., Alaska Gov. Sarah Palin said, "The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

Fannie and Freddie’s Bust and Deeply Flawed Government Bailout;

“On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.”

The stealth bailout, illustrated, in close to real time;

Yves Smith – responding to PIMCO’s Gross — noted that governments, through the increase in their central bank reserves, have been intervening to support the US financial markets for a while now. She is, of course, right.

With the help of Paul Swartz of the Council’s Center for Geoeconomic Studies, I recently was able to get the full data set on the Fed’s custodial holdings. The data goes back to the early 1980s — though the Fed’s custodial holdings of Agencies only appear in 2001, presumably when the shrinking stock of outstanding Treasury debt induced central banks to consider alternatives. The resulting charts need little commentary.

Fannie & Freddie Thoughts

Government Hypocrisy in GSE Bailout?

Better late than never, or two cheers for Hank Paulson

Deprivatization;

The fact is that Fannie Mae was originally a government agency; it was privatized in 1968, not for any good economic reason, but to move its debt off the federal balance sheet (and Freddie was created 2 years later as a competitor.) Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.

So what we’re really seeing now is deprivatization. It’s not something like the UK government seizing the steel mills; it’s more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

Beating the Dead Horses;

In this briefing paper, I will suggest ways that Congress could gradually extricate housing policy from its dependence on the GSEs. While it may be too late to insulate taxpayers from the risks embedded in the GSEs’ current portfolios, it is possible to shrink the GSEs without significantly damaging the housing market.

Thoughts on the GSE Takeover -Mankiw;

The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.

Long-Term Capital: It’s a Short-Term Memory

As Crisis Grew, One Option Remained ;

“Today’s necessary but likely very expensive action for taxpayers is the consequence of regulatory neglect and of a broader political system’s reluctance to take on what should have been clearly seen as festering problems,” said Lawrence H. Summers,