The National Journal has been reporting this week that current Congressional Budget Office (CBO) Director Peter Orszag is in line to head up the Office of Management and Budget in the upcoming Obama administration. Orszag formerly served as a senior economic adviser during the Clinton administration and held a post in the economics studies program at the Brookings Institution.

Orszag has been impressive in his two year stint as the head of the CBO, which he began in January, 2007 and I think he would be an excellent choice to run the OMB for Obama. BudgetBlog readers will certainly know that we have high esteem for Dr. Orszag.

Senate Finance Chairman Max Baucus, D-Mont., said Monday that he hopes to make sure a health care overhaul proposal he released last week is paid for over a 10-year period. But he left open the possibility that it would not comply with pay-as-you-go budget rules over five years, or perhaps at all.

"There are going to be some upfront costs, but they'll be investments," Baucus said after speaking at a Brookings Institution seminar on health care reform. "Over 10 years, some of the bulk of the upfront investments will be offset by cost reductions. But that's over a 10-year period."

The budget rules, which Democrats adopted at the beginning of the 110th Congress, generally require legislation authorizing new spending to be offset with spending decreases elsewhere or with tax increases. Democrats have often pointed to the budget rules as evidence of their fiscal discipline.

I've got a bit of an issue with that last sentence - or perhaps my issue is with the Democrats. They do like to cite PAYGO rules as evidence of their fiscal discipline. And it is good they voted to reinstate those rules in early 2007. But to be fiscally responsible, they actually need to follow the rules rather than waiving them whenever they please. Unfortunately, their commitment to PAYGO has been much more rhetorical than real over the last two years. The CQ article goes on to state that Democrats will feel pressure from their supporters, particularly labor unions, to pass health care reform regardless of costs. That's comforting. Who is steering this ship anyway?

The Republicans have been no better. In the same article, Senate Finance Committee Ranking Republican Charles Grassley (R-IA) states that "paying for health care reform needs to be done in an intellectually honest way for the fiscal health of our country." Is Grassley serious? I almost fell out of my chair when I read that. It leaves me wondering why Grassley hasn't had any problems with eight years of irresponsible, reckless, and downright stupid justifications for passing budget-busting tax cuts at any cost?

He hasn't seem too concerned with the fiscal health of our country when he has repeatedly advocated that since the Alternative Minimum Tax (AMT) was never intended to impact millions of Americans, we might as well not pay for repealing it. That's what fiscal responsibility is about - intentions.

Grassley can't even be honest about the money-suck that is the IRS's private tax collection program, which has repeatedly been shown to cost the government more money than it brings in. Now he's seen the light and wants to be intellectually honest about budgeting and being fiscally responsible? That's not change we can believe in.

Image by Flickr user PhotoJonny used under a Creative Commons license.

CQ Politics:

[Speaker of the House Nancy] Pelosi [(D-CA)] and Senate Majority Leader Harry Reid , D-Nev. — whose chamber will return for a post-election session next week — have called for Congress to pass an economic stimulus package and Tuesday added plans for billion of dollars in new aid for Detroit's struggling automakers. But Pelosi and House Majority Leader Steny H. Hoyer of Maryland have said they won't bring the House back unless President Bush and Senate Republicans agree to allow a stimulus and the auto industry aid to become law.

In separate statements, House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) asserted the need to hold a post-election session to bolster efforts to help the beleaguered auto industry.

"I am confident Congress can consider emergency assistance legislation next week during a lame-duck session," Pelosi said in a statement, "and I hope the Bush administration would support it."

Rethinking the crux of the financial markets crisis and its solutions, Treasury Secretary Henry Paulson announced today that the $700 billion Troubled Asset Relief Program (TARP), originally intended to take toxic financial assets off the books of lending institutions to spur market liquidity, will not be used to purchase such assets.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.

This statement ultimately undermines the "Do Anything" approach to legislating. When Paulson made his initial pitch for a Wall Street bailout, lawmakers correctly balked. While we noted that Congress should proceed deliberately, they instead rushed a legislative counter-proposal and quickly passed it. And although various objections to such a bailout were offered, one offered by economists was that the underlying problem (and its ultimate solution) of the financial markets crisis was not entirely clear.

Thankfully (I think), the TARP legislation was written with enough flexibility that it allows Paulson to abandon the explicit purpose of the program in favor of adopting strategies (like injecting capital into banks in exchange for equity). Paulson continues to search for an appropriate solution.

For better of worse, Congress crafted a law that gave the Treasury Secretary authority to throw $700 billion at, well, whoever for whatever. Will it work? Who knows? Congressional hearings and empirical research might have helped identify the problem and solution sooner. Instead, Washington decided to the correct course of action was to freak out and throw bails of cash at whoever is asking for it.

A learning moment? Hmmm...

Image by Flickr user kenyee used under a Creative Commons license.

Argh! More bad news about the Defense Contract Audit Agency (DCAA), the watchdog at the Department of Defense that is supposed to watch out for waste and fraud within the agency's enormous contracting apparatus.

DCAA was in the news a lot this summer (see here, here, here, and here) after information surfaced showing the DoD spends too little on contract oversight and interferes with current auditors to restrict the length and scope of investigations. It doesn't look like things have improved much since then.

The Associated Press reported yesterday that defense contractors, particularly the Bechtel Group, had "chronic failures" in handing over financial records and other documents to the DCAA needed to perform audits.

The article also cites Raytheon, Northrup Grumman, and KBR as giving the DCAA trouble. In the widely publicized KBR incident over the summer, top officials at the DCAA would not back up auditors who balked at over $1 billion in unsubstantiated payments.

One auditor quoted in the AP article from yesterday hits the nail on the head about why strict oversight by agencies like the DCAA are so important:

The Bechtel episode illustrates how tolerant the agency can be when defense contractors slow the government's access to paper records and databases. There is no way to know how often DCAA withholds payments because it does not keep track. And it has not used its subpoena power in 20 years.

"We have been basically on the trust system for years," said the auditor who attended the May meeting. "It did not work on Wall Street and it is not working for federal contracts," said the two-decade veteran of the agency who spoke on condition of anonymity because DCAA employees are not allowed to publicly discuss their work.

Trust system? Seriously? What ever happened to "trust but verify?"

On the Depart of Treasury Emergency Economic Stabilization Act (EESA, AKA TARP) website, the Department has posted, according EESA law, a list of transactions made under TARP. And here they are, all $125 billion* worth of them:

Also in accord with the law, Treasury has released its First Tranche Report to Congress. Among other things, the report includes:

• A description of all the transactions made during the reporting period.
• A description of the pricing mechanism for the transactions.
• A justification of the price paid for, and other financial terms associated with, the
• transactions.

However, ProPublica, is one step ahead of Treasury. In addition to transactions completed under TARP, ProPublica is tracking which banks have are participating in TARP's Capital Purchase Program but have yet to receive funds. Their tally indicates that Treasury has committed over $172 billion to banks.

The Congressional Budget Office reported in its Monthly Budget Review for October that the federal budget deficit for that month will be $134 billion. But CBO predicts that when the Treasury Department releases the official deficit number later this month, it will be $232 billion.

The $98 billion gap is the product of differing interpretations on how purchases under the Troubled Asset Relief Program (TARP) should be scored. According to CBO:

...the stock investment and associated warrants should not be recorded on a cash basis but on a net present value basis, accounting for market risk, as specified in the Emergency Economic Stabilization Act. CBO's preliminary estimate of $17 billion for the present value cost is included in its estimate of $134 billion for the October deficit.

So far, Treasury has purchased $115 billion in bank stocks. Treasury says that this will increase the budget deficit by $155 billion, while CBO says it should increase the deficit by $17 billion.

This is an interesting development, as the potential impact on the budget deficit could be hundreds of billions of dollars, depending on whether Treasury follows the law, and uses a present value calculation -- the method employed in CBO's estimate, or if it continues to use a cash basis of accounting. There are a number of ramifications that could result from these accounting differences.

• A larger budget deficit figure may impose constraints on future fiscal policy
• Cash-basis accounting of these assets deviates from current practice. For example, a student loan is not counted as a cash expenditure, but as an asset, as the government expects to see the principal repaid
• The future sale of purchased bank stock would appear to decrease the budget deficit. This could open the door to manipulation by an administration seeking political gains to be had from decreasing the federal budget deficit.

The Bush administration is continuing its push to finalize hundreds of new regulations in an effort to cement its legacy before the new administration takes power on Jan. 20 next year. Also called "midnight regulations," these rules tend to get rammed through the regulatory review process before the lights go out on an administration, regardless of process violations or self-imposed cutoffs.

The Reg team here at OMB Watch is doing a fantastic job tracking these regulations, the vast majority of which benefit industries and corporations by relaxing or eliminating economic, environmental, health, and safety rules.

Yet another example appeared in the New York Times on Friday, this time targeting health care for low-income Americans. Robert Pear reports:

WASHINGTON — In the first of an expected avalanche of post-election regulations, the Bush administration on Friday narrowed the scope of services that can be provided to poor people under Medicaid's outpatient hospital benefit.

Public hospitals and state officials immediately protested the action, saying it would reduce Medicaid payments to many hospitals at a time of growing need.

The new rule conflicts with efforts by Congressional leaders and governors to increase federal aid to the states for Medicaid as part of a new economic action plan.

The Bush administration claims it is just trying to pay for services "more accurately and appropriately," while others say this is significant change to a long established Medicaid policy - that states get to define hospital outpatient services. Even if the Bush administration claim is true (and I've got my doubts), the practical effect is going to be fewer services for low-income folks covered through Medicaid. That's a shame.

On Thursday, in an interview with the Wall Street Journal, House Speaker Nancy Pelosi (D-CA) said that she is considering a two-stage economic stimulus strategy. The first would be a bill totalling $60 billion to $100 billion (composed of what exactly, she didn't say) and would be passed in November during a lame-duck session of Congress. The second bill would be composed of tax cuts and passed in early 2009 (totalling what exactly, she didn't say). Calling the first a "down payment," Pelsoi said that "the economy needs something sooner" and that Congress "take the longer view as soon as we take over in January."

But on Friday, House Majority Leader Steny Hoyer (D-MD) said that a lame-duck session would be unlikely if Congress and President Bush could not arrive at some sort of agreement on what an economic stimulus package should look like. However, guaranteeing (even more) loans to the failing auto industry could be sufficient to warrant a late-inning session.

House Speaker Nancy Pelosi (2nd-R) and House Majority Leader Steny Hoyer (R), along with other members of Congress, participate in a meeting with executives from American car companies on Capitol Hill in Washington, DC. (AFP/Getty Images/Brendan Hoffman)

It's up from 6.1 percent in September to 6.5 percent in October. Also according to the Bureau of Labor Statistics, the economy lost 240,000 jobs in October, as the year-to-date number of jobs shed rose to 1.2 million.

October's drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months. In October, job losses continued in manufacturing, construction, and several service-providing industries. Health care and mining continued to add jobs.

The unemployment rate rose by 0.4 percentage point to 6.5 percent in October, and the number of unemployed persons increased by 603,000 to 10.1 million. Over the past 12 months, the number of unemployed persons has increased by 2.8 million, and the unemployment rate has risen by 1.7 percentage points.

The Government Accountability Office (GAO) has created a website "designed to help make the [presidential] transition an informed and smooth one across the federal government." In addition to suggesting myriad policies for various governmental issues like the long-term fiscal outlook, management challenges, and major cost-saving opportunities GAO highlights what it believes to be 13 issues demanding urgent attention. They are:

• Oversight of financial institutions and markets,
• U.S. efforts in Iraq and Afghanistan,
• Protecting the homeland,
• Undisciplined defense spending,
• Improving the U.S. image abroad,
• Finalizing plans for the 2010 Census,
• Caring for service members,
• Preparing for public health emergencies,
• Revamping oversight of food safety,
• Restructuring the approach to surface transportation,
• Retirement of the Space Shuttle,
• Ensuring an effective transition to digital TV, and
• Rebuilding military readiness.

Writing in The New Yorker, Steve Coll meditates on the significance of the reactions certain political élites who are now lining up in favor using the government to better the economy.

The country is fortunate in one respect: the sudden buckling of financial safeguards has put just about everyone in touch with his inner New Dealer. Even Alan Greenspan recently confessed to Congress a crisis of faith in self-regulation. Meanwhile, former free-market true believers in the Bush Administration have tossed out money from the public vault like looters...

[...]

Embedded in this festival of emergency measures, however, is an important and possibly durable ideological shift. Last week, in an op-ed in the Washington Post, Martin Feldstein, the chairman of the Council of Economic Advisers in the Reagan Administration, and, more recently, an adviser to John McCain, endorsed large-scale spending on public works as a way to stimulate economic recovery....The essay's appearance indicated that a broad coalition is emerging, where none existed a year ago, in favor of New Deal-style expenditures on roads, bridges, broadband lines, alternative energy, and the like, to support economic recovery and future growth.

If Coll's observation proves durable, then there will be greater political elbowroom -- to a greater or lesser extent depending on the outcome of today's contests, but room nonetheless -- to strengthen public investments.

If you had your say, what would you move to the top of the agenda?

Email us at , and let us know.

• CongressDaily reported ($) yesterday that "House Democratic leaders appear to be moving toward bringing a $100 billion economic stimulus package to the floor during a lame-duck session the week of Nov. 17" and that Democratic leadership might include "federal matching funds for state Medicaid programs, an extension of unemployment benefits, expanded food stamp spending and money for infrastructure projects" in the package.
  
  
• House Minority Leader John Boehner (R-OH), meanwhile, has other plans. Earlier this week, he was touting a Republican stimulus package that would be composed mostly of tax cuts. Noteworthy, however, is that his plan would increase the child tax credit from $1,000 to $2,000. The rest of the measures would cut taxes for businesses and owners of stocks outside of retirement plans.
  
  
• The White House is taking a different approach. Stepping back a bit from being "open" to a second stimulus, the chairman of the president's Council of Economic Advisors does not believe that such a package is "the right way to go." Instead, the administration would prefer to re-brand the Wall Street bailout plan (TARP) as "stimulus," because it's "a huge amount of money, and...it's targeted at exactly the right thing."
  
  

• But it doesn't seem like anybody is listening to the experts. At hearing held by the Joint Economic Committee, NYU economics professor Nouriel Roubini testified that "$300-400 [billion] of public works is more effective and productive than just spending $700 [billion] to buy toxic assets and/or recapitalizing financial institutions." MIT professor Simon Johnson, after articulating the mathematics supporting his suggestion, testified similarly: "Added together, this yields a total stimulus package of around $450 billion, or about 3% of GDP, spread over about 3-4 years. It also implies a way to time the short-term and long-term programs..."

  On hand to provide the standard conservative perspective was American Enterprise Institute Visiting Scholar and Ohio University economics professor Richard Vetter. Vetter fears that the government has already provided too much stimulus and implemented perilous monetary policy. His advice to Congress is to skip economic stimulus altogether and to "[r]elax and recover from [their] labors and allow the healing properties of markets to be asserted again."

Image by Flickr user Thomas Hawk used under a Creative Commons license.

The Treasury Department has been writing checks to banks for a couple weeks now. And although the law that created the Troubled Asset Relief Program (TARP) mandates the Secretary to "make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase," the Treasury Dept. has yet to publish such information.

However, ProPublica is using media reports to track Treasury's purchases of financial institution stock under TARP's Capital Purchase Program.

It's great that ProPublica is providing this service, but they shouldn't have to be. The government should already be doing this. How hard could it be to put a spreadsheet up on website?

One of the starkest indicators is that the number of people who have been unemployed for 27 weeks or more reached two million in September. That's 21% of the total unemployed, and approaching the prior peaks of about 23% in 2003 and 1992.

[...]

And while the unemployment rate is at a five-year high at 6.1%, a broader measure of weakness that includes people who have stopped looking for work or whose hours have been cut to part-time is 11% -- the highest in 15 years.

The jobs numbers sure look like we're in a recession, but here's the thing:

During the so-called "jobless recovery" following the 2001 recession, jobs continued to be shed after it was officially declared over. But the current weakness comes as the country heads into a recession that is now forecast to be deeper and longer than previously thought.

"No one thinks we are anywhere near the bottom of this, and we're already rivaling these other recessions," says Heidi Shierholz, an economist at the Economic Policy Institute, a left-leaning think tank in Washington.

Yikes!

But with Fed Chair Ben Bernanke supporting a second stimulus measure, President Bush signaling he is "open" to it, and Senate Minority Leader Mitch McConnell (R-KY) climbing onboard (CongressDaily, $), chances of Congress passing something in November are increasing.