House Majority Leader Steny Hoyer (D-MD) provides us with a teaching moment (BNA [$]):

House Majority Leader Steny Hoyer (D-Md.) said Nov. 18 House Democrats still hope to adhere in 2009 to the pay-as-you-go budget rule they put in place at the start of the 110th Congress, but acknowledged the troubled economy and other priorities may outweigh it.

"We will continue to be committed to the principle of pay-as-you-go," Hoyer said at a speech at the National Press Club. "The reality, however, is that recovery legislation will raise the deficit in the short term. Fiscal hawk that I am, I still believe that that is the right course, because a wide consensus of economists tells us that deficit spending is both the way out of a recession like this one and the way to prevent even more catastrophic decline."

Hoyer makes the classic mistake of believing that PAYGO stops all deficit spending. What PAYGO actually does is (theoretically) prevent deficit increases resulting from tax cuts or increases in mandatory spending. Much of the proposed spending in the Senate's latest stimulus package (like unemployment insurance and infrastructure spending) would increase discretionary spending, which does not have to be offset with revenue increases or spending cuts.

However, some of the spending proposals in the Senate package do increase mandatory spending (like increased Medicaid spending) and would have to be offset in PAYGO-land. But to say that this would wreck the economy is, well, just plain wrong.

Keynesian economics tells us that increasing budget deficits (or reducing budget surpluses) spurs economic growth. Fidelity to PAYGO, because it enforces deficit neutrality, would be economically neutral. True: 100 percent deficit-neutral budget changes would be a mistake, as now is the time to increase the deficit to boost economic growth, but adherence to PAYGO would have no impact on the economy.

So, yes, deficit spending is absolutely necessary right now. Adhering PAYGO, however, would not stop Congress from pursuing this course of fiscal policy.

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

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.

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."

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.

In this week's Watcher, we write about how the political landscape for a fiscal stimulus package is shaping up. Essentially, everyone agrees there needs to be some sort of fiscal policy legislation called "a stimulus package," but that's where the agreement stops. At issue is the size and what elements should be included in the package. We get into these issues in the article, but here I wanted to flag what I think will be typical of the ensuing debate.

House Republicans are also calling for purchasers of homes that are not primary residences to be entitled to the same capital gains exclusion as owners who sell their primary residences. Currently, a single homeowner can exclude $250,000 of capital gains on a sale, while couples can exclude $500,000.

The proposal would only apply to people who bought second or third properties over the next 18 months and held their properties for at least five years.

"This could help take foreclosed properties off the market, raising home values," said House minority leader John Boehner, R-Ohio.

This is just crazy talk. Not only is this sort of tax break aimed at those wealthy enough to own second (and third!) homes, but it will do next to nothing to stimulate the economy. Boehner rightfully rails against "pork-barrel spending masquerading as 'stimulus'," yet this is exactly the kind of non-stimulative giveaway that he abhors. Hopefully, when Congress reconvenes in November, this sort of nonsense will be ignored by legislators in favor of passing an economically-sound package that delivers aid to those who need it and those most likely to spend it.

Image by Flicker user Usonian used under a Create Commons license.

Following a closed-door meeting with economic experts, Speaker of the House Nancy Pelosi (D-CA) said that she is instructing various committee chairs to begin holding hearings on what should be included in an economic stimulus package that could be voted on in November should the House return to Washington for a lame-duck session. No price tag has been placed on a potential, a backtrack from statements made last week an adequate stimulus package would cost $150 billion.

The package would likely include funds for infrastructure projects, an unemployment insurance extension, a boost to the Food Stamp program and Medicaid, and financial aid to states. While Pelosi stated that tax cuts were "in the mix of consideration," she emphasized that other components would be prioritized.

But first we want some of the issues that were not dealt with in the last package, because we want this to truly be a recovery package.

And therefore we have to make the investments in rebuilding America, and in doing so in a green way, with innovation and job creation; and to, again, recognizing the unemployment in our country, have an extension of unemployment benefits and some improvement on that policy, as well; to have emergency food assistance, recognizing the dire straits of many people in our country; and to do, also, in this very strong component of aid to the state to meet the health needs of our children and our seniors, to name a few.

Those would be our priorities. We'll look at what else we might do, in terms of tax cuts.

The Democrats' push for economic stimulus comes days after the president signed the $700 financial rescue plan. But, as we noted in The Watcher last week, the Wall Street bailout would do nothing to mitigate the effects of the impending recession. Quick action on such a stimulus indicates that Congress believes more action is necessary to protect millions of American families.

Photo: REUTERS/Hyungwon Kang
U.S. House Speaker Nancy Pelosi (D-CA) is flanked by former Securities and Exchange Commission Arthur Levitt (L), and Joseph Stiglitz of Columbia University (R) at a forum with economic experts to help Congress develop an economic recovery plan that focuses on creating jobs and strengthening our economy in her office on Capitol Hill in Washington, October 13, 2008.

In a stark reversal of Monday's vote, the House approved the Senate-passed version of a financial market rescue bill. By a vote of 263 to 171, the House passed a $700 billion plan to buy up troubled financial assets, patch the AMT for a year, and extend dozens of expiring tax cuts (some for a year, some for two). While the final cost to taxpayers of the bailout is impossible to estimate, the tax portion of the bill will reduce revenues by $107 billion.

Moments after passage, President Bush signed the bill into law.

President Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office after the House passed the $700 billion financial bailout bill at the White House in Washington, Friday, Oct. 3, 2008. (AP Photo/Charles Dharapak)

Last night, the Senate approved a financial rescue (or Wall Street bailout) bill, HR 1424, by a 74-25 vote. As we noted yesterday, the package includes not only a provision that grants the Treasury Secretary $700 billion to purchase troubled financial assets, but also a package of tax cuts passed previously by the Senate.

According to the Congressional Budget Office (CBO), the ten-year cost of the tax cuts, which include a fully-offset set of tax incentives for renewable energy production; an extension of dozens of miscellaneous individual and business tax cuts; and a $64 billion patch for the Alternative Minimum tax, would total $107.1 billion. The CBO, however, indicates that the cost of the asset purchase program is "impossible at this point to provide a meaningful estimate of the ultimate impact on the federal budget from enacting this legislation," but would be "substantially smaller than $700 billion." Nor can CBO estimate the cost of increasing FDIC limits on insured deposits.

Congressional Budget Office: Letter to Honorable Christopher J. Dodd (estimated budgetary effects)
Joint Committee on Taxation: Estimated Budget Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to HR 1424

With all the action recently on the financial sector bailout, it almost slipped our notice that Congress has finalized the FY 2009 appropriations process, at least through March 6 of next year. Last week, on Wednesday (Sept. 24), the House passed its package of three appropriations bills (Defense, Homeland Security, and Military Construction-VA), along with a continuing resolution (CR) that will cover all the other sections of the government until March 6, 2009. The vote was 370-58. The Senate passed the House proposal over the weekend on Saturday by a vote of 78-12.

The CR was put together and passed in less than a week, with little transparency or time to review specific provisions, earmarks, and funding levels. The bill level-funds most government programs outside of the three individual security bills that were included and a few select programs and priorities in need of more immediate funding. These include the Low Income Home Energy Assistance Program (LIHEAP), which received a $5.1 billion increase. This is more than double the $2.5 billion appropriated in FY 2008 and finally brings the program up to its authorized funding level. There is also $22.9 billion in emergency funding for disaster relief and $7.5 billion to support a $25 billion loan to the U.S. auto industry.

Even though this was the result of the appropriations process that everyone was expecting for most of this year, the result that Democratic leaders themselves had announced early on as a deliberate strategy, it is still pretty disappointing. In fact, it might be more disappointing because it was pre-ordained by Reid, Pelosi, and others on the Hill early on this year. Congress is supposed to pass appropriations bills on time. In fact, it is their primary responsibility. They have repeatedly failed to do this over the last decade regardless of circumstances, regardless of who controls Congress, and this year we've reached the point where they aren't even trying anymore. How can we expect them to enact a solution to the financial sector crisis if they can't even complete their basic job responsibilities?

Congressional leaders were left scratching their heads, contemplating what to do next after the House failed, by a vote of 205-228 to approve a $700 billion plan to buy up troubled financial assets that are purportedly threatening the financial markets.

CQ Politics reports that although the House voted to adjourn, they will return Thursday to continue working on assuaging the angst of financial markets. Calling the issue "much too important to simply let fail," Treasury Secretary Henry Paulson vowed to return to working out a plan to bailout Wall Street. However, legislators have been at best vague in spelling out what to expect in the next few days. As Speaker of the House Nancy Pelosi said, "stay tuned."

Members of the House Democratic Leadership, from left, House Majority Leader Rep. Steny Hoyer, D-Md., House Speaker Nancy Pelosi, House Democratic Caucus Chair Rep. Rahm Emanuel, D-Ill. and House Majority Whip James Clyburn, D-S.C. meet reporters on Capitol Hill in Washington, Monday, Sept. 29, 2008. (AP Photo/Lawrence Jackson)

This post is an updated version of our previous post on a summary of the $700 billion Wall Street bailout plan that the House rejected (205-228) this afternoon.

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the presidentt, which Congress could reject within 15 days . The rejection could then be vetoed by the president.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets and their derivatives. With support from the Fed, it could also purchase other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, if the firm becomes profitable.
• Participating firms would be subject to executive pay restrictions, implemented through the tax code. The plan would also bar firms from giving "golden parachutes" to executives leaving participating firms for reasons other than retirement
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• If, after five years, the Congressional Budget Office and the Office of Management and Budget agree that the government has not profited from the sale of troubled assets, the president must submit to Congress a plan to recuperate the cost of the plan from the financial industry

Foreclosure Protection
• Treasury can encourage mortgage servicers to modify troubled mortgages
• Requires federal entities that own mortgages to develop a plan to mitigate the foreclosure rate
• Relaxes requirements for eligibility for the Hope for Homeowners program

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Executive Power Enhancement
• An affirmation of the SEC head to suspend mark-to-market accounting, thus allowing firms to report asset values different from what the market believes them to be
• Allows Treasury Secretary to suspend federal contracting rules

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

Media reports and a press release from House Speaker Nancy Pelosi (D-CA) indicate that Congressional leaders and the White House have agreed to a package of measures designed to prevent a financial market meltdown. An official announcement of agreement is expected tonight, and final details of the plan remain unsettled. Here are the package's main provisions:

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the president. Media reports, however, are inconsistent on this. Some are reporting says that the money would be available "only upon action by Congress," while others say it would be available upon presidential request, which Congress could reject. The rejection could then be vetoed.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock.
• Participating firms would be subject to executive pay restrictions, although the details remain vague
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• A fee may be imposed upon the banking industry to pay for the bailout if the government loses money on the purchase of these toxic assets. Reports on this provisions vary, an no details have been announced

Foreclosure Protection
• Treasury can renegotiate mortgages purchased by the federal government with borrowers
• A "tax holiday" for homeowners facing foreclosure will be extended

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

This information has been compiled from the following news sources:
The Wall Street Journal
The New York Times
The Washington Post
McClatchy Newspapers
Congressional Quarterly ($)

The House Appropriations Committee is circulating this morning an economic stimulus proposal (summary and bill text) they hope will be debated by the full House later this afternoon (nothing like the last minute). Chairman David Obey (D-WI) writes about the need for this legislation in the summary:

84,000 Americans lost their jobs last month and the number of unemployed Americans is the highest it has been since 1992. The economy has lost jobs for eight straight months, with 605,000 American jobs lost this year.

Congress responded quickly to the White House's call for a financial rescue package. The White House should join Congress in putting together a solid package for Main Street. Today the House will take up legislation to boost our economy, create jobs, and help provide additional relief to families who are struggling.

The House stimulus package consistents of blocks of spending on infrastructure (public housing, transit, schools, and water and sewer), energy development (electric grid moderinization, advanced vehicle battery technology, and renewable energy development) and human needs (unemployment benefits extension, job training, health care, and food assistance). The full cost of the House package is reported to be around $50 billion or a bit more.

Of course, Obey (and others who have been calling for this type of package) are right. If Wall Street was not literally melting before our eyes, the quickly deteriorating economy would be the top issue in the news. As Andrew Samwick reminded us yesterday blogging over at Capital Gains and Games, traditional economic indicators are really not doing very well, with demand for workers and manufactured products decreasing.

The Senate is working on a similar package, and Majority Leader Reid (D-NV) and Appropriations Committee Chairman Robert Byrd (D-WV) have announced the Senate's will be $56.2 billion. The bill would "extend unemployment insurance benefits for seven weeks, address high food costs and energy prices, create jobs, promote education and job training, and aid small businesses." A detailed summary of the bill is available.

House Stimilus Summary
House Stimulus Bill Text

Senate summary

With all the news of the massive Wall Street bailout, I've heard really nothing about how this $700 billion gamble is supposed to be paid for (other than more borrowing, which is to say paid for by later). And what I have read, makes me real nervous. In a "dear colleague" letter, former chair of the Republican Study Committe Rep. Mike Pense (R-IN) pleads with colleagues (MS Word doc) to avoid raising revenue or the national debt.

If Congress decides to spend nearly 1 trillion dollars on a corporate bailout, it must find budget savings to prevent that cost from being passed along to the American people.

[...]

[Republicans] should demand consideration of free market alternatives to massive government spending and we should fight to pay for the solution through budget cuts and reform instead of more debt or taxes.

Surely Rep. Pense knows that the entire FY 2009 discretionary budget is $1.01 trillion. Of that, $350 billion funds non-defense, domestic discretionary programs. I don't know what Pense has in mind, but there simply isn't $700 billion to be found in "budget savings" that would prevent an increase in the national debt.

Just a little perspective on the size of this bailout.

Image by Flickr user dharma communications used under a Creative Commons license.

House Democratic leaders have announced some details of a potential continuing resolution (CR) that would keep the federal government operating for half a year from the start of the FY 2009 fiscal year on October 1 through March of 2009. With none of the appropriations bills enacted into law and only eight days before the start of the fiscal year, passage of a CR is almost guaranteed. CongressDaily reported this afternoon some of the details of the plan:

According to a draft version of the CR, House Democrats would fund most federal government programs at FY08 levels until March 6 unless Congress acts before that. The draft also includes $5.1 billion for the Low Income Home Energy Assistance Program. House Democratic leaders had previously discussed including the funding in an economic stimulus package valued at about $50 billion. The package also includes $25 billion in loan guarantees for the U.S. auto industry that was authorized in legislation enacted last year.

You can read a discussion draft of the proposed continuing resolution.

Update: 9.23.08, 4:00 pm
CongressDaily is reporting ($) this afternoon that the House will take up the proposed CR legislation on Wednesday this week. More details to come tomorrow.