While we here in the Budget Brigade are thankful that our respective alma mates are poised to clinch BCS bowl berths (hook 'em, Horns!), we are even more thankful that President Elect Obama has serious concerns about the current BCS system. That's change we can believe in!

The Budget Brigade will return to the BudgetBlog on Monday.

Have a great Thanksgiving and enjoy the day.

Image by Flickr user Jennifer13 used under a Creative Commons license.

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.

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.

Back in August, I blogged about a report issued by the U.S. Senate Permanent Subcommittee on Investigations about how foreign banks, specifically large European banks, were helping wealthy Americans evade U.S. taxes.

This week on Wednesday, the Justice Department, in conjunction with the Internal Revenue Service (IRS), announced the indicment of Raoul Weill, a senior executive at the Swiss banking giant UBS. Sharp BudgetBlog readers will remember that UBS was one of the European banks named in the Senate investigation released over the summer. Seems like things have come full circle for UBS. From the Justice Department press release:

According to the criminal indictment, between 2002 and 2007, Weil oversaw the Swiss bank's cross-border private banking business that provided services to some 20,000 U.S. clients who reportedly concealed approximately $20 billion in assets from the IRS. Weil, who allegedly referred to this business as "toxic waste," mandated that Swiss bankers grow the cross-border business, despite knowing that this would cause bankers to violate U.S. law.

According to the indictment, when given a choice to wind down, sell or spin off the cross-border business, Weil chose to continue the business because of its profitability. Between 2002 and 2007, the United States cross-border business generated between $200 million a year in revenue for the Swiss bank.

Unfortunately, prosecutors may not be able to obtain the information necessary to convict Mr. Weill or expand their investigation to pursue U.S. clients who participated in tax evasion. Even if they are able to convict Mr. Weill, it's not assured that Switzerland would extradite him to the U.S. According to a report in the Wall Street Journal, the Swiss government has "firmly dug in its heels against the U.S. investigation, citing Swiss laws that generally prohibit banks from revealing the names of clients." The U.S. has demanded that the Swiss government step in to assure the investigation can continue, but doing so would likely hurt the prospects for Swiss banks, which have long served as a refuge for the rich and powerful in their attempts to horde assets.

It is unclear how much trouble Mr. Weill has gotten himself into, but if convicted of the felony charge of conspiring to defraud the U.S. government, he could serve up to 5 years in jail. Somehow that doesn't seem to me like enough for stealing $1.2 billion from the American people.

Jail time for Mr. Weill aside, the broader hope is that this case will open up Swiss banks and indeed the international banking industry generally, so we have a more honest, transparent, banking system that is held accountable to laws and regulations. That's the hope, but I'm not holding my breath.

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.

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 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.