Congressional Budget Office
Director's Blog

CBO released an economic and budget issue brief today that discusses the factors underlying the decline in manufacturing employment over the past several years. The manufacturing sector of the U.S. economy has experienced substantial job losses since 2000. During the recession of 2001 and its immediate aftermath, employment in the manufacturing sector fell by about 2.9 million jobs, or 17 percent. Even after overall employment began to improve in 2004, the decline in manufacturing employment persisted. By the end of 2007, with the slowing of economic growth, employment in the sector had edged down further, by half a million jobs. And, as of November 2008, employment in manufacturing had fallen yet again, by slightly more than 600,000 jobs. A significant number of additional losses is likely given the current weakness in the economy.

Although the decline in manufacturing employment in recent years is not a departure from long-standing trends—the sector’s share of total employment has been falling steadily for more than half a century—the recession of 2001 hit manufacturing particularly hard. And, in sharp contrast to the pattern observed during previous expansions, employment in manufacturing (as reflected in the total number of hours worked) did not recover as it usually does following a recession.

The decline in manufacturing employment between 2000 and 2007 stemmed as much from an absence of new hiring as it did from layoffs of individual workers and downsizing. Rates of both job losses and job gains have been lower since the 2001 recession than they were in the 1990s. Workers who lost jobs, however, have typically experienced longer stretches of unemployment than did workers who lost jobs in the previous decade.

The steep decline in manufacturing employment since 2000 is associated with two interrelated developments: rapid gains in productivity (output per hour) in U.S. manufacturing and increased competition from foreign producers. Productivity in manufacturing has risen by about one-third since 2000, and growth in that productivity has consistently exceeded that of the overall nonfarm business sector.

Competition from overseas helped spur U.S. firms to boost productivity, but that competition has also dampened demand for goods produced in the United States, despite domestic manufacturers’ efforts to reduce costs through productivity enhancements. Those same developments have also had some beneficial effects for many U.S. residents, including the ability to buy manufactured goods at relatively low prices.

This decline in manufacturing employment represents a reallocation of jobs among industries rather than a decline in total employment in the United States. Until recently, other sectors of the economy have more than compensated in terms of overall employment, as evidenced by the relatively low 4.7 percent unemployment rate that existed during early 2007 and the roughly 7.5 million net new jobs created in the U.S. between early 2004 and the end of 2007.

This brief was prepared by David Brauer with the assistance of Eric Miller, both of CBO’s Macroeconomic Analysis Division.

Today, CBO is releasing two volumes that focus on health care issues:  Key Issues in Analyzing Major Health Insurance Proposals and Budget Options, Volume 1:  Health Care.  These two volumes build upon CBO’s previous analytical work on health insurance and health care financing issues and are intended to assist the Congress as it contemplates possible changes– both large and small– to federal health programs and the nation’s health insurance and health care systems.  In keeping with CBO’s mandate to provide objective, impartial analysis, neither volume makes any recommendations. 

The first document, Key Issues in Analyzing Major Health Insurance Proposals, focuses on large-scale proposals, provides extensive background information, and explains CBO’s analysis of numerous issues that could arise should the Congress seek to enact major changes in the health insurance system.  Key Issues does not provide analyses of specific proposals; rather, it provides an overview of CBO’s approach to major questions and issues that would likely arise in the context of such legislation.  Its main conclusions are as follows:

• The rising costs of health care and health insurance pose a serious threat to the future fiscal condition of the United States. Under current policies, CBO projects that federal spending on Medicare and Medicaid will rise from about 4 percent of gross domestic product (GDP) in 2009 to nearly 6 percent in 2019 and 12 percent by 2050.  Most of that increase will result from rising per capita costs, rather than from the aging of the population.
• Without changes in policy, a substantial number of nonelderly people (those younger than 65) are likely to be without health insurance. CBO estimates that the average number of nonelderly people who are uninsured will rise from at least 45 million in 2009 to about 54 million in 2019.
• Those problems cannot be solved without making major changes in the financing or provision of health insurance and health care. In considering such changes, policymakers face difficult trade-offs between the objectives of expanding insurance coverage and controlling both federal spending and total costs for health care.
• By themselves, premium subsidies or mandates to obtain health insurance would not achieve universal coverage.  Proposals could, however, achieve near-universal coverage using a combination of approaches. One option, for example, would be to establish an enforceable mandate for individuals to obtain insurance and provide subsidies for lower-income households to help them pay their required premiums. Another option, under a voluntary system, would be to provide subsidies that cover a very large share of the expected costs of insurance for every enrollee and establish a process to facilitate enrollment (as is done in Medicare). Other policies could achieve substantial reductions in the number of people who are uninsured at a lower budgetary cost.
• Serious concerns exist about the efficiency of the health care system, but no simple solutions are available to reduce the level or control the growth of health care costs. Steps to restructure the insurance market and to encourage people to purchase less extensive coverage could reduce the use of treatments that provide minimal benefits, but enrollees would face higher cost sharing or tighter management of their care.
• Other approaches—such as the wider adoption of health information technology or greater use of preventive medical care—could improve people’s health but would probably generate either modest reductions in the overall costs of health care or increases in such spending within a 10-year budgetary window. 
• In many cases, the current health care system does not give doctors, hospitals, and other providers of health care incentives to control costs.  Significantly reducing the level or slowing the growth of health care spending would require substantial changes in those incentives.

The second document, Budget Options, Volume I: Health Care, is much more specific and focused on discrete changes. It presents 115 discrete options, encompassing a broad array of issues related to the financing and delivery of health care.  (Volume 2 of Budget Options, which will address policy options in other areas of the federal budget, will be issued in 2009.) The health care volume includes some options that would reduce spending and others that would increase it, as well as changes that would reduce or raise revenues. Those options were culled from a wide variety of sources. Many variants are possible, and many other options exist but are not included in the report. The inclusion or exclusion of a particular policy option does not represent an endorsement or rejection by CBO, which does not make policy recommendations.

The options in the volume are organized by thematic chapters:

• The private health insurance market
• The tax treatment of insurance
• Changing the availability of health insurance through existing federal programs
• The quality and efficiency of health care
• Geographic variation in spending for Medicare
• Paying for Medicare services
• Financing and paying for services in Medicaid and SCHIP
• Premiums and cost sharing in federal health programs
• Long-term care
• Health behavior and health promotion
• Closing the gap between Medicare’s spending and receipts.

The Budget Options volume presents CBO’s estimates of year-by-year costs or savings for five years, as well as a 10-year total. The options are not additive; a package of multiple options would, in many cases, have a budgetary effect that differs from the sum of the individual effects because of interactions among them.  Subsequent cost estimates by CBO or revenue estimates by the Joint Committee on Taxation may differ from the estimates in the volume – either because the policy proposal differs from the option as described, or because of additional data and analysis.

These projects involved an enormous amount of effort by more than three dozen CBO staff over a period of many months, and we are grateful to the health policy group of the staff of the Joint Committee on Taxation, which prepared estimates for the various tax provisions.  

The reports provide a foundation for the CBO’s work in the next Congress. New issues will arise, however, and more analysis will be necessary, so CBO will continue its own energetic research efforts and will follow carefully the research of others on health care issues.  

Today, CBO released a cost estimate for H.R. 7321, the Auto Industry Financing and Restructuring Act, as passed by the House of Representatives last night.  We estimate that enacting H.R. 7321 would increase net direct spending by $1.7 billion over the 2009-2018 period, mostly for loans to domestic automobile manufacturers.  An additional $7.0 billion in potential costs would be subject to future appropriation action.

The act would provide sufficient funding to cover the costs of up to $14.0 billion in “bridge loans” to the auto manufacturers.  It would make available for that purpose $7.0 billion of federal funds previously authorized to cover the cost of loans to automobile manufacturers and component suppliers for the manufacture of advanced technology vehicles (often labeled “section 136 loans,” referring to the provision of law that authorized them).

How does the $7.0 billion in previous funding relate to the $14.0 billion in loans to be made under this legislation?  Under federal budgeting procedures, most loans and loan guarantees issued by the federal government are not recorded in the budget on a cash basis. Rather, estimates of the various cash flows (including, for example, disbursement of the loan principal, interest and principal payments received, and recoveries on defaults) are netted and discounted to the year of disbursement so as to show a net cost or savings to the government on a present-value basis; the amount of funding needed is not the total amount of the loan, but rather the net cost, if any, on that present-value basis. That net cost, as a percentage of the loan principal, is called the subsidy rate. For example, if the subsidy rate for a $1 billion loan is 50 percent, its net subsidy cost and the amount of funding necessary would be $500 million.

CBO estimates that the subsidy cost for $14.0 billion in loans would be about $7.0 billion (an average subsidy rate of 50 percent), the amount of existing funds made available for that purpose.

In CBO’s judgment, the subsidy cost of the bridge loans authorized in this legislation could fall within a wide range depending on estimates of potential interest income, a significant probability of default (which could be different for different firms), and possible recoveries in the event of default. Under the Federal Credit Reform Act, the Administration determines the estimated subsidy cost of loans based on the procedures specified in that act.  CBO’s point estimate of 50 percent represents a weighted average of many possible outcomes and takes into account the possibility that subsidy rates assigned by the Administration could fall within a wide range.

There is, however, some likelihood that the net costs of the subsidy for the bridge loans would be higher.  To the extent that the Administration assigns subsidy rates to loans that exceed CBO’s current estimate of the average subsidy rate, total funding available for bridge loans would exceed the $7.0 billion reallocated from existing funds. Such an outcome would result in greater spending for bridge loans. If, on the other hand, the Administration assigns subsidy rates lower than 50 percent, there would be no corresponding reduction in spending for loans under the bill because any amounts not required for bridge loans would remain available to the Department of Energy for section 136 loans.  As a result, there is a possibility that the total loan costs resulting from this legislation could exceed the $7.0 billion in existing funds, but no possibility that they could be smaller.  (We sometimes label such a situations a “one-sided bet.”)

Reflecting the significant uncertainty and the possibility that the Administration might assign subsidy rates other than 50 percent,  authorizing the Administration to spend higher amounts if necessary yields about $1.0 billion in estimated additional spending for bridge loans in 2009.

Another $500 million in costs arises because the act would provide, out of the indefinite “such sums” appropriation, $500 million in new funding for the original section 136 loans to auto makers (for advanced-technology vehicles).

The Congress could, in the future, decide to provide an additional $7.0 billion in funding to replace the $7.0 billion that had previously been appropriated for section 136 loans and that, under this legislation, would be used instead for the bridge loans.  This act would authorize future appropriations for that purpose, but would not provide such funding.

The remaining almost $200 million in new costs stem from provisions that would provide government insurance for certain financing arrangements made by transit systems and authorize a cost-of-living increase for federal judges.

Today (December 5), CBO released a letter at the request of House Majority Leader Hoyer analyzing the budgetary effects of two legislative proposals: S. 3715, the Auto Industry Emergency Bridge Loan Act, as introduced on November 20, 2008; and draft legislation released by the House Committee on Financial Services (and posted on that committee’s Web site) on November 17, 2008.

Both proposals would authorize the federal government to provide up to $25 billion in “bridge loans” to support ongoing operations of automobile manufacturers and component suppliers.  S. 3715 would rescind $7.5 billion of funds previously appropriated to the Department of Energy for loans to automakers and also appropriate $7.5 billion for the cost of “bridge loans” to support ongoing operations of eligible auto manufacturers and component suppliers. Repayments of bridge loans would be available to support new loans.

The draft legislation posted by the House Committee on Financial Services would require the Secretary of the Treasury to provide $25 billion in bridge loans to eligible auto manufacturers and component suppliers, to be administered under the Troubled Assets Relief Program (TARP) that was created by the Emergency Economic Stabilization Act of 2008 (Public Law 110-343).

Provisions related to the administration and financial terms of such loans are similar under the two proposals, but significant differences arise regarding their budgetary treatment and potential net impact on the federal budget.  In particular, the subsidy costs of loans under S. 3715 would be calculated on a present value basis following the requirements of the Federal Credit Reform Act (FCRA), while loans made under TARP (as directed by the draft House legislation) would be calculated on a slightly different basis.  Under TARP, subsidy costs would be calculated by adjusting the discounting called for in FCRA to account for the market risk associated with the loans. In contrast, FCRA discounting is done by using the relatively “risk-less” Treasury rate of borrowing. (That difference, and its impact on the net budget impact of the proposals is explained in more detail in the letter to Majority Leader Hoyer.)

Another key difference between the two proposals is that S. 3715 would allow loan repayments to be “revolved” into new loans. That provision would effectively raise the estimated subsidy rate of the initial loans under S. 3715 to 100 percent. That result occurs because repayments would automatically revolve into new loans without subsequent appropriation of any additional funding to cover the subsidy costs of those new loans, as would normally be required under FCRA. By making new loans with the repayments of the initial loans, the government would essentially be spending those receipts, thus adding to the subsidy costs of the initial loans.

A summary of CBO’s estimates for the two proposals is provided in the following table:

CBO also sent a letter today to Cong. John M. Spratt Jr., Chairman of the House Budget Committee, providing information on how two alternative scenarios to provide $34 billion in bridge loans to the auto industry would affect the federal budget. Under both scenarios, the loans would support firms’ ongoing operations and would carry interest rates of 5 percent for the first five years after disbursement and 9 percent thereafter. CBO’s estimates of the subsidy cost for providing $34 billion in bridge loans under the two scenarios specified by Chairman Spratt are summarized in the following table:

CBO estimates that the subsidy rate for bridge loans under standard credit reform accounting (following the requirements of FCRA) would be 50 percent. By comparison, we estimate a subsidy rate of 70 percent for providing such loans under TARP because that program’s accounting requires an adjustment to reflect market risk. Using those subsidy rates, CBO estimates a budget cost of $17.0 billion for the use of new budget authority (with FCRA accounting), and a net budget cost of $13.6 billion to $17.0 billion for use of existing TARP authority.

Yesterday, CBO released its Monthly Budget Review.  CBO estimates that the Treasury will report a federal budget deficit of $408 billion for the first two months of fiscal year 2009, $253 billion higher than the deficit recorded through November of last year.  This estimate includes $191 billion disbursed for the Troubled Assets Relief Program (TARP) during the first two months of the fiscal year.

CBO believes that the equity investments for that program should be recorded on a net present value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008, rather than on a cash basis as recorded by the Treasury.  CBO’s preliminary analysis suggests that the present value cost of the TARP transactions made through November totals about $50 billion, $141 billion less than the cash disbursement recorded in the budget by the Treasury.  The estimated cost accounts for subsidized interest rates and market risk, but also for the likelihood that the government will ultimately get much of its money back.  As a result, CBO’s estimates of outlays and the deficit are much lower than the amounts that will be reported by the Treasury. 

Evaluating TARP on a net present value basis, CBO estimates the federal deficit totaled $267 billion through November, compared with a deficit of $155 billion during the same period last year. Revenues are running about 6 percent below receipts during the same period last year—but even excluding the TARP payments and $14 billion in payments to Freddie Mac to cover its losses, outlays are up by about 13 percent (after adjusting for shifts in the timing of certain payments).