Congressional Budget Office
Director's Blog

As part of ongoing efforts to protect the United States and its allies from attack by ballistic missiles, the U.S. Missile Defense Agency (MDA) is working to deploy a missile defense system in Europe to “defend allies and deployed forces in Europe from limited Iranian long-range threats and expand protection of [the] U.S. homeland.” As proposed, the system would be in the field by 2013 and would include interceptor missiles in silos to be built in Poland, a tracking radar in the Czech Republic, and another radar at an unspecified location near Iran.

CBO’s study of this system, released today, compares the potential cost and performance of MDA’s proposed European system with the cost and performance of three other options for deploying missile defenses in Europe:

• Standard missile interceptors located on U.S. Navy Aegis ballistic missile defense ships operating at three locations around Europe, supported by two transportable radars;
• Ground-based standard missile interceptors operating from mobile launchers located at two existing U.S. bases, supported by two transportable radars; and
• Ground-based kinetic energy interceptors (a new high-acceleration interceptor under development at MDA), also operating from mobile launchers located at two existing U.S. bases and supported by two transportable radars.

CBO developed these alternatives using components that are already being planned rather than entirely new systems. Like MDA’s proposal, the alternatives are all midcourse-phase defense systems (they would intercept an enemy missile after its rocket booster had burned out and the missile was “coasting” on a ballistic trajectory above the atmosphere). (Note for the uninitiated: the report has an introduction to ballistic missiles– you can find it in Appendix A.)  

CBO compared MDA’s proposed deployment and the alternatives for the defense that they provide to Europe, the additional defense they would provide to the U.S. relative to existing system, their costs, and when the alternatives could be available. Using those four criteria, CBO found the following:

• Defense of Europe. All of the alternatives CBO considered would provide defense of most of Europe roughly equivalent to the defense provided by MDA’s proposal against most types of ballistic missiles that Iran is thought to have developed or could develop in the future. Because the alternatives CBO considered would locate interceptors closer to Iran than MDA’s planned system, they would generally provide more extensive defense of southeastern Europe than would MDA’s proposal. Moreover, because they would be composed of mobile or transportable components, deploying the alternative systems would not require building permanent facilities—including missile silos—at European sites.
• Extended defense of the United States. A second goal of MDA’s proposed European system is to give the United States an extra layer of defense against potential Iranian intercontinental ballistic missiles. CBO’s analysis indicates that by 2012 systems already in place at two bases in the United States would protect more than 99 percent of the U.S. population from this threat. MDA’s proposed European system would extend defensive coverage to the other 1 percent of the U.S. population. It would also provide redundant defense from a third interceptor site for all of the continental United States, giving system operators more flexibility by creating an opportunity to launch a second interceptor from the United States, if necessary. None of the alternatives considered by CBO provide as much additional defense of the United States.
• Costs. For roughly the same cost as MDA’s European system—a total of about $9 billion to $14 billion over 20 years—the United States could deploy either of the ground-based alternatives. The ship-based alternative would cost almost twice as much as MDA’s proposal—a total of about $18 billion to $26 billion over 20 years—largely because CBO assumed that the Navy would need to buy additional ships to operate it.
• Availability. The alternatives that CBO examined might not be available as early as MDA’s proposed European system.

Kudos to Michael Bennett of the National Security Division for the development of this report, and to Maureen Costantino, who prepared the many interesting and informative maps and figures. 

Yesterday, CBO released a cost estimate of H.R. 1106, the Helping Families Save Their Homes Act, as introduced on February 23, 2008. CBO estimates that enacting H.R. 1106 would increase direct spending by about $8 billion over the 2009-2014 period, and would reduce direct spending by about $15 billion over the 2009-2019 period. Enacting H.R 1106 would increase revenues by $19 million over the 2009-2014 period and by $23 million over the 2009-2019 period.

The Helping Families Save Their Homes Act would:

• Authorize bankruptcy courts to modify the terms of some mortgages on principal residences during Chapter 13 bankruptcy proceedings;
• Allow the Federal Housing Administration and the Rural Housing Service to pay claims on losses stemming from the judicial modification of mortgage loans that they insure;
• Modify the Hope for Homeowners loan-guarantee program authorized by the Housing and Economic Recovery Act of 2008;
• Permanently increase the amount of deposits insured by the Federal Deposit Insurance Corporation and the National Credit Union Administration from $100,000 to $250,000 and modify other terms of both deposit insurance programs; and
• Protect mortgage servicers from legal liability if they perform loan modifications according to specific criteria established under the legislation.

CBO has completed several cost estimates since January 2009 for bills with provisions similar to those in the Helping Families Save Their Homes act, which provide more detail on CBO’s analysis of various provisions of this bill. Those cost estimates include:

• H.R. 200, the Helping Families Save Their Homes in Bankruptcy Act, as ordered reported by the House Committee on the Judiciary on January 27, 2009;
• H.R. 786, a bill to make permanent the temporary increase in deposit insurance coverage, as ordered reported by the House Committee on Financial Services on February 4, 2009;
• H.R. 787, a bill to make improvements in the Hope for Homeowners program, as ordered reported by the House Committee on Financial Services on February 4, 2009; and
• H.R. 788, a bill to provide safe harbor for mortgage servicers who engage in specified mortgage loan modifications, as ordered reported by the Committee on Financial Services on February 4, 2009.

This morning I testified before the Senate Finance Committee on CBO’s two major health reports, Key Issues in Analyzing Major Health Insurance Proposals, and Budget Options for Health Care. The first examines the principal elements of reform plans that would affect our estimates of the effect of such plans on federal costs, insurance coverage, and other outcomes. The second comprises 115 discrete options to alter federal programs, affect the private health insurance market, or both. These two reports are the culmination of a tremendous effort by many people at CBO as we’ve redoubled our capacity to analyze these complex issues. (I was recently asked to testify about these volumes before the Senate Budget Committee; click here for the blog summarizing my testimony there.) 

As I emphasized today in my statement before the committee, health care reform is an urgent issue. In contrast with the situation in the economy and financial markets, our system for delivering and paying for health care is not fundamentally different this year from last year. However, the relatively gradual pace of change in health care is rarely seen as an argument for deferring action. Our current health system evolved over years and decades, and while coverage could be substantially expanded in a few years, it could take many years or even decades for the thoroughgoing changes needed to improve the system’s efficiency to come fully to fruition. Because of the lead times involved in realizing these efficiencies, nearly all analysts think that those changes should begin now.  

Over the past week CBO has released a number of products related to the stimulus efforts in Congress. On Wednesday, CBO released a letter on the macroeconomic impacts of H.R. 1 that included year-by-year analysis of the economic effects of the stimulus legislation. (This analysis was based on an average of the effects of two versions of H.R. 1– as passed by the House and as passed by the Senate. The economic effects of those two bills were projected to be broadly similar). Today, CBO released a cost estimate of the conference agreement for H.R. 1, as posted on the Web site of the House Committee on Rules.

CBO estimates that enacting the conference agreement for H.R. 1 would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, by $399 billion in 2010, by $134 billion in 2011, and by $787 billion over the 2009-2019 period (combining both spending and revenue effects). The table below summarizes the estimated budgetary impacts of the conference agreement legislation.

Yesterday I testified before the Senate Budget Committee about CBO’s recent health volumes, Key Issues in Analyzing Major Health Insurance Proposals and Budget Options Volume 1: Health Care.

Congress faces both opportunities and challenges in pursuing two major policy goals: (1) expanding health insurance coverage, so that more Americans receive appropriate health care without undue financial burden, and (2) making the health care system more efficient, so that it can continue to improve Americans’ health but at a lower cost in both the public and private sectors.

On a broad level, many analysts agree about the direction in which policies would have to go in order to make the health care system more cost-effective: Patients and providers both need stronger incentives to control costs as well as more information about the quality and value of the care that is provided. But much less of a consensus exists about crucial details regarding how those changes are made. Similarly, many analysts would agree that expanding insurance coverage significantly woudl require risk pooling, subsidies, and tools to mandate or facilitate enrollment—but would disagree about the relative importance of these pieces.  In part, those disagreements reflect different values or different assessments of the existing evidence, but often they reflect a lack of evidence about the likely impact of making significant changes to the complex system of health insurance and health care.

With respect to expanding health insurance coverage, my testimony made the following key points:

• Without changes in policy, a substantial and growing number of people under age 65 will lack 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. That projection is consistent with long-standing trends in coverage and largely reflects the expectation that health care costs and health insurance premiums will continue to rise faster than people’s  income—making health insurance more difficult to afford.
• Proposals could achieve near-universal health insurance coverage by combining three key features:   (1) Mechanisms for pooling risks—both to ensure that people who develop health problems can find   affordable coverage and to keep people from waiting until they are sick to sign up for insurance. Options include strengthening the employment-based system, modifying the market for individually purchased insurance, and establishing a new mechanism such as an insurance exchange. (2) Subsidies to make health insurance less expensive for individuals and families, particularly those with lower income who are most likely to be uninsured today. For reasons of equity and administrative feasibility, however, it is difficult for subsidy systems to avoid providing new subsidies to people who already have insurance or would have purchased it anyway. (3) Either an enforceable mandate to obtain insurance or an effective process to facilitate enrollment in a health plan. An enforceable mandate would generally have a greater effect on coverage rates, but without meaningful subsidies, it could impose a substantial burden on many people.
• Many analysts would agree that payment systems should move away from a fee-for-service design and should instead provide stronger incentives to control costs and reward value. A number of alternative approaches could be considered—including fixed payments per patient, bonuses based on performance, or penalties for substandard care—but their precise effects are uncertain. Policymakers may thus want to test various options (for example, using demonstration programs in Medicare).
• Many analysts would agree that the current tax exclusion for employment-based health insurance—which exempts most payments for such insurance from both income and payroll taxes—dampens incentives for cost control because it is open-ended. Those incentives could be changed by replacing the tax exclusion or restructuring it in ways that would encourage workers to join health plans with higher cost-sharing requirements and tighter management of benefits.
• Many analysts would agree that more information is needed about which treatments work best for which patients and about what quality of care different doctors, hospitals, and other providers deliver. But absent stronger incentives to improve efficiency, the effect of information alone on spending will generally be limited.

This evening, CBO released its Monthly Budget Review, reflecting an analysis of budget data through the end of January.  CBO estimates that the Treasury Department will report a deficit of $563 billion for the first four months of fiscal year 2009, $474 billion higher than the deficit incurred through January 2008. This year’s deficit to date includes estimated outlays of $284 billion for the Troubled Asset Relief Program (TARP). Although the Treasury is recording most spending for the TARP on a cash basis, CBO believes that the budget should record all of the program’s activities, including equity investments, on a net present-value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008. Using that approach, CBO estimates that outlays of $76 billion should be recorded for the TARP through January, which would yield an estimated deficit of $355 billion through January.

Receipts for the first four months of fiscal year 2009 were about $88 billion (or 10 percent) lower than receipts during the comparable period last year. Almost half of the decline, or $43 billion, resulted from lower net corporate receipts, which fell by 43 percent. Declines in those receipts reflect the continued weakness in corporate profits stemming from the recession.

Outlays through January totaled $1,337 billion, CBO estimates—$387 billion more than in the same period last year.  That amount includes expenditures of $284 billion for activities by the TARP (under the cash treatment used by the Treasury) and $14 billion of equity injections for Freddie Mac. Spending for other federal programs was $123 billion higher than in the first four months of 2008; adjusted for calendar-related shifts in the timing of certain payments, program outlays rose by 12 percent (about $101 billion). In contrast, outlays for net interest on the public debt fell by 39 percent, or $35 billion, over that period because of lower costs for inflation-indexed securities and a decline in short-term interest rates.

In a letter sent today to Senators Grassley and Gregg, CBO analyzed the macroeconomic effects of an initial Senate version of the stimulus legislation (the Inouye-Baucus amendment in the nature of a substitute to H.R. 1, which is the House stimulus bill). CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.

Those estimated effects are slightly greater than those of H.R. 1 (as introduced) in 2009 and 2010 (particularly in 2009), but lower in 2011, because more of the overall rise in spending and fall in revenues occurs in the first two years under the Senate legislation.

Most of the budgetary effects of the Senate legislation would occur over the next few years. Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity. Short-run stimulative policies can affect long-run output by influencing those three factors, although such effects would generally be smaller than the short-run impact of those policies on demand.

In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt.  To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy.

The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.

Today CBO released a cost estimate for a proposed Senate substitute amendment to H.R. 1, the American Recovery and Reinvestment Act of 2009, introduced by Senators Inouye and Baucus on January 31st. The amendment would specify appropriations for a range of federal programs and would increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs; it also would reduce individual and corporate income tax collections in a number of ways, including an alternative minimum tax (AMT) patch for 2009 and a tax credit of up to $500 for each worker in both 2009 and 2010.

CBO estimates that if enacted in mid-February, H.R. 1 as amended would increase outlays by $132 billion during the remaining several months of fiscal year 2009, by $242 billion in fiscal year 2010, by $145 billion in 2011, and by a total of $632 billion over the 2009-2019 period. In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the proposed Senate amendment to H.R. 1 would reduce revenues by $101 billion in fiscal year 2009, by $219 billion in fiscal year 2010, and by a net amount of $253 billion over the 2009-2019 period. (Approximately $96 billion of the estimated revenue change is attributable to the proposed tax credit for wage earners and $70 billion to the proposed changes in the AMT.)

Combining those effects, CBO estimates that enacting the Senate amendment would increase federal budget deficits by $233 billion over the remaining months of fiscal year 2009, by $461 billion in 2010, by $142 billion in 2011, and by about $884 billion over over the 2009-2019 period. The table below summarizes CBO’s and JCT’s estimates of the legislation’s budgetary effects.

These estimates differ from CBO’s cost estimates for similar legislation considered in the House of Representatives last week. On January 30, CBO transmitted a cost estimate for H.R. 1 as passed by the House on January 28, 2009; and on January 26, we transmitted a cost estimate for the bill as introduced in the House on that date.  CBO and JCT estimated that the version of H.R. 1 that was passed by the House of Representatives would increase deficits by $526 billion over the 2009-2010 period and by a total of $820 billion over the 2009-2019 period; the Senate amendment would increase the deficit by $694 billion over the 2009-2010 period and by about $884 billion over the 2009-2019 period. 

Much of the difference in the 11-year totals comes from the Senate amendment’s AMT provisions, which would reduce revenues by about $70 billion. The most significant difference in outlays from discretionary funding in the House and Senate versions stems from the proposed State Fiscal Stabilization Fund: both versions would appropriate $79 billion for this new activity, but CBO estimates outlays of about $31 billion over the 2009-2010 period under the House-passed version of H.R. 1 and about $52 billion over the 2009-2010 period under the Senate amendment.  The difference reflects the fact that the House version would provide the funding in two components, the first available for obligation beginning July 1, 2009, and the second a year later; the Senate proposal would provide all the funding in 2009.