Congressional Budget Office
Director's Blog

The variability of individual earnings and household income (that is, how much a worker’s earnings or a household’s income bounces around from year to year) has become a topic of much interest to analysts and the policy community. Today, CBO issued a comprehensive paper on the topic. The study follows up on our earlier work on earnings and income variability — see here.

The paper issued today examines variation over the past two decades, both for individuals and for households, using data from the Social Security Administration (SSA) and the Census Bureau. The bottom line from the analysis is that a substantial fraction of workers experience large changes in their earnings from one year to the next, though the trend in earnings variability has been roughly flat since the mid-1980s. A somewhat smaller percentage of households see large changes in their income; that trend has also been roughly flat over the same period. (Some other recent studies relying on other data sources have suggested increases in the volatility of household and family income, but various problems in the surveys used in those studies may be contaminating those results. The administrative data upon which CBO relies tend to be more consistent over time and more accurate in general than many survey results.)

Individual Earnings

CBO’s new analysis of the extent to which workers’ earnings vary from year to year builds on our previous work. Despite slight differences in the age ranges examined and the methods used, the results are consistent with those in the earlier analyses. The main findings of the current analysis, which covers the period from 1984 to 2003, are:

• A substantial fraction of workers ages 25 to 55 experience large changes in earnings from one year to the next. For example, about 40 percent of workers experienced a change in earnings of 25 percent or more between 2002 and 2003. More than a quarter of those workers experiencing large changes in earnings move into or out of employment covered by Social Security.
• Women, younger workers, and workers with lower earnings experience large changes in earnings more frequently than their counterparts.
• Overall, the year-to-year variability of earnings has changed little since the mid-1980s.

Household Income

Changes in overall economic well-being are better captured by a broader measure than individual earnings. Because many people live in households with other earners or have nonlabor income (including, for example, unemployment insurance or interest income) that may mitigate or exacerbate the economic effect of any changes in his or her own earnings, CBO extended its work on variability in individual earnings to include an analysis of variability in household income. The main findings from that analysis, which covers the period from 1984 to 2005, are:

• Large changes in household income from year to year are somewhat less common than large changes in individual earnings. For example, about 25 percent of U.S. households experienced a 25 percent or larger change in income from 2004 to 2005.
• Overall, the fraction of households experiencing large changes in income has been relatively constant since the mid-1980s. Income tends to vary more for low-income households and for households headed by younger people, by those with less education, and by those who are not married.
• Changes in earnings are a major contributor to the changes in household income.

Although household income is a broader measure of people’s resources than individual earnings and is therefore likely to better capture some notion of overall well-being, some aspects of well-being and measures of financial resources are not considered here. For example, by looking only at before-tax income, the analysis misses the effects of taxes in a given year and the effects of changes in taxes over time on purchasing power. The tax system tends to smooth out variability at the household level by reducing year-to-year fluctuations in after-tax income. At the same time, however, the tax system imposes costs on the economy by distorting the decisions that households make about how much to work, how much to save, and how to receive their compensation. Also, the analysis does not investigate the relationship between household assets, such as savings or equity in a home, and variability in household income. Finally, the analysis does not examine the effect of changes in household income on other measures of household well-being, such as consumption or the health of household members.

The paper was written by Molly Dahl and Jonathan A. Schwabish of CBO’s Health and Human Resources Division, and Thomas DeLeire, formerly of CBO. Molly was about to give birth to her first child as the paper was finished, and it was a close race to see whether the paper or her child would see the light of day first. (The baby won– congratulations to Molly on the new addition to her family!)

Today’s New York Times has an outstanding and quite detailed front page story on the use of computed tomography (CT) scanners. The article highlights several points, including how little we often know about whether a new technology works better than an existing one, how the use of new technologies (along with existing ones) can be substantially affected by the financial incentives facing doctors and other medical providers, and as a result how new technologies often spread to many settings in which their use is of questionable value.

If the nation is going to improve the efficiency of our health system, we will need to grapple with the types of issues raised by this important article.

Yesterday, I participated in a forum discussing a new paper on health care financing options from Better Health Care Together.  The video is posted here.

A major issue in the pharmaceutical world involves the licensing of biological drugs. (Biological drugs are products derived from living organisms.)

CBO has now issued a cost estimate for S. 1695, which would establish an abbreviated regulatory procedure for licensing, by the FDA, of biological drugs that meet certain requirements and that are similar to certain existing biological drugs. Savings to public and private purchasers of biologics would result from the availability of these lower-priced versions that would be approved by FDA for marketing under the bill. Such competing products are commonly referred to as “follow-on biologics (FOBs),” “biosimilars,” or “biogenerics.”

CBO estimates that:

• Enacting S. 1695 would reduce total expenditures on biologics in the United States by $0.2 billion over the 2009-2013 period and by about $25 billion over the 2009-2018 period. (Over that 10-year period, such savings would equal roughly 0.5 percent of national spending on prescription drugs, valued at wholesale prices.)
• Direct spending by the federal government would decrease by $46 million over the 2009-2013 period, and by $5.9 billion over the 2009-2018 period; most of those savings would accrue to the Medicare program. Federal revenues would increase by $6 million over the 2009-2013 period and by $0.8 billion over the 2009-2018 period, because insurance premiums paid by employers would be lower and  taxable wages would consequently be higher. As a result of those changes, CBO estimates that enacting the bill would reduce budget deficits (or increase surpluses) by a total of $52 million over the 2009-2013 period and by $6.6 billion over the 2009-2018 period.
• Implementing S. 1695 would increase federal discretionary spending, on net, by nearly $30 million over the 2009-2013 period and by $5.3 billion over the 2009-2018 period, assuming appropriation of the necessary amounts, mostly because the bill would authorize discretionary spending equal to the estimated amount of savings to the federal government under the legislation. These sums exclude FDA’s costs to administer the new regulatory program established under the bill.

Analyzing this proposal has raised many complicated issues, and Julia Christensen of our Budget Analysis Division and Anna Cook of our Health and Human Resources Division have worked tirelessly on the cost estimate over an extended period of time. In my view, the product reflects CBO at its best!

CBO has a fantastic internship program — I regularly hear from former interns about what a wonderful experience they had as part of the program. In addition to our summer intern program, we also recently created a Health Policy Internship, which may be available on a summer, semester, or year-long basis depending on work needs and students’ availability.

Here’s a photo of this year’s CBO interns:

The summer internships normally last about ten weeks and include compensation based on academic level and work experience.

Interns contribute to CBO’s work in program areas such as budget and tax policy, health care, national defense, the environment, education, retirement and other income assistance, regulation, and public investment. They participate in an educational program that includes briefings on the agency’s role in the budget process, and may also participate in seminars offered by other Congressional support agencies and in the Congressional Summer Intern Lecture Series. (Our slots are unfortunately already filled for this summer!)

For more on our internships, see here.

CBO just released a score of the Medicare legislation (H.R. 6331, with a proposed amendment) under consideration in the House. In total, CBO estimates that the bill would reduce deficits by $0.3 billion over the 2008-2013 period and by less than $50 million over the 2008-2018 period. (The five-year savings would decline to $0.1 billion if the pending supplemental appropriations act is cleared before H.R. 6331.)

As I mentioned in a previous post, behavioral economics seems to have advanced substantially in influencing policymakers in the UK. For some recent commentary on that phenomenon, see this article from the Sunday Times and this comment on the article. The comment notes that “The Sunday Times is very good at spotting intellectual trends. When they print an entire piece on some new thinking, it is an important sign that a change is taking place.”

On Friday I participated in a briefing sponsored by the Alliance for Health Reform and the Robert Wood Johnson Foundation on the effects of health IT. The video from the event is posted here .

During my remarks, I borrowed an analogy from Laura Adams of the Rhode Island Quality Institute , to the effect that wondering how we are going to achieve more efficiency in health care is like wondering why we don’t have buttered toast. Some people say the key is to plug the toaster in; others say we need to go to the store and buy the bread; others say the key is putting the bread into the toaster and pressing the lever down; and others say the most important step is the final one, applying the butter. (For those of you who like to eat healthy, imagine wheat toast and a high-protein spread instead.) Health IT is like plugging in the toaster — necessary but not sufficient by itself to produce the buttered toast. Obtaining some combination of higher quality and lower cost from health care will also require changing the way we use information and the incentives facing providers, among other steps. In other words, health care contains massive opportunities for efficiency improvements, and health IT can facilitate some of the steps that will be crucial to improving efficiency, but capturing those opportunities will generally require more than just expanded health IT. For more on health IT, see here and here .

CBO issued a letter today reviewing options to offset price increases experienced by low- and moderate-income households under a cap-and-trade program for carbon dioxide emissions.

• Under a cap-and-trade program for CO2 emissions, the government would set gradually tightening limits on emissions, issue rights (or allowances) corresponding to those limits, and then allow firms to trade the allowances among themselves. The net financial impact of such a program on low- and moderate-income households would depend in large part on how the value of emission allowances was allocated. By itself, a cap-and-trade program would lead to higher prices for energy and energy-intensive goods. Those price increases would impose a larger burden, relative to either income or household consumption, on low- and moderate-income households than on higher-income households.

• Lawmakers could choose to offset the price increases experienced by low- and moderate-income households by providing for the sale of some or all of the CO2 emission allowances and using the revenues to compensate such households.

• For example, if all allowances were sold and the proceeds used for an equal lump-sum rebate to each household, the rebate would be greater than the average increase in low-income households’ spending on energy-intensive goods. CBO’s letter discusses that and other options, including broad or targeted reductions in income tax rates, payroll or income tax rebates, an increase in the Earned Income Tax Credit, a supplement to Food Stamp benefits, increased funding for the Low Income Home Energy Assistance Program, and increased incentives for energy-saving investments by households. In addition, automatic cost-of-living increases for Social Security and Supplemental Security Income would provide partial protection for some households.

• Choosing among such options often involves a trade-off between providing targeted assistance to low- and moderate-income households and offsetting some of the adverse effects on overall economic activity from reducing carbon emissions.

I delivered testimony today before the Senate Finance Committee on CBO’s long-term budget outlook and options for slowing the growth of health care costs. To view the hearing, click here.

Under any plausible scenario, the federal budget is on an unsustainable path—that is, federal debt will grow much faster than the economy over the long run. In particular, in the absence of significant changes in policy, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly. If federal revenues as a share of gross domestic product (GDP) remain at their current level, that rise in spending will eventually cause future budget deficits to become unsustainable.

To prevent deficits from growing to levels that could impose substantial costs on the economy, revenues must rise as a share of GDP, or projected spending must fall—or some combination of the two outcomes must be achieved. Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.

Our political system unfortunately does not appear to be particularly effective at addressing gradual long-term problems such as rising health care costs and aging. The problems caused by rising health care costs, though, are not just long-term ones. Indeed, health care costs are already reducing workers’ take-home pay to a degree that is both underappreciated and at least partially unnecessary, consuming roughly a quarter of the federal budget, and putting substantial pressure on state budgets (mostly through the Medicaid program), thereby constraining funding for other governmental priorities. Identifying and addressing inefficiencies in the nation’s health care system can yield significant benefits, even in the short term, and focusing attention on those effects that are already occurring may be helpful in developing the consensus necessary to make the needed changes.