Hearing of the Senate Budget Committee: Congressional Budget Office Budget and Economic Outlook

Interview

Hearing of the Senate Budget Committee: Congressional Budget Office Budget and Economic Outlook

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SEN. WAYNE ALLARD (R-CO): You bet. Thank you.

I do feel that when we -- in 2001, 2003 when we -- I think 2003 is where we actually increased the expensing for small business.

MR. ORSZAG: In --

SEN. ALLARD: And I talked to Alan Greenspan, at that time chairman of the Fed. And he -- he and I -- I made the comment to him, I said, "You know, I think one of the greatest drivers to get our economy going is the increased expensing for small businesses because that's where you get your innovation, that's where you get new job creation." And I think I'm pleased to hear that this proposal has increased or sustained those expensing provisions.

And I wish you'd comment -- and he happened to agree, by the way. He says, nobody's been talking about how increasing expensing provisions has driven the economy in a positive direction. And -- but he felt like it had a profound impact.

I'd appreciate your comments and feeling on that because that is part of what has just been announced by the media.

So go ahead and comment on that.

MR. ORSZAG: Sure. Let me comment both on the Section 179 small business expensing and also the bonus depreciation provisions that were included in legislation in 2003.

The theory here, especially for temporary changes in those kinds of provisions, is very strong in the sense that you create an incentive for firms to do more investment toady, maybe some that they were planning on doing in four or five years, do it today instead to capture a more substantial tax incentive.

At least with regard to the bonus depreciation provisions for -- that were appropriate for many larger businesses too, the results from 2002 and 2003 were not as auspicious as we had hoped. So we have a really good theory. The most recent experience was not as promising as one would have hoped for. And that led us in our report to conclude that this would have a kind of medium effectiveness, in part because the most recent experiment or experience was not as strong as we would have hoped.

SEN. ALLARD: Well, of the things that we did, what did you think did the most to stimulate the economy?

MR. ORSZAG: Per dollar, it looks like the rebate that was advanced in 2001 turned out to be the most effective, per dollar.

SEN. ALLARD: Long term?

MR. ORSZAG: No, I'm -- I should back up.

SEN. ALLARD: Yes.

MR. ORSZAG: This entire discussion is -- from my end, this entire discussion is in terms of short-term aggregate demand. And again, those are a much different set of considerations than long-term growth.

SEN. ALLARD: Were your comments on expensing and the other provision, was that long-term or short-term discussion?

MR. ORSZAG: It was short-term, although the same considerations there would apply to long-term. The question is how much kick you're getting.

Just briefly, there is some ambiguity, but studies that looked at the bonus depreciation provisions before, during and after, you'd expect the largest response for long-lived assets because if you were under -- you know, previous law allowed to depreciate something over 20 years, and all of a sudden you're allowed to expense or depreciate a lot more of it up front. That's a much larger change than for a three or five or 10-year property.

And there's some ambiguity about whether we even got the response in terms of investment classes, that is whether the longer-life assets disproportionately responded. In any case, even the studies that found that that did occur suggested that the aggregate impact was small.

SEN. ALLARD: The fact that we'd sunsetted that in 10 years -- you know, if it's a long-term benefit, you whack off a long-term benefit when you do that. Is that correct?

MR. ORSZAG: Again, it depends what your objective is. If you want to spur short-term investment --

SEN. ALLARD: No, I'm talking about long-term.

MR. ORSZAG: Long-term.

SEN. ALLARD: Yeah.

MR. ORSZAG: Long-term investment you can argue that more permanency is beneficial. But if you're trying to accelerate things into the short-term, actually having it be temporary is beneficial, because firms than say, "Oh, something I was going to do in five years might as well do today to capture this benefit."

SEN. ALLARD: Well, you know, I'm of the view with many people that there has to be an adjustment in the markets, I mean, that obviously there was a lot of willingness to move into buying a home with the assumption that the growth in value was always going to be there year after year. And realistically that doesn't happen in -- where you have a capital market.

Is there anything other than perhaps the tax credit for buying new homes, which would tend to cut down your inventory in homes that would be coming on -- is there anything that you see where we could target a problem where it originated, which is out of the housing market and the subprime loan area?

MR. ORSZAG: The final section of our report to the committee on stimulus options had to do with options in the housing and mortgage market area. I would just note a lot of them -- there's no clean, you know, perfect solution here. Again, imbalance is built up, and trying to come in after the fact and kind of clean up is very difficult. So they're all -- they all have both pros and cons. There's nothing that sort of stands out as an elixir.

SEN. ALLARD: It seems to me like we can be thankful that we've allowed for the securitization of these loans, which has spread risk.

MR. ORSZAG: And that has me --

SEN. ALLARD: And I mean, if we hadn't done that I think we'd be in a worse problem today than -- but with the securitization we spread the risks, in fact we spread it beyond the borders of the United States. We have -- but I guess the downside is you do have not only an impact on our economy here, but you have a worldwide impact. And other countries don't have the flexibility to adjust, I think, that our economy does.

I know you're anxious to comment.

MR. ORSZAG: Oh no, I was just going to say I agree. Securitization is very beneficial in spreading risk, and that's a wonderful innovation and very important to our financial markets. On the other hand, the securitization process may have played some role in the situation that we currently find ourselves both because originators may not have adequate incentive to take care in originating loans, and also because securitization complicates the renegotiation of mortgages. The traditional model where I sat -- where you sat down with your banker and said here's what happened and you sort of worked out a deal to renegotiate the mortgage is difficult when there are thousands and thousands and thousands of people or investors owning bits of your mortgage.

SEN. ALLARD: Yeah. What about the regulatory environment in? You know, it seems to me that we're getting pretty heavy on the regulatory side and making it much more difficult for companies to produce and create jobs because of the regulatory environment. Do you think the regulatory environment now is at a point where it's having a noticeable effect on the economy?

MR. ORSZAG: Well, I mean, in general, relative to, say, the 1960s and 1970s, the regulatory environment has moved towards a more flexible and more market-oriented structure. And certainly relative to other, especially continental European countries, we have a more market-oriented system of regulations.

SEN. ALLARD: In the United States.

MR. ORSZAG: It really depends on what you're comparing it to. And I think we are learning to apply the insights from market incentives to a broader array of regulatory matters so that you can accomplish your public policy purposes as efficiently as possible.

SEN. ALLARD: One of the things I'm looking at -- I'm looking -- when we -- when you presented your chart there on the accelerated cost of health -- for Medicare, Medicaid and you said so much of it -- a certain portion of it that was demographics; the other portion of it was the cost of Medicare. The big impact of that is regulation. You know, you use a lot of hazardous materials in medicine. And so we've applied a lot of regulations and rules on the way we manage our hazardous materials with in-depth in reagents for laboratory tests. They end up in products that we use for medicine. They end up in the machinery and stuff that you use in medicine, such as X-ray machines and all the other fancy machines that we do now. They all have -- they all deal with hazardous materials and a lot of things.

And so I don't think a lot of people in implementing those stop to think of what the end impact may be on some industry that provides a vital service that Americans have considered number one priority and that's health care. And so that's what brings up the question. And I -- you know, you may not want to comment on it, but I think it's worth some discussion.

MR. ORSZAG: Well, Senator, I understand I think I may be appearing before this committee next week to talk about rising health care costs, so we can have an extended discussion next week on those topics.

SEN. ALLARD: Yeah, because there are built-in things that we -- well, energy is another area, you know, and it's a fundamental area and when you have the costs go up it affects everything. And you get an area like medicine, you use a lot of energy too. So it's in hospitals and the lights are on 24 hours a day -- equipment that goes on 24 hours for monitoring and everything like that so -- yeah, I look forward to that comment.

SEN. CONRAD: Let me just say I was just in a hospital several nights with my daughter who had an appendectomy and I spent all night in the hospital, and they do keep the lights on through the night, I found that out. (Laughter.)

SEN. ALLARD: Yeah.

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