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. SHELDON WHITEHOUSE (D-RI): Thank you, Mr. Chairman.
Mr. Orszag, welcome back. I understand that we will be having a health care-specific budget hearing shortly, so although that is my favorite and constant subject, let me ask you, since we are in the arena now of stimulus packages -- you point out in your written testimony that the enactment of the stimulus could further increase the projected deficit for 2008. The hope of the stimulus package would be that it would be helpful to boost consumption and GDP. Do you believe that the revenue generated by a carefully crafted stimulus could cancel out that cost over the 10-year horizon?
MR. ORSZAG: The revenue generated by an effective stimulus, because the stimulus would then boost economic activity, could offset part but not all of the cost. A rough rule of thumb -- and I want to, again, say, we are now entering a realm that in official scoring CBO does not undertake -- but a rough rule of thumb is that each additional dollar of economic activity generates roughly 20 cents and revenue.
We have said that an effective stimulus could generate roughly an extra dollar of economic activity for each dollar of budgetary costs. So if you wanted to go down that path of figuring out what the net impact is you could shave something like 20 percent off the budget costs, if it were well designed and you wanted to incorporate that revenue feedback effect.
But again, I want to emphasize, in official scoring that is not done.
SEN. WHITEHOUSE: And in terms of the quality of design, in terms of the effectiveness that you have described, how would you rank income tax rebates, unemployment compensation extensions and food stamp provisions along that -- by those two benchmarks?
MR. ORSZAG: All of them rank high in terms of their cost- effectiveness -- that is the extra consumption or demand that you get per dollar of budgetary cost -- especially on the rebate if it were tilted towards liquidity-constrained and lower-income households.
There is, however, a difference in terms of timing. We indicated in our --
SEN. WHITEHOUSE: Can I interrupt you and ask you to define a liquidity--constrained --
MR. ORSZAG: A house -- sorry -- a household that has difficulty borrowing. So the evidence, for example, from the 2001 tax rebates suggested that households with lower credit limits or those who had exhausted a larger share of their credit limit --
SEN. WHITEHOUSE: Would that correlate to family income?
MR. ORSZAG: It doesn't always, but it's disproportionately lower-income households tended to spend more of their rebate, ultimately, than households that didn't face those kinds of borrowing constraints.
SEN. WHITEHOUSE: Okay. Sorry to interrupt.
MR. ORSZAG: But that's the logic for why tilting a rebate towards lower- and moderate-income households tends to get you more kick in terms of immediate spending.
There is, however, a difference between those -- the unemployment insurance benefits and food stamp benefits similarly rank high because any money that you pump out the door will likely get spent to a large degree and result in additional consumption.
There is, however, a difference in terms of timing. The length of lag from the enactment to the actual stimulus we said for a tax rebate is medium -- and I can define medium more precisely in a second -- whereas for unemployment insurance benefits and food stamp benefits it's short. So there's a difference in timing.
We expect that after enactment food stamp benefits and unemployment insurance benefits could start to affect spending within, say, two months. Whereas under a rebate, because of where the IRS is currently in -- where it currently is in the tax filing season and because the response to a rebate seems to lag by a quarter to two quarters, you're going to be disproportionately affecting spending at the -- basically at the end of 2008. And that may well be outside of the window of economic weakness that you want to be targeting.
SEN. WHITEHOUSE: In addition to the question of effectiveness, in addition to the question of timing, is there also a question of a multiplier effect depending on what goods are likely purchased with the stimulus funds? For instance, since food is fairly likely, particularly at the income levels affected by food stamps, to be American-produced, is there a multiplier effect from that versus somebody with a higher income buying a made in China television that is bounced once in a low-margin big-box American company before it moves into the hands of the consumer?
MR. ORSZAG: There could be differences.
I would say in general, the type of spending that is induced probably is less important than the aggregate amount that you do. But you're right that to the extent the response is disproportionately consumption of imported goods, you don't get as much impact on domestic production as if it were domestically produced goods. Just in general, those ratios don't tend to vary so much across broad categories of spending that it's a first -- of sort of primary importance. But you're right that there could be differences.
SEN. WHITEHOUSE: I think my yellow light is on so I won't trespass on the red light, and I will yield back my time.
Thank you, Mr. Chairman.
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SEN. WHITEHOUSE: Thank you, Mr. Chairman.
Two quick questions: Back to the issue of the timing of stimulus effect -- and I don't even know if you're the person to answer the first one, but with respect to the IRS and its ability to put the rebate through the tax system, is there any chance that this could be connected to the 2007 refund process, which would presumably be quicker than --
MR. ORSZAG: My understanding is that there is special programming that would be required for processing a rebate like this, and that it could not be done in conjunction with the current tax- filing season.
SEN. WHITEHOUSE: Okay. The other question is that we've sort of overlooked our senior citizens in this whole stimulus equation. In the event that we were to choose a stimulus mechanism that involve seniors, and specifically, a Social Security mechanism, how quickly would money flow through Social Security to seniors?
MR. ORSZAG: I am told that after enactment it would involve something like perhaps a three-month lag or so before it would actually show up in benefit payments.
SEN. WHITEHOUSE: So quicker than tax rebates, less rapid than unemployment insurance extensions and food stamps.
MR. ORSZAG: That's probably fair.
SEN. WHITEHOUSE: Thank you, Mr. Chairman.
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