CBO Bullish on TARP and Autos

I never thought that I’d be calling the Congressional Budget Office (CBO) a hidden bullpen. In large part because the CBO doesn’t typically analyze investments and it definitely doesn’t give advice to investors on where their money should be. The TARP and other components of the 2008 bailout have changed the workings of CBO a bit. Now that the US government owns shares (or the right to buy shares through warrants) in many companies, CBO’s reports now include a bit of corporate forecasting.

In its latest report, CBO estimates that TARP will cost taxpayers less than predicted by the White House’s Office of Management and Budget.

CBO estimates the program will cost $109 billion. That figure is $18 billion less than the $127 billion predicted by OMB. CBO gets the lower cost in two ways, first by estimating that the government will recover an additional $14 billion form its loans to AIG. Given that only a small portion of AIG’s business (and not a part of its namesake insurance business) was the hardest hit by the crisis it’s encouraging that the firm may be better able than expected to repay.

CBO’s second “savings” is more normatively ambiguous. CBO predicts that the Home Affordable Modification Program, which gives direct grants to homeowners will cost less than OMB predicts. CBO admits that these grants were never meant to be repaid. So the only way that CBO obtains a lower cost is by assuming that Treasury doesn’t spend all the money allocated to the program. If the government spent less because no one was losing their home, we’d cheer but numerous reports have shown that the program can be too slow to help homeowners, or just deny them help outright. So the Treasury spends less outright but it’s not clear the economy gets in better shape.

Lastly, yesterday’s report takes a buoyant view of the auto company loans. I’ve been crucial of these loans several times in the past. In an early auto loans report, CBO predicted a subsidy rate (the amount of money that will not be paid back) at 64 cents on the dollar. That figure has declined over time, even though little money has yet to be paid back. In the most recent report CBO expects the taxpayers will only lose 41 cents on the dollar. GM’s CFO Chris Liddell must share CBO’s improved outlook, saying that GM could profit as early as this year. I’m not surprised there but I am that CBO beat him to showing optimism. Although I must admit, I'm glad for it.

Unemployment Rises to 8.9 percent

The Bureau of Labor Statistics released the unemployment rate for April today. It's estimated at 8.9 percent of the labor force, an increase from 8.5 percent in March. This is moth a slower job loss than last month and not much of a surprise. I wanted to point out two quick things.

1. The "rosey" assumptions in the Obama FY2010 Budget look more unrealistic with time. Below I've charted the US unemployment rate so far this year along with projections needed to match the average unemployment rates predicted in the budget (8.1 percent) and by CBO (8.3) back in January.

The figure assumes that unemployment declines at a constant rate each month to reach the average. Already unemployment would have to decline by .2 percentage points a month to 7.3 percent by year's end to meet the budget's annual average. Yet the administration projects an average of 7.9 percent unemployment in 2010. So it's going to take some wild gyrations in unemployment to get these results. I've dismissed these assumptions before but the numbers, for unemployment at least, continue to underscore just how off they were.

2. I'm glad to see that BLS gave attention to something I've blogged about previously, the growth of discouraged workers. The chart below from BLS show that discouraged and marginally attached workers have grown during this recession.