It seems likely that when Phil Swagel took over as director of the Congressional Budget Office (CBO) last June he did not think he would need to include assumptions about “social distancing” as part of the cost estimates the agency would produce. Nor does it seem likely that he envisioned having to make economic projections in an environment where nearly 10 million unemployment claims would be filed in a two-week period.
As with so many things, however, the COVID-19 pandemic has ushered in a new world for CBO. Two CBO publications last week illustrate how difficult it has become to estimate the economic and budgetary fallout of the pandemic.
On Thursday April 2, Swagel published a blog post updating the agency’s economic forecast. Later that day, CBO released its preliminary cost estimate for H.R. 6201 (Families First Coronavirus Response Act), which was the second of three bills Congress has passed in response to the pandemic.
The common theme was significant uncertainty.
Swagel wrote in his blog that CBO now expects the gross domestic product to decline by more than 7 percent in the second quarter of 2020, which translates into an annualized decline of more than 28 percent. “Those declines could be much larger, however,” Swagel noted.
He also said that the CBO expects the unemployment rate to top 10 percent during the second quarter of 2020 and that interest rates on 10-year Treasury notes will remain below 1 percent over that time.
For purposes of scoring H.R. 6201, CBO assumed an unemployment rate of 12 percent and an expectation that nationwide social distancing measures would continue “on average, and with local variation for the next three months.”
“Information about economic conditions and the spread of the novel coronavirus is changing rapidly,” Swagel wrote, “and CBO is monitoring it closely.”
One element of uncertainty is the duration of social distancing measures, which according to Swagel “could be in place for a shorter, longer, or much longer time [than CBO now assumes], with major consequences for the economy and the nation.”
Based on these assumptions and caveats, CBO estimated that H.R. 6201 will increase the federal budget deficit by $192 billion between 2020 and 2030. Most of that increase will come in 2020 and 2021, which is consistent with the goals of getting the money out fast and limiting the long-term budgetary cost.
According to CBO, the bill will increase spending by about $98 billion (roughly half of that for federal matching assistance to the states under Medicaid) and decrease revenues by $94 billion (mostly in tax credits for paid sick leave, family leave and medical leave). However, CBO noted, “The magnitude of the budgetary effects of the act is uncertain to an extraordinary degree because it will depend at least to some extent on the duration of the current declaration of a public health emergency, the severity of the effects of COVID-19, and how quickly measures to curb the pandemic begin to work.”
Looking ahead, CBO warned that, “A weaker economy and job losses as a result of the virus are likely to increase participation in various income security programs and thus result in higher costs for this act—but this preliminary estimate does not include that potential economic impact.”
An even more challenging task for CBO will be coming up with a cost estimate for the massive H.R. 748, (Coronavirus Aid, Relief, and. Economic Security Act, or CARES), which was enacted on March 27th. That estimate is due out within two weeks and we can be certain that the uncertainties surrounding H.R 6201 will be even greater.
Like CBO, The Concord Coalition will be monitoring events. One thing, however, does not seem uncertain. As CBO observed in its H.R 6201 cost estimate: “The longer the pandemic, the greater the increase in the deficit is likely to be.”