Sen. Warren Uses CBO Numbers–and Still Gets Dinged by the WaPo Fact Checker

July 11th, 2013 at 10:20 am

Close readers of OTE may recall my weighing in on the important but obscure issue of fair value accounting (FVA) and the federal budget.  The issue came up again today in a WaPo fact checker that (slightly) dings Sen. Elizabeth Warren for using CBO numbers (!!) that show an expected profit to the government over the next decade from its student loan program.  I say Sen. Warren shouldn’t have been dinged at all.

The budget currently scores lending programs, like those for student loans, by calculating the value today of both cash outflows and inflows over the life of the loan, accounting for default risk, prevailing and expected interest rates, and the timing of the flows.  But because the government has unique characteristics as a lender relative to the private sector, the budget scores them differently than would, say, a private bank:

…private lenders face various disadvantages relative to the government and they reasonably want to be compensated for them, so they charge more for their loans.  They can’t borrow as cheaply as Uncle Sam, they can’t tax, they can’t print money, they won’t make loans unless they expect to make a profit on them, and for all these reasons, they’re more risk averse.  So they add a risk-premium to their interest rate.

The FVAers want the budget to reflect that risk premium.  Even though they agree that the government faces neither those risks nor their associated costs, it would face them if it were a private lender.  To budget otherwise makes the government appear to be a less risky lender than the private sector.  Which, as noted, they agree the government is…making these additional costs phantom ones.

In this regard, team FVA as cited by the WaPo get one important part of this wrong: they suggest that the current method fails to fully account “for the risk of default.”  Not so.  As noted above, accounting for default risk is a critical part of the current method.  Moreover, as the Center for American Progress has pointed out, these methods have provided an accurate accounting of the actual cash flows to and from the government:

Our review of federal government credit programs back to 1992 shows that on average the government is quite accurate in its risk pricing. In fact, the majority of government credit programs cost less than originally estimated, not more.

So, let’s review: Sen. Warren, in an argument in support of affordable student loans, used official CBO numbers based on sound and accurate accounting, yet was scored by the WaPo factchecker as getting the numbers half-wrong (she got two out of four “Pinocchios”).


OK, the fact-checker’s not nuts.  The reason he went there is because among those who raise questions about the use of the current method are the CBO themselves.  That’s a big deal in this town and I think it’s fair to point out that the budget office doesn’t necessarily agree that the added cost of market risk should be left out of the budget, even though the USG is not “the market” and doesn’t face that same risk set.

On the other hand, I wouldn’t say CBO’s view is monolithic either, at least not in an historical sense.  Former CBOers who are now my colleagues at CBPP as well as former CBO director Robert Reischauer strongly support the current method and oppose a change to FVA.

Here’s the thing.  Underlying this disagreement are two different accounting methods, and there are arguments for both.  Honorable, knowledgeable scholars line up on both sides of the argument.  The “correct” method for scoring government loans is thus a matter of opinion.  Until that opinion is resolved, the correct thing to do—the thing that is by far most commonly done by honest brokers in DC budget debates—is to use CBO’s published numbers.

That’s what the Senator did and I encourage her to continue to do so.

Print Friendly, PDF & Email

7 comments in reply to "Sen. Warren Uses CBO Numbers–and Still Gets Dinged by the WaPo Fact Checker"

  1. JohnR says:

    I see you’re assuming that the WaPo “fact-checks” in a reasonably objective and sensible manner, rather than the “parties disagree on shape of world, but one thing is sure; life goes on”, ‘Procrusteally non-biased’ manner characteristic of the post-Nixon corporate media. I’m not sure I’d be that optimistic.

  2. Perplexed says:

    -“The ‘correct’ method for scoring government loans is thus a matter of opinion.”

    Or maybe the “correct” method is the one that comes closer to what the actual cost is which is why Reischauer is very appropriately standing his ground. Its only in entertainment news shows that reality is a matter of opinion.

    “Honorable, knowledgeable scholars line up on both sides of the argument.”
    Maybe so, but one side is also heavily weighted with politicians and their agenda. Fortunately the math is on Warren’s side. This “risk premium” is little more that a facade for “margin.” Even if the government “scores” it as cost, they still have to do something with it when it comes in.

    • Jared Bernstein says:

      Agree–I was being generous.

      • Perplexed says:

        Wow, must be nice to be at your house at Christmas! (Or is it more of a Hotei Buddha thing?)

        As you well know (and have tirelessly tried to point out on this site), this argument, like numerous others, isn’t really about mathematical accuracy, its about a political agenda; an agenda that is having enormous consequences. While you continue to expose that agenda with charts, statistics, and analysis, Bill Moyers has taken a slightly different approach:

        Bill’s documentary does a great job of translating what many of the stats. & charts discussed here on OTE mean in terms of actual effects on the lives of American families. Its a powerful combination.

        Have you seen it? Its quite the wake-up call.

        • Jared Bernstein says:

          That’s the third time someone’s told me to see that in just the past two days. I’ll be sure to do so.

  3. save_the_rustbelt says:

    What happens in Washington should never be referred to as “accounting” in any way because most of what happens doesn’t pass muster in any known set of accounting principles.

  4. joe bongiovanni says:

    the more truthiness is not what accounting method to use but in whether the Senator is telling us anything that she seems to be talking about.
    She claims a reduction to 1 percent on student loans is economically feasible BECAUSE the Guv is earning $50 Billion annually, due to the high interest rates.

    There is first of all the fact that there is no real amount of what the government is ‘earning’, just an accounting gimmick or two to come up with an amount to plug into the budget. What can be meaningful is a statement by the Senator that says “a reduction from x percent to y percent (her favorite) would have a z-1 effect on the budgeted ‘income’, and a z-2 effect on student debt service payments.

    My question is this, under present “rules, would not any reduction in the Guv”s income from such a reduction NEED to be balanced by an equal cut in spending on some other program??
    If so, then should we not be getting the full picture of effects from a suggested policy move?
    The best potential source of alternative income to fund student loans or debt forgiveness remains former Congr. Dennis Kucinich’s NEED Act proposal from the 112th.

    It is a change to the monetary-fiscal relationship that puts the Guv in charge of issuing the money and paying off the public debt.
    It is similar to Lord Adair Turner’s proposal for Permanent Overt Money Finance of budget deficits.