CBO Is Wrong Again — Revenues Are Surging; Fed Curbs Eyed; Congress Continues to Surprise

Greg Valliere, Chief Political Strategist
May 8, 2015

A DRAMATIC SURGE IN RECEIPTS: Everyone focuses on spending, but we’ve argued for years that the key factor in analyzing the budget is receipt growth. That certainly looks true this year, following the release of post-April estimates from the Congressional Budget Office that showed receipts through the first seven months of this fiscal year are up by an astonishing 9%, thanks to surging tax payments — which CBO maddeningly ALWAYS underestimates. Revenues rose by $48 billion more this April than in 2014.

THIS DEMOLISHES CBO’S GLOOMY FORECAST OF MARCH 9 – so in less than two months, the agency’s official forecast is already obsolete.  It’s virtually certain that more progress in lowering the deficit is likely this year, despite a surprisingly strong rise in outlays (much of it from entitlements) and a drop in payments to Treasury from Fannie Mae and Freddie Mac.  It’s all about receipts, so we think red ink this year will fall significantly below CBO’s deficit forecast of $486 billion.

HOW LOW CAN IT GO?  The deficit this year, as a percentage of GDP, surely will fall below CBO’s estimate of 2.7% — perhaps to 2.5% or a little less, with a further drop in fiscal 2016-17, perhaps getting close to 2% of GDP. Yes, there will be some new spending, but this is a very positive story for the bond market — the deficit will not be a major concern until much later in the decade, when demographic changes could drive red ink higher.  Can we grow our way out of deficits?  That’s a wildly optimistic scenario — but we can grow our way to a low deficit environment that the markets can easily live with.

CONGRESS EYES CURBS ON FED:  No good deed goes unpunished — the Federal Reserve almost single-handedly saved us from another Great Depression, but Congress wants to meddle.  The bill to watch is from Richard Shelby, Chairman of the Senate Banking Committee.  Not only would he seek to curb the influence of the NYC Fed, but his proposal would impose a “mechanical” rule — modeled after proposals from Stanford Prof. John Taylor — that would stipulate conditions under which the Fed could raise or lower rates.

THERE’S SURPRISING ANTIPATHY TOWARD THE FED IN CONGRESS — which could intensify if critics on the left begin to stir once the central bankers raise rates later this year.  For now, we think any legislation — including a measure to audit the Fed’s decision making — would get vetoed if it got to the White House, so the Fed is off the hook at least until 2017.  Beyond that, if Republicans control the White House and Congress in two years, all bets are off.

CONGRESS CONTINUES TO SURPRISE: It’s not exactly a well-oiled machine, but Congress continues to exceed low expectations, defying predictions of gridlock and dysfunction.  After Senate passage, by 99-1, of a bill to review an Iranian nuclear deal, the stage is set early next week for a key procedural vote on “fast track” trade legislation.  We think the Senate will pass the trade bill, setting up a close (but winnable) fight in the House later this spring.

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Morning Bullets: FOMC Surprise; Prickly Rand Paul; New Rallying Cry on the Left — Expand Social Security

Greg Valliere, Chief Political Strategist
April 9, 2015

FOMC SURPRISE: Most of yesterday’s FOMC statement reiterated what we already knew — the first quarter weakness was probably temporary, there’s still some slack left in the labor markets, “liftoff” probably won’t come in June, etc.  But there was one surprise, according to our colleague Don Kohn, the former Fed Vice Chairman.

THE STATEMENT EMPHASIZED THE DOLLAR AND ENERGY PRICES in terms of the inflation outlook and liftoff, Don said in an email yesterday, “and this was the major surprise.”  The statement said that a leveling out of the dollar move and energy prices would be helpful in building confidence that inflation will rise, and the FOMC also indicated that the dollar’s strength and declines in energy prices were a reason to wait until later in the year to raise rates.

THESE TWO COMMENTS FROM THE FOMC seemed to refer to dollar/energy price movements that had already occurred, rather than projected ahead, although that wasn’t clear, Don said.  In any event, “there seems to be less looking through the dollar/energy price effects than I had anticipated,” he said.

PRICKLY RAND PAUL:  When reminded of his past quotes that conflict with his current positions, Rand Paul simply bashes the questioner’s temerity.  His interviews this week were either great theater or cringe-inducing, depending on your perspective, but they represented a genuine red flag for Paul’s campaign — you don’t disrespect the media and get away with it (see: the Clintons).  Paul is off to a rocky start compared to Ted Cruz, who raised an astonishing $31 million in the past week.

NEW RALLYING CRY ON THE LEFT — EXPAND SOCIAL SECURITY:  Silly us, thinking that the next battle over entitlements would involve the beginnings of COLA reform and other measures to help avoid a train wreck in the next decade.  No — the next battle may be to expand Social Security benefits.  Activists on the left, led by Sens. Bernie Sanders and Elizabeth Warren, are sponsoring legislation that would increase the monthly benefit and make the COLA more generous.

THIS IDEA POLLS WELL, especially since it raises Social Security taxes on the wealthy.  There’s a new rallying cry on the left — entitlements should be restructured to fight poverty and income inequality — and this makes it even less likely that cost-cutting is coming any time soon.  The clock is ticking; entitlements will eat us alive in the next decade, and expanding them would be reckless, even though the idea polls well.

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Medicare Inpatient Hospital Payment for New Medical Devices; Medical Device Tax

Sasha Simpson, Health Policy Analyst 
April 6, 2015

Medicare Inpatient Hospital Payment for New Medical Devices:  CMS is likely to approve four new technology add-on payment applications in the 2016 final regulation for inpatient hospital pay. This is positive for manufacturers and distributors of the new medical devices, in our view.

Medical Device Tax:  We believe the legislation to repeal the device tax is most likely to move through the House after the Supreme Court rules on King v. Burwell in June.  The legislation could reach enactment as part of a larger bill in September when Congress sets government spending for part or all of the 2016 fiscal year and raises the debt ceiling.  If the legislation were to stall in the current Congress, the likely 2017 Senate Democratic leader, Charles Schumer of New York, would be a more likely ally than the current Democratic leader, Harry Reid of Nevada.  Senator Schumer, who is slated to move into the top Democratic leadership position in 2017, has voiced his support this year for repeal of the device tax.

The Doc Fix; SCOTUS’s Ruling on the ACA

Paul Heldman, Senior Health Policy Analyst 
April 1, 2015

The Doc Fix: The legislative risk will likely be minimal through 2016 for cuts in projected Medicare payments to hospitals, post-acute care and other health providers after likely enactment in mid April of a $210 billion, 10 year bill to replace the flawed Medicare physician pay formula and extend children’s health insurance funding.  The bill would squeeze about 1% of projected aggregate Medicare payments to hospitals and post-acute care, including hospice, over the next 10 years.

The Supreme Court Ruling on Federal Subsidies:  The Supreme Court ruling is a close call, however, and nine to eleven southern and mountain states, including Texas, would likely resist starting a state exchange to keep subsidies flowing if the court rules them illegal on federal  exchanges.  A ruling against the administration poses a threat to an otherwise positive regulatory outlook for hospitals.

Iran Deal Adds More Pressure to Oil Prices; North Dakota Oil Stabilization Regulation; Crude-By-Rail Regulation

Former Secretary Spencer Abraham, Senior Energy Analyst &
Joe McMonigle, Senior Energy Analyst
April 6, 2015

Iran Deal Adds More Pressure to Oil Prices But Congressional Action Expected:  With the announcement of a framework deal with Iran on its nuclear program, the White House is in full sell mode until April 14, when Congress returns from its scheduled recess for Passover and Easter. Any deal is likely to be viewed by Congress as too accommodating to Iran. After that point, Congress is expected to pass bipartisan legislation in mid-to-late April requiring the deal to be approved by Congress. President Obama said he will veto the bill, but with eight Democrat Senators as cosponsors the legislation is in striking distance of a veto-proof majority. The White House is working on an approach that will circumvent Congress. Current law requires congressional approval to “lift” the sanctions but the president can “suspend” sanctions if he deems it “in the national interest.” The Administration plans to “suspend” sanctions for years, or at least through the president’s second term. Iran is seeking immediate sanctions relief, especially with regard to oil exports. The White House contends it will be phased in. The question of sanctions will be a key negotiating point in talks for a full agreement due by June 30. Whether the sanctions relief is in weeks or months, we expect an extra 500,000 barrels per day of Iranian crude exports by the end of the year just from turning on existing fields. This is similar to Libyan exports coming back online last fall, which led to a production surplus and subsequent price collapse. However, getting back to pre-sanctions production levels of about 4 million barrels per day will take much more time, investment and western technology.

North Dakota Oil Stabilization Regulation Starts April 1:  North Dakota’s new rule requiring producers to stabilize crude oil and remove flammable properties at the well site before transport goes into effect on April 1. The state regulators hope the rule will reduce or eliminate fireballs and explosions that have resulted from recent crude-by-rail train derailments. The acting head of the Federal Rail Administration told Congress late last month that the draft federal crude-by-rail regulation is unlikely to contain similar language due to concerns about legal authority. However, Reuters reported this week that safety advocates believe the North Dakota rule will be ineffective because it does not address increased vapor pressure of fully loaded oil tankers in transit.

Federal Crude-By-Rail Regulation Expected Later This Month:  The White House is currently reviewing draft crude-by-rail regulations from the Department of Transportation, and we could see a final rule by the end of April.  We expect the rule to require new cars or retrofits with thicker 9/16″ steel hulls. We see the older DOT-111 tank cars being phased out in 2-3 years and the newer CPC-1232 tank cars phased out in 5-7 years. Most of the burden and expense of the regulation will fall to the energy industry which generally owns the tank cars. The rail industry seems to have escaped tougher brake requirements, speed limits and two-man crews.