I can see the Obama administration and Congress already salivating over the news that the Department of the Treasury now estimates that over the next ten years TARP will cost $141 billion at most. This number is down $200 billion from the $341 billion the White House projected in August.
But what to do with this $200 billion? Congress and the administration, of course, are thinking of spending the cash on a jobs bill. But that would be a terrible idea. First, while Secretary Geithner can use the TARP money as he sees fit, he still has to do it within the boundaries of the original legislation (no matter how fuzzy these are, they do exist).
More important, because of the way TARP funds were accounted for, each dollar returned to Treasury doesn’t translate into a dollar of spending. Economist Donald Marron explains this point very clearly:
The key thing to note here is that each dollar of reduced TARP authority translates into only fifty cents of reduced spending. Why? Because TARP accounting is done using a “credit” approach, which accounts not only for the money that the government uses to purchase troubled assets, but also expectations of any money that will be returned.
The potential for returns varies greatly among the existing TARP programs. On average, the investments in banks seem likely to return most of the original investment, so the net cost of those investments will be relatively small. At the other extreme, the program supporting mortgage modifications will generate no returns. In scoring possible changes to TARP, CBO splits the difference and assumes that, on average, 50 cents of each TARP dollar will be repaid, and 50 cents will be added to the deficit.
And that’s where a budget-gimmick alert gets off in my head. Already, the White House is trumpeting the availability of $200 billion. I doubt they will ever admit that, as Marron notes, “the actual amount of ‘available’ TARP funds is probably more like $50 to $100 billion. Rescinding those monies would thus pay for ‘only’ $25 to $50 billion in new programs.”
Yet who wants to bet that they will keep this fact quiet and make plans for $200 billion?