Surplus Lines Insurance: Background and Current Legislation

Baird Webel
Specialist in Financial Economics

In general, insurance is a highly regulated financial product. Every state requires licenses for insurance companies, and most states closely regulate both company conduct and the details of the particular insurance products sold in the state. This regulation is usually seen as important for consumer protection; however, it also creates barriers to entry in the insurance market and typically reduces to some degree the supply of insurance that is available to consumers. Rather than requiring consumers who may be unable to find insurance from a licensed insurer to simply go without insurance, states have allowed consumers to purchase insurance from non-licensed insurers, commonly called nonadmitted or surplus lines insurers. Although any sort of insurance could be sold by a surplus lines insurer, most such transactions tend to be for rarer and more exceptional property and casualty risks, such as art and antiques, hazardous materials, natural disasters, amusement parks, and environmental or pollution risks. 

Although surplus lines insurance is sold by insurers who do not hold a regular state insurance license, it is not unregulated. The sale of this insurance is regulated and taxed by the states largely through requirements placed on the brokers who usually facilitate the insurance transactions. The varying state requirements for surplus lines insurance has led to calls for greater harmonization between the states' laws and for federal intervention to promote uniformity. Such federal intervention is the central focus of the Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571/S. 1363), which passed the House by voice vote on September 9, 2009. This act was also added as an amendment to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) when it was considered on the House floor. H.R. 4173 passed the House on December 11, 2009. The Restoring America's Financial Stability Act of 2010 includes nearly identical language as well. This legislation was marked up and ordered reported by the Senate Committee on Banking, Housing, and Urban Affairs on March 22, 2010. In addition, the National Insurance Consumer Protection Act (H.R. 1880), whose central focus is the creation of a federal charter for the insurance industry, includes provisions aimed at harmonizing state laws regarding surplus lines insurance. 

Past Congresses have also taken up legislation on surplus lines insurance. Versions of the Nonadmitted and Reinsurance Reform Act were passed by the House in both the 109th and 110th Congresses, but the Senate did not act on surplus lines legislation in either case. Provisions on surplus lines insurance similar to those in H.R. 1880 were included in the National Insurance Act of 2007, but that bill was not acted on in the 110th Congress.


Date of Report: April 9, 2010
Number of Pages: 9
Order Number: RS22506
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Insurance and Financial Regulatory Reform in the 111th Congress

Baird Webel
Specialist in Financial Economics

In the aftermath of the recent financial crisis, broad financial regulatory reform legislation has been advanced by the Obama Administration and by various Members of Congress. Under the McCarran-Ferguson Act of 1945, insurance regulation is generally left to the individual states. For several years prior to the financial crisis, some Members of Congress have introduced legislation to federalize insurance regulation along the lines of the regulation of the banking sector, although none of this legislation has reached the committee markup stage. 

The financial crisis, particularly the role of insurance giant AIG and the smaller monoline bond insurers, changed the tenor of the debate around insurance regulation, with increased emphasis on the systemic importance of insurance companies. While it could be argued that insurer involvement in the financial crisis demonstrates the need for full-scale federal regulation of insurance, to date the broad financial regulatory reform proposals have not included language implementing such a system. Instead, broad reform proposals have tended to include the creation of a somewhat narrower federal office focusing on gathering information on insurance and setting policy on international insurance issues. Legislation proposed by the Obama Administration, Representative Paul Kanjorski (H.R. 2609 as incorporated into H.R. 4173), and Senator Christopher Dodd (the Restoring American Financial Stability Act of 2010), all contain slightly differing versions of such an office. 

The broad reform proposals could also affect insurance through consumer protection or systemic risk provisions, though insurance is largely exempted from these aspects of the legislation as well. The Obama proposal exempts insurance from the proposed federal consumer protection agency's oversight, except for title, credit, and mortgage insurance whereas Representative Barney Frank's H.R. 4173 as passed by the House exempts all insurance from the federal consumer protection agency's purview and Senator Dodd's bill would do so as well. In all three proposals, large insurers could be considered systemically significant and be subject to oversight by a systemic risk council and the Federal Reserve as well as federal resolution authority. 

H.R. 4173 and the Restoring American Financial Stability Act of 2010 also include narrower insurance reform language regarding surplus lines insurance and reinsurance similar to H.R. 2572/S. 1363, which had previously passed the House. 

The House of Representatives passed H.R. 4173 on December 11, 2009, by a vote of 223-202. The Senate Banking, Housing, and Urban Affairs Committee marked up and ordered the Restoring American Financial Stability Act of 2010 reported on March 22, 2010, but it has not been assigned a bill number nor brought up for floor consideration at this time.


Date of Report: April 9, 2010
Number of Pages: 10
Order Number: R41018
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Trade Adjustment Assistance for Communities: The Law and Its Implementation

Eugene Boyd
Analyst in Federalism and Economic Development Policy

On August 18, 2009, the Department of Commerce's Economic Development Administration (EDA) published in the Federal Register final rules and regulations governing Trade Adjustment Assistance for Communities (TAAC) program. The regulations outline the responsibilities of EDA in administering the program, including determining a community's eligibility for TAAC grants, providing technical assistance to impacted communities, and evaluating grant applications. On January 11, 2010, EDA published in the Federal Register a notice soliciting applications for TAAC grants. Concurrently, it published the full announcement and application for assistance at http://www.grants.gov and established April 20, 2010, as the deadline for applications. 

The TAAC grant program was created with the passage of the American Recovery and Reinvestment Act (ARRA) of 2009, P.L. 111-5. Included among the subtitles of Division B of ARRA, was the Trade and Globalization Adjustment Assistance Act (TGAAA) of 2009. The TAAC program, as authorized by ARRA, comprises four subchapters: 

• Subchapter A—Trade Adjustment Assistance to Communities (TAAC) directs the EDA to provide technical assistance and to award strategic planning and implementation grants to eligible trade-impacted communities. 

• Subchapter B—Community Colleges and Career Training (CC&CT) creates a competitive grant program administered by the Department of Labor which is intended to strengthen the role of community colleges in filling the education and skills gap of workers in trade impacted communities. 

• Subchapter C—Industry or Sector Partnership Grants Program for Communities Impacted by Trade (ISG) creates a grant program intended to encourage the creation of public private partnerships that develop a skilled workforce. 

• Subchapter D—General Provisions includes language prohibiting workers receiving trade adjustment assistance from being disqualified from receiving assistance under activities funded by the TAAC program. 

The Supplemental Appropriations Act of 2009, P.L. 111-32, included a $40 million appropriation that funded both TAAC and Trade Adjustment Assistance for Firms. For FY2010, the Consolidated Appropriations Act for FY2010, P.L. 111-117, included an appropriation of $15.8 million to be shared between the trade adjustment assistance programs for communities and firms. In addition, on March 30, 2010, the President signed the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, which included $500 million in funding for each of the fiscal years FY2011 through FY2014 for Subchapter B, Community Colleges and Career Training Grants.


Date of Report: April 9 2010
Number of Pages: 16
Order Number: R40863
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Section 404 of the Sarbanes-Oxley Act of 2002(Management Assessment of Internal Controls): Current Regulation and Congressional Concerns

Michael V. Seitzinger
Legislative Attorney

Section 404 of the Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission (SEC) to issue rules requiring annual reports filed by reporting issuers to state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting and for each accounting firm auditing the issuer's annual report to attest to the assessment made of the internal accounting procedures made by the issuer's management. There have been criticisms that this provision is overly burdensome and costly for small and medium-sized companies. On December 15, 2006, the SEC adopted rule changes giving smaller firms more time to comply with Section 404's reporting requirements. Compliance with Section 404 by small and medium-sized companies was an issue in both the 109th and 110th Congresses and has continued to be an issue in the 111th Congress. On November 4, 2009, the House Financial Services Committee recommended H.R. 3817, the Investor Protection Act, which contained a clause, inserted as a bipartisan amendment, permanently exempting businesses with a market capitalization up to $75 million from complying with the auditing requirements of Section 404. This bill is included in H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, as section 7606, passed by the House on December 11, 2009. The chairman's mark on financial regulatory reform of the Senate Committee on Banking, Housing, and Urban Affairs does not have a comparable provision.


Date of Report: April 12 2010
Number of Pages: 7
Order Number: RS22482
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Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens

Thomas L. Hungerford
Specialist in Public Finance

According to the Social Security Trustees, assets in the two Social Security trust funds will be exhausted by 2037, and, thereafter, Social Security payroll tax revenues will cover about three quarters of promised benefits. Over the past decade several proposals have been put forward which could help to close the Social Security program's long-term financing gap. One proposal would increase the Social Security payroll tax base so that 90% of covered earnings are taxable— the same proportion as in 1982. This policy would increase the payroll taxes paid by higher earning workers and not affect workers earning less than the current Social Security maximum taxable limit, which is $106,800 in 2010. 

Some analysts have proposed raising the Social Security payroll tax base and reducing the payroll tax rate. This policy would increase the taxes paid by higher-earning workers and reduce taxes paid by low- and middle-income workers. This policy proposal could raise revenue for the Social Security program or be revenue neutral. 

Although the legislated Social Security payroll tax rate is 12.4%, the average Social Security payroll tax is slightly progressive throughout the bottom 80% of the income distribution in that lower-income families pay a lower proportion of income in payroll taxes than higher-income families. At the higher-income levels—the top 20%—the payroll tax is regressive in that the proportion of income paid in payroll taxes falls as income rises. The richest 1% of American families pay a smaller proportion of their income in payroll taxes than the poorest 20% of families. 

Three policy options, which raise the payroll tax base, are examined; two of the policies also provide tax relief to low- and middle-income workers. Each of the three policies reduces the regressivity of the payroll tax at the upper end of the income distribution. Currently, less than 10% of families contain a worker earning more than the maximum taxable limit. Consequently, over 90% of families would be unaffected by increasing the maximum taxable limit. And if this change were combined with a payroll tax rate reduction, over 90% of families would pay lower payroll taxes. 

It has been argued that the revenue increases from raising the payroll tax base would be significantly less than expected because of indirect behavioral changes by workers. These predicted behavioral effects would reduce taxable earnings, the proportion of family income subject to payroll taxes, and tax revenue. But recent research raises doubts concerning this position and suggests these behavioral effects would likely be negligible.


Date of Report: April 9 2010
Number of Pages: 12
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Consumer Financial Protection by Federal Agencies

Mark Jickling
Specialist in Financial Economics

Consumers interact with the financial system as borrowers, savers, and investors. They do business with a panoply of firms and intermediaries and with each other. A wide range of federal laws and regulations seeks to protect them from unethical, fraudulent, and unfair financial practices and to ensure that they receive adequate information to assess the risks and costs of financial services and products. 

Consumer financial protection responsibilities are divided among a number of federal agencies, including 

• the Federal Trade Commission (FTC), which is the principal federal regulator of consumer transactions that do not involve a regulated financial institution, and which works to protect consumers against unfair, deceptive, or fraudulent practices in the marketplace; 

• the Federal Reserve, which has primary responsibility for writing rules to enforce the consumer provisions of federal banking laws; 

• the Securities and Exchange Commission (SEC), which regulates the public stock and bond markets; 

• the Commodity Futures Trading Commission (CFTC), which monitors trading in futures markets and is charged with preventing commodity price manipulation; 

• the Department of Housing and Urban Development (HUD), which regulates certain aspects of home mortgage lending; 

• the Department of Labor, which regulates employer pension plans; 

• the Department of Education, which has some oversight responsibility over student lending; and 

• the Farm Credit Administration (FCA), which oversees nonbank lending to farmers. 

Regulatory reform legislation before the 111th Congress (H.R. 4173, passed by the House on December 11, 2009, and Senator Dodd's Restoring American Financial Stability Act, as ordered reported by the Senate Banking Committee on March 22, 2010) would consolidate much consumer financial protection authority in a single entity—a new agency in the House version, a bureau within the Federal Reserve in the Senate. For more on these proposals, see CRS Report R40696, Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency (CFPA) as Proposed by the Obama Administration and H.R. 3126, by David H. Carpenter and Mark Jickling. 

 

This report briefly sets out the current division of consumer financial protection responsibilities among the various federal agencies.

Date of Report: April 9 2010
Number of Pages: 10
Order Number: R40857
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Hedge Funds: Legal Status and Proposals for Regulation

Kathleen Ann Ruane
Legislative Attorney

Michael V. Seitzinger
Legislative Attorney

Hedge funds have received a great deal of media coverage in the past several years because large sums of money have been gained or lost in a relatively short time by some hedge funds. Most hedge funds are not required to register with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 or the Investment Advisers Act of 1940. In 2004, the SEC implemented a rule that would have required all hedge fund advisers to register with the SEC under the Investment Advisers Act. Hedge funds challenged the rule in federal court, arguing that the SEC had misinterpreted provisions of the Investment Advisers Act. The U.S. Court of Appeals for the D.C. Circuit agreed with the hedge funds and struck down the SEC's rule. Following that decision, it appeared that congressional action would be necessary to require all hedge funds to register. 

In the wake of the financial crisis, Congress and President Obama's Administration have begun to debate proposals for financial regulatory reform. One of the main thrusts of the proposals seems to be to allow agencies better access to information regarding large market participants whose failure may have a detrimental effect on the entire financial system. It is widely believed that many hedge funds could fall into the category of market participants that pose this sort of risk. In order to require hedge fund managers to register with the SEC, many of the reform proposals would eliminate some or all of these exemptions granting the agency wider access to the information proponents see as necessary to protect the markets. 

This report will discuss the SEC's previous rule requiring hedge fund advisers to register with the agency and the appeals court decision that struck it down. It will also discuss some of the proposals to amend the Investment Advisers Act and the Investment Company Act that would require registration of hedge funds with the SEC, including The White Paper, Title IV of the Treasury Department's proposed bill, the Restoring American Financial Stability Act of 2010 as ordered to be reported by the Senate Committee on Banking, Housing, and Urban Affairs, H.R. 4173, H.R. 3818, H.R. 711, S. 1276, and S. 344. Further discussion of the various policy perspectives on this topic may be found in CRS Report 94-511, Hedge Funds: Should They Be Regulated?, by Mark Jickling. 

 

Date of Report: April 14, 2010
Number of Pages: 15
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Temporary Extension of Unemployment Benefits: Emergency Unemployment Compensation (EUC08)

Katelin P. Isaacs
Analyst in Income Security

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

In July 2008, a new temporary unemployment benefit, the Emergency Unemployment Compensation (EUC08) program, began. The EUC08 program was created by P.L. 110-252, and it has been amended by P.L. 110-449, P.L. 111-5, P.L. 111-92, P.L. 111-118, and P.L. 111-144.This temporary unemployment insurance program provides up to 20 additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular unemployment compensation (UC) benefits. A second tier of benefits provides up to an additional 14 weeks of benefits (for a total of 34 weeks of EUC08 benefits for all unemployed workers). A third tier is available in states with a total unemployment rate of at least 6% and provides up to an additional 13 weeks of EUC08 benefits (for a total of 47 weeks of EUC08 benefits in certain states). A fourth tier is available in states with a total unemployment rate of at least 8.5 % and provides up to an additional six weeks of EUC08 benefits (for a total of 53 weeks of EUC08 benefits in certain states). There are no proposals that would create a Tier V of benefits. 

All tiers of EUC08 benefits are temporary and will expire on June 2, 2010. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before May 29, 2010 (May 30, 2010, in New York) are "grandfathered" for their remaining weeks of eligibility for that particular tier only. There will be no new entrants into any tier of the EUC08 program after May 30, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier benefit after May 30, 2010, that individual would not be entitled to tier II benefits once those tier I benefits were exhausted. No EUC08 benefits—regardless of tier—are payable for any week after November 6, 2010. 

The Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, expanded benefits available in the EUC08 program. It created two new tiers of benefits, bringing total benefit tiers to four and adding 20 weeks to the number of weeks of EUC08 benefits available to individuals, for a total of up to 53 benefit weeks. The Department of Defense Appropriations Act of 2010, P.L. 111-118, was signed by the President on December 19, 2009, and extended the EUC08 program, the 100% federal financing of the Extended Benefits (EB) program, and the $25 supplemental weekly benefit through February 28, 2010. 

P.L. 111-144 extends EUC08, the $25 supplemental weekly benefit, and 100% federal EB financing until April 5, 2010. 

On March 10, 2010, the Senate passed H.R. 4213, the Tax Extenders Act of 2010. H.R. 4213 would extend the availability of EUC08, 100% federal financing of EB, and the $25 Federal Additional Compensation (FAC) benefits, through the end of December 2010. Because the original bill was amended by the Senate in the nature of a substitute (S.Amdt. 3336), the Senatepassed version must now go back to the House for consideration. 

On April 15, 2010, the President signed H.R. 4851, the Continuing Extension Act of 2010, into law. H.R. 4851 extends the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before June 2, 2010.


Date of Report: April 16, 2010
Number of Pages: 16
Order Number: RS22915
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Trends in Discretionary Spending

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

Discretionary spending is provided and controlled through appropriations acts, which fund many of the activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. Essentially all spending on federal wages and salaries is discretionary. 

Federal spending in 2009 accounted for just under a quarter (24.7%) of the U.S. economy, as measured by gross domestic product (GDP). Federal spending since 1962 has averaged about a fifth of GDP. (Years denote federal fiscal years unless noted otherwise.) Discretionary spending accounted for 35.2% of total outlays in 2009, as extraordinary federal responses to financial turmoil sharply increased mandatory spending (59.5% of outlays in 2009), reducing discretionary spending's share of total spending. 

In 1962, discretionary spending accounted for 47.2% of total outlays and was the largest component of federal spending until the mid-1970s. Since then, discretionary spending as a share of federal outlays and as a percentage of GDP has fallen. The long-term fall in the share of discretionary spending as a portion of total federal spending is largely due to rapid growth of entitlement outlays and slower growth in defense spending relative to other federal spending in past decades. 

Discretionary spending is often divided into defense, domestic discretionary, and international outlays. Trends in those categories may indicate broad national priorities as reflected in federal spending decisions. Defense and domestic discretionary spending compose nearly all of discretionary spending. In 1962, discretionary spending equaled 12.3% of GDP, with defense spending making up 9.0% of GDP. In 2010, total discretionary spending is estimated to fall to 9.6% of GDP with defense spending totaling 4.9% of GDP. Military spending has increased sharply over the last decade. On average, from 2000 to 2010, defense outlays grew 6.8% per year in real terms, whereas non-defense discretionary outlays grew 5.6% per year in real terms. 

The G. W. Bush and Obama Administrations each created their own division of security and nonsecurity spending. Dividing spending into security and non-security components, however, presents many conceptual and practical difficulties. Some federal activities, such as Coast Guard patrols, advance non-security and security interests. Furthermore, federal programs tasked with non-security aims in normal times may respond to specific homeland security challenges. Nondefense security discretionary budget authority increased sharply after Hurricane Katrina, although changes in outlays were less dramatic. Non-defense non-security outlays, which have ranged between 3% and 3.5% of GDP since the mid-1980s, are estimated to reach about 4% of GDP in 2010, largely due to economic stimulus measures and other recession-related spending. 

The Obama Administration in its recent budget submission called for a three-year freeze on nonsecurity discretionary spending. Weak economic conditions have depressed federal revenues and may continue to increase government social safety-net expenditures. Some contend that additional stimulus measures are needed to reduce high unemployment levels, while others have called for imposing greater budgetary stringency. Over the long term, projected future growth in entitlement program outlays may put severe pressure on discretionary spending unless policy changes are enacted or federal revenues are increased.


Date of Report: April 12, 2010
Number of Pages: 23
Order Number: RL34424
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Unemployment Insurance: Available Unemployment Benefits and Legislative Activity

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Various benefits may be available to unemployed workers to provide income support. When eligible workers lose their jobs, the Unemployment Compensation (UC) program may provide up to 26 weeks of income support through the payment of regular UC benefits. UC benefits may be extended for up to 13 or 20 additional weeks at the state level by the Extended Benefit (EB) program if certain economic situations exist within the state. Certain groups of workers who lose their jobs because of international competition may qualify for income support through Trade Adjustment Act (TAA) programs. Unemployed workers may be eligible to receive Disaster Unemployment Assistance (DUA) benefits if they are not eligible for regular UC and if their unemployment may be directly attributed to a declared major disaster. 

The authorization for the Emergency Unemployment Compensation (EUC08) program expired on April 5, 2010, although Congress is currently considering legislation to retroactively extend the program. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before April 3, 2010 (April 4, 2010, in New York) are "grandfathered" for their remaining weeks of eligibility for that particular tier only. There will be no new entrants into any tier of the EUC08 program after April 3, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier benefit after April 3, 2010, that individual would not be entitled to tier II benefits once those tier I benefits were exhausted. 

The American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, contained provisions affecting unemployment benefits. ARRA temporarily increased benefits by $25 per week (Federal Additional Compensation, or FAC). ARRA also extended the EUC08 program through the end of 2009. ARRA provided for 100% federal financing of the EB program through January 1, 2010, and allowed states the option of temporarily easing EB eligibility requirements. ARRA suspended income taxation on the first $2,400 of unemployment benefits received in 2009. In addition, states would not owe or accrue interest, through December 2010, on federal loans to states for the payment of unemployment benefits. ARRA also provided for a special transfer of up to $7 billion in federal monies to state unemployment programs as "incentive payments" for changing certain state UC laws. In addition, ARRA transferred $500 million to the states for administering unemployment programs. P.L. 111-92 expanded the number of weeks available in the EUC08 program. Tier I benefits continue to be up to 20 weeks in duration and tier II benefits are now 14 weeks in duration (compared with 13 previously) and no longer are dependent on a state's unemployment rate. The new tier III benefit provides up to 13 weeks of EUC08 benefits to those workers in states with an average unemployment rate of 6% or higher. The new tier IV benefit may provide up to an additional six weeks of benefits if the state unemployment rate is at least 8.5%. P.L. 111-118 extended the EUC08 program, 100% federal financing of the EB program, and the $25 FAC benefit through the end of February 2010. The Temporary Extension Act of 2010 (P.L. 111-144), extends the EUC08 program, 100% federal financing of the EB program, and the $25 FAC benefit to April 5, 2010. 

On March 10, 2010, the Senate passed H.R. 4213, the Tax Extenders Act of 2010. H.R. 4213 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, through the end of December 2010. Because the original bill was amended by the Senate in the nature of a substitute (S.Amdt. 3336), the Senate-passed version must now go back to the House for consideration. On March 17, 2010, the House passed H.R. 4851, the Continuing Extension Act of 2010. H.R. 4851 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before May 5, 2010.


Date of Report: April 6, 2010
Number of Pages: 32
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Authoritative Resources on the American Recovery and Reinvestment Act of 2009(ARRA)

Kim Walker Klarman
Acting Section Head - G&F Section

Julie Jennings
Information Research Specialist

The following list of authoritative resources is designed to assist in responding to a broad range of questions and concerns about the American Recovery and Reinvestment Act (ARRA), P.L. 111-5. Links to the full text of the act, Congressional Budget Office (CBO) estimates, White House fact sheets, and federal, state, and municipal government websites are included, along with other useful information.


Date of Report: April 5, 2010
Number of Pages: 12
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Long-Term Unemployment and Recessions

Gerald Mayer
Analyst in Labor Policy

Linda Levine
Specialist in Labor Economics

The recession that began in the United States in December 2007 has been one of the deepest and longest since World War II. One feature that distinguishes the recent recession from its postwar predecessors is the historically high percentage of unemployed persons without jobs for more than six months (the long-term unemployed). This report analyzes the trend in long-term unemployment over the postwar period and compares the individual, job, and household characteristics of the long-term unemployed during the latest recession (2007-2009) with the long-term unemployed at the end of the two previous recessions (1990-1991 and 2001). 

In each of the last three recessions, older unemployed workers were more likely than younger workers to have been unemployed for more than six months. On the other hand, during the last two recessions, an equal share of unemployed men and women were without work for over half a year. At the end of the 1990-1991 recession, unemployed women were less likely than men to have been out of work for more than six months. Unlike the two previous recessions, in 2009, unemployed workers with less than a high school education were more likely than unemployed workers with more education to have been out of work for at least six months. 

Long-term unemployment varies by industry and occupation. In 2009, workers laid off from the financial activities and information industries were the most likely to have been jobless longer than 26 weeks. Workers displaced from management, business, and financial occupations were most at risk of long-term unemployment during recent recessions. 

Unemployment affects both the individuals who are without work and their families. Households of the long-term unemployed have lower earnings and income than other households (where households include married couples, single parents, and single individuals). In 2008, the most recent year for which data are available, the long-term unemployed were more likely than all unemployed workers to live in households with incomes below the official poverty line. They were more likely than other unemployed workers to receive benefits from the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp program) or be covered by Medicaid. In 2008, only 2.7% of the long-term unemployed received public assistance. 

Over half (55%) of the long-term unemployed had some type of health insurance coverage at some time during 2008, compared to 84% of employed workers. Although a majority of the longterm unemployed (58%) were homeowners in 2008, they were less likely than employed workers (72%) to own their own homes. 

As the economy recovers and employers increase hiring to meet the growing demand for goods and services, many currently unemployed workers will be able to find new jobs. However, finding work may be more difficult for the long-term unemployed if, for example, employers think their skills have deteriorated during their lengthy time away from the workplace. The longterm unemployed displaced from industries in which restructuring has occurred may also have a hard time finding new jobs in other industries, especially if the jobs require skills different from those they possess. Policies to encourage employers to hire the long-term unemployed include wage and training subsidies. Offering wage insurance and reemployment bonuses to unemployed workers may encourage them to accept jobs sooner than they otherwise might have.


Date of Report: April 14, 2010
Number of Pages: 30
Order Number: R41179
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Economic Impacts of Prison Growth

Suzanne M. Kirchhoff
Analyst in Industrial Organization and Business

The U.S. corrections system has gone through an unprecedented expansion during the last few decades, with a more than 400% jump in the prison population and a corresponding boom in prison construction. At the end of 2008, 2.3 million adults were in state, local, or federal custody, with another 5.1 million on probation or parole. Of that total, 9% were in federal custody. Globally, the United States has 5% of the world's population but 25% of its prisoners. Prison growth has been fueled by tough drug enforcement, stringent sentencing laws, and high rates of recidivism—the re-arrest, re-conviction, or re-incarceration of an ex-offender. 

The historic, sustained rise in incarceration has broad implications, not just for the criminal justice system, but for the larger economy. About 770,000 people worked in the corrections sector in 2008. The U.S. Labor Department expects the number of guards, supervisors, and other staff to grow by 9% between 2008 and 2018, while the number of probation and parole officers is to increase by 16%. In addition to those working directly in institutions, many more jobs are tied to a multi-billion dollar private industry that constructs, finances, equips, and provides health care, education, food, rehabilitation and other services to prisons and jails. By comparison, in 2008 there were 880,000 workers in the entire U.S. auto manufacturing sector. Private prison companies have bounced back from financial troubles in the late 1990s, buoyed in part by growing federal contracts. Nearly all new U.S. prisons opened from 2000-2005 were private. Private prisons housed 8% of U.S. inmates in 2008, including more than 16% of federal prisoners. 

The growth of the corrections sector has other impacts. A number of rural areas have chosen to tie their economies to prisons, viewing the institutions as recession-proof development engines. Though many local officials cite benefits, broader research suggests that prisons may not generate the nature and scale of benefits municipalities anticipate or may even slow growth in some localities. Record incarceration rates can have longer-term economic impacts by contributing to increased income inequality and more concentrated poverty. The problems are exacerbated by the fact that African Americans and Hispanics are far more likely than whites to be incarcerated. The large prison population also may be affecting distribution of federal dollars. The U.S. Census counts individuals where they reside. Some regions may record a significant population increase due to new prisons, meaning they garner more aid under federal population-based formulas. 

The corrections sector is in stress as states seek to reduce prison populations and rein in costs. The efforts have been underway for several years, but have intensified as the recession that began at the end of 2007 has wrought havoc on state budgets. At least 26 states cut corrections spending for FY2010. California Gov. Arnold Schwarzenegger has suggested amending that state's constitution to ensure that spending on prisons cannot exceed spending on higher education. Arizona is preparing to sell prison facilities to private firms. It remains to be seen whether private companies will prosper from state efforts, or incur losses if inmate populations level out or decline. Congress is involved in the debate via federal contracts with private prisons, proposed legislation to create a task force on the prison system, increased funding to reduce recidivism, a proposed bill to allow collective bargaining for public sector correctional workers, proposals to alter rules for the 2010 Census count, and rural development efforts. Legislation introduced in the 111th Congress includes S. 2772, S. 714, S. 1611, H.R. 4080, H.R. 413, and H.R. 2450. This report will not be updated.


Date of Report: April 13, 2010
Number of Pages: 39
Order Number: R41177
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Federal Financial Services Regulatory Consolidation: Structural Response to the2007-2009 Financial Crisis

Walter W. Eubanks
Specialist in Financial Economics

To address the causes of the 2007-2009 financial crisis, three major proposals have been put forward that would consolidate at least some parts of the federal financial regulatory structure: the 2008 Department of the Treasury Blueprint for a Modernized Regulatory Structure (the Henry Paulson Plan), the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), and the Restoring American Financial Stability Act of 2010 (RAFSA) introduced by Senator Christopher Dodd, chairman of the Senate Committee on Banking, Housing, and Urban Affairs. Even though these three proposals would not establish a single federal financial services regulator along the lines of Japan's Financial Services Agency (FSA) or the United Kingdom's Financial Services Authority (FSA), the three proposals are the federal government's attempts to remedy the causes of the financial crisis by simplifying and adding transparency to financial services regulation. 

Before the financial crisis, there were a number of proposals to consolidate the federal financial services regulatory structure. However, Congress has not reduced the number of federal financial services regulatory agencies for several reasons. First, the U.S. financial regulatory system has evolved into what some call a functional competitive regulatory structure where regulatory agencies compete against each other and there are regulatory redundancies. Yet, this structure may be viewed as fundamentally sound, despite periodic failures in regulatory enforcement. 

Second, the regulation of financial services has become more complex. Since the Civil War, both the federal government and the states have regulated most financial services providers, such that they have some overlapping regulatory relationships. Financial providers began commingling financial services in the 1980s, a practice that contributed to regulatory enforcement failures. For example, banks no longer were exclusively providing banking services. Instead, insurance and securities companies also delivered banking services. When the federal government enacted the 1999 Gramm-Leach-Bliley Act (GLBA, P.L. 106-102), which repealed the law prohibiting the mixing of banking and commerce and allowed the commingling of financial services, the enforcement of financial regulation became more complicated. Analysts argued that regulators' inability to enforce safety and soundness requirements contributed to the financial crisis. 

This report provides a brief history and overview of the U.S. federal financial services regulatory structure and examines the regulatory structural changes the three major federal government proposals would make to remedy the causes of the financial crisis. Specifically: 

• The 2008 Paulson plan would have reduced the number of regulatory agencies to three by eliminating financial institutions' charters. Most depository institutions would have a national charter. 

• The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which would add a Financial Services Oversight Council, an independent Consumer Financial Protection Agency, and a Federal Insurance Office instead of consolidating agencies. 

• The Restoring American Financial Stability Act of 2010 (RAFSA), which would consolidate and redistribute the regulatory responsibilities of bank holding companies by asset size among the three remaining bank regulators. 

The report concludes with a discussion of some possible implications of reform.


Date of Report: April 12, 2010
Number of Pages: 26
Order Number: R41176
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Impact on the Federal Budget of Freezing Non-Security Discretionary Spending

Mindy R. Levit
Analyst in Public Finance

As economic recovery continues, the focus on the federal budget has shifted, in part, towards deficit reduction. In fiscal year (FY) 2009, the federal budget deficit, relative to the size of the economy, reached a level not seen since the end of World War II. Deficit levels are projected to remain elevated through FY2011. The budget deficit for FY2011, according to CBO's analysis of the President's budget, is projected to be $1,342 billion. In his FY2011 budget, the President made several proposals to curb spending, while acknowledging that additional steps are needed to achieve long-term fiscal stability. 

The President proposes to freeze non-security discretionary spending for the next three fiscal years (FY2011-FY2013) at FY2010 nominal levels (i.e., spending levels would not be adjusted for inflation). After FY2013, growth in this category of spending would be linked to inflation. Non-security discretionary spending is defined as discretionary spending outside of defense, homeland security, veterans affairs, and international affairs. If enacted in this form, the President's budget projects that this proposal would save approximately $250 billion over the next 10 years. 

Under the Administration's Current Policy baseline, the deficit is projected to equal 7.5% of GDP in FY2011, falling to 5.6% of GDP in FY2020. If all of the President's proposed policies are implemented, the Administration projects that the deficit will fall from 8.3% of GDP in FY2011 to 4.2% of GDP in FY2020. In other words, the deficit would be 1.4% of GDP lower in FY2020 compared to current policy if all of the President's proposals are enacted. In order to achieve even greater deficit reduction, larger cuts would be needed. To illustrate, even if non-security discretionary spending is cut to zero and there are no other policy changes implemented, the deficit would fall from 4.0% of GDP in FY2011 to 3.3% of GDP in FY2020. This would mean no federal funding for education, transportation, most energy, and numerous other programs. In order to balance the budget, significant additional spending cuts, tax increases, or a combination would still be required. 

Freezing non-security discretionary spending can reduce the deficit relative to certain policy alternatives. In other words, whether or not freezing non-security discretionary spending actually lowers the deficit depends on which deficit projections are used as the starting point to measure the impact of policy changes. Depending on which one of the three Administration's baseline scenarios are used as a starting point to measure savings, this proposal may generate lower levels of savings compared to what is described in the President's budget. Achieving savings from this proposal ultimately depends on what policies Congress enacts this year and in each subsequent budget cycle. Congress enacts appropriations every year and would continue to face a decision on legislation restraining non-security discretionary spending in future years. 

The proposal to place a three-year freeze on non-security discretionary spending, as analyzed in this report, represents a small reduction in the federal budget deficit. Freezing this spending does not address longer-term budgetary challenges. 

This report will not be updated. 


Date of Report: April 12, 2010
Number of Pages: 14
Order Number: R41174
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Temporary Extension of Unemployment Benefits: Emergency Unemployment Compensation (EUC08)

Julie M. Whittaker
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

In July 2008, a new temporary unemployment benefit, the Emergency Unemployment Compensation (EUC08) program, began. The EUC08 program was created by P.L. 110-252, and it has been amended by P.L. 110-449, P.L. 111-5, P.L. 111-92, P.L. 111-118 and, P.L. 111-144.This temporary unemployment insurance program provides up to 20 additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular unemployment compensation (UC) benefits. A second tier of benefits provides up to an additional 14 weeks of benefits (for a total of 34 weeks of EUC08 benefits for all unemployed workers). A third tier is available in states with a total unemployment rate of at least 6% and provides up to an additional 13 weeks of EUC08 benefits (for a total of 47 weeks of EUC08 benefits in certain states). A fourth tier is available in states with a total unemployment rate of at least 8.5 % and provides up to an additional six weeks of EUC08 benefits (for a total of 53 weeks of EUC08 benefits in certain states). There are no proposals that would create a Tier V of benefits. 

All tiers of EUC08 benefits are temporary and expired on April 5, 2010, although Congress is currently considering legislation to retroactively extend the program. Those beneficiaries receiving tier I, II, III, or IV EUC08 benefits before April 3, 2010 (April 4, 2010, in New York) are "grandfathered" for their remaining weeks of eligibility for that particular tier only. There will be no new entrants into any tier of the EUC08 program after April 3, 2010. If an individual is eligible to continue to receive his or her remaining EUC08 tier benefit after April 3, 2010, that individual would not be entitled to tier II benefits once those tier I benefits were exhausted. No EUC08 benefits—regardless of tier—are payable for any week after September 4, 2010. 

The Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92, expanded benefits available in the EUC08 program. It created two new tiers of benefits, bringing total benefit tiers to four and adding 20 weeks to the number of weeks of EUC08 benefits available to individuals, for a total of up to 53 benefit weeks. The Department of Defense Appropriations Act of 2010, P.L. 111-118, was signed by the President on December 19, 2009, and extended the EUC08 program, the 100% federal financing of the Extended Benefits (EB) program, and the $25 supplemental weekly benefit through February 28, 2010. 

P.L. 111-144 extends EUC08, the $25 supplemental weekly benefit, and 100% federal EB financing until April 5, 2010. 

On March 10, 2010, the Senate passed H.R. 4213, the Tax Extenders Act of 2010. H.R. 4213 would extend the availability of EUC08, 100% federal financing of EB, and the $25 Federal Additional Compensation (FAC) benefits, through the end of December 2010. Because the original bill was amended by the Senate in the nature of a substitute (S.Amdt. 3336), the Senatepassed version must now go back to the House for consideration. 

On March 17, 2010, the House passed H.R. 4851, the Continuing Extension Act of 2010. H.R. 4851 would extend the availability of EUC08, 100% federal financing of EB, and the $25 FAC benefits, until the week ending on or before May 5, 2010.


Date of Report: April 6, 2010
Number of Pages: 16
Order Number: RS22915
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An Analysis of the Tax Treatment of Capital Losses

Thomas L. Hungerford
Specialist in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

Several reasons have been advanced for increasing the net capital loss limit against ordinary income: as part of an economic stimulus plan, as a means of restoring confidence in the stock market, and to restore the value of the loss limitation to its 1978 level. Under current law, long-term and short-term losses are netted against their respective gains and then against each other, but if any net loss remains it can offset up to $3,000 of ordinary income each year. Capital loss limits are imposed because individuals who own stock directly decide when to realize gains and losses. The limit constrains individuals from reducing their taxes by realizing losses while holding assets with gains until death when taxes are avoided completely. 

Current treatment of gains and losses exhibits an asymmetry because long-term gains are taxed at lower rates, but net long-term losses can offset income taxed at full rates. Individuals can game the system and minimize taxes by selectively realizing gains and losses, and for that reason the historical development of capital gains rules contains numerous instances of tax revisions directed at addressing asymmetry. The current asymmetry has grown as successive tax changes introduced increasingly favorable treatment of gains. Expansion of the loss limit would increase "gaming" opportunities. In most cases, this asymmetry makes current treatment more generous than it was in the past, although the capital loss limit has not increased since 1978. 

Capital loss limit expansions, like capital gains tax benefits, would primarily favor higher income individuals who are more likely to hold stock. Most stock shares held by moderate income individuals are in retirement savings plans (such as pensions and individual retirement accounts) that are not affected by the loss limit. Statistics also suggest that only a tiny fraction of individuals in most income classes experience a loss and that the loss can usually be deducted relatively quickly. 

One reason for proposing an increase in the loss limit is to stimulate the economy, by increasing the value of the stock market and investor confidence. Economic theory, however, suggests that the most certain method of stimulus is to increase spending directly or cut taxes of those with the highest marginal propensity to consume, generally lower income individuals. Expanding the capital loss limit is an indirect method, and is uncertain as well. Increased capital loss limits could reduce stock market values in the short run by encouraging individuals to sell. 

Adjusting the limit to reflect inflation since 1978 would result in an increase in the dollar limit to about $9,800. However, most people are better off now than they would be if the $3,000 had been indexed for inflation if capital losses were excludable to the same extent as long-term capital gains were taxable. For higher income individuals, restoring symmetry would require using about $2 in long-term loss to offset each dollar of ordinary income. Fully symmetric treatment would also require the same adjustment when offsetting short-term gains with long-term losses.


Date of Report: April 8 2010
Number of Pages: 14
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Key Issues in Derivatives Reform

Rena S. Miller
Analyst in Financial Economics

Financial derivatives allow users to manage or hedge certain business risks that arise from volatile commodity prices, interest rates, foreign currencies, and a wide range of other variables. Derivatives also permit potentially risky speculation on future trends in those rates and prices. Derivatives markets are very large—measured in the hundreds of trillions of dollars—and they grew rapidly in the years before the recent financial crisis. The events of the crisis have sparked calls for fundamental reform. 

Derivatives are traded in two kinds of markets: on regulated exchanges and in an unregulated over-the-counter (OTC) market. During the crisis, the web of risk exposures arising from OTC derivatives contracts complicated the potential failures of major market participants like Bear Stearns, Lehman Brothers, and AIG. In deciding whether to provide federal support, regulators had to consider not only the direct impact of those firms failing, but also the effect of any failure on their derivatives counterparties. Because OTC derivatives are unregulated, little information was available about the extent and distribution of possible derivatives-related losses. 

The OTC market is dominated by a few dozen large financial institutions who act as dealers. Before the crisis, the OTC dealer system was viewed as robust, and as a means for dispersing risk throughout the financial system. The idea that OTC derivatives tend to promote financial stability has been challenged by the crisis, as many of the major dealers required infusions of capital from the government. 

Derivatives reform legislation before Congress would require the OTC market to adopt some of the practices of the regulated exchange markets, which were able to cope with financial volatility in 2008 without government aid. A central theme of derivatives reform is requiring OTC contracts to be cleared by a central counterparty, or derivatives clearing organization. Clearinghouses remove the credit risk inherent in bilateral OTC contracts by guaranteeing payment on both sides of derivatives contracts. They impose initial margin (or collateral) requirements to cover potential losses initially. They further impose variation margin to cover any additional ongoing potential losses. The purpose of posting margin is to prevent a build-up of uncovered risk exposures like AIG's. Proponents of clearing argue that if AIG had had to post initial margin and variation margin on its trades in credit default swaps, it would likely have run out of money before its position became a systemic threat that resulted in costly government intervention. 

Benefits of mandatory clearing include greater market transparency, as the clearinghouse monitors, records and usually confirms trades. Clearing may reduce systemic risk, by mitigating the possibility of nonpayment by counterparties. There are also costs to clearing. Margin requirements impose cash demands on "end users" of derivatives, such as nonfinancial firms who used OTC contracts to hedge risk. H.R. 4173, as passed by the House, and Title VII of the comprehensive financial reform proposal, the Restoring American Financial Stability Act of 2010 (RAFSA), as amended and passed by the Senate Committee on Banking, Housing and Urban Affairs, provide exemptions from mandatory clearing for certain categories of market participants. If exemptions are too broad, then systemic risks, as well as default risks to dealers and counterparties, may remain. The bills seek to balance the competing goals of reducing systemic risk and preserving end users' ability to hedge risks through derivatives, without causing those derivatives trades to become too costly. This report analyzes the issues of derivatives clearing and margin and end users, and it discusses the various legislative approaches to the enduser issue.


Date of Report: April 8 2010
Number of Pages: 21
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National Flood Insurance Program: Background, Challenges, and Financial Status

Rawle O. King
Analyst in Financial Economics and Risk Assessment

In 1968, the U.S. Congress established the National Flood Insurance Program (NFIP) to address the nation's flood exposure and challenges inherent in financing and managing flood risks in the private sector. Private insurance companies at the time claimed that the flood peril was uninsurable and, therefore, could not be underwritten in the private insurance market. A threeprong floodplain management and insurance program was created to (1) identify areas across the nation most at risk of flooding; (2) minimize the economic impact of flooding events through floodplain management ordinances; and (3) provide flood insurance to individuals and businesses. Major changes were made to the program in 1973, 1994, and 2004. 

Despite investing significant resources to identify flood risk and shape floodplain and coastal development, flood costs have risen over the past recent decade. The unprecedented losses in 2005 from Hurricanes Katrina and Rita and the 2008 Midwest flood and Hurricanes Ike and Gustav have focused national attention on hurricane risk and the impact of storm surge on property, inland flooding on rivers, and the financial viability of the NFIP. 

The NFIP was self-supporting from 1986 until 2005 as policy premiums and fees covered all expenses and claim payments. In 2005, the NFIP incurred approximately $17 billion in flood claims caused by Hurricanes Katrina, Rita, and Wilma. This amount exceeded the $2.2 billion in annual premiums and the $1.5 billion in borrowing authority from the U.S. Treasury. As a result, Congress passed and the President signed into law legislation to increase NFIP borrowing authority first to $3.5 billion (P.L. 109-65) and then to $18.5 billion (P.L. 109-106) in November 2005, and finally to $20.775 billion (P.L. 109-208) on March 23, 2006. As of March 31, 2010, the outstanding debt and accrued interest cost stood at $18.75 billion. Under current law, the funds borrowed from the U.S. Treasury must be repaid with interest. The program, however, is not in a position to repay the debt. At the conclusion of the 110th Congress, conferees attempted, unsuccessfully, to resolve key differences in the House and Senate flood insurance reform bills (H.R. 3121 and S. 2284). 

The 111th Congress has acted to ensure that basic NFIP authorities remain in force while the debate on reform proposals continues. Since 2009, the NFIP has been extended by a series of bills. The authority of the Federal Emergency Management Agency (FEMA) to issue flood insurance contracts, however, lapsed on March 28, 2010. Congress will likely consider retroactively reauthorizing the NFIP when Members return from Easter recess on April 12, 1010. 

Meanwhile, several flood insurance-related bills are currently before the 111th Congress. Representative Taylor has introduced legislation (H.R. 1264) to add wind coverage to the NFIP. Also, Representative Pallone has introduced H.R. 777 to suspend flood map changes until the Administrator of FEMA submits a community outreach plan to Congress. H.R. 777 would also create a tax credit for flood insurance premiums on property not previously in a mapped floodplain but included on a new flood hazard map.


Date of Report: April 8 2010
Number of Pages: 27
Order Number: R40650
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Saving Rates in the United States: Calculation and Comparison

Brian W. Cashell
Specialist in Macroeconomic Policy

The amount of money saved has important economic consequences. Nationally, the amount of saving affects how much can be invested and ultimately the size of the capital stock. Increasing the size of the capital stock is believed to be one way to raise the productivity of the labor force. Individually, saving is critical to accumulating sufficient wealth to maintain living standards after retirement. This report explains how national saving is measured, presents recent estimates of saving rates in the United States, and, for comparison, provides those of other major industrial countries.


Date of Report: March 29, 2010
Number of Pages: 9
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Is the U.S. Current Account Deficit Sustainable?

Marc Labonte
Specialist in Macroeconomic Policy

America's current account (CA) deficit (the trade deficit plus net income payments and net unilateral transfers) rose as a share of gross domestic product (GDP) from 1991 to a record high of about 6% of GDP in 2006. It began falling in 2007, and reached 3% of GDP in 2009. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such large inflows are sustainable. Even at 3% of GDP, the deficit is probably still too large to be permanently sustained, and many economists fear that the decline is temporary and caused by the recession. Further, a large share of the capital inflows have come from foreign central banks in recent years, and some are concerned about the economic and political implications of this reliance. Some fear that a rapid decline in capital inflows would trigger a sharp drop in the value of the dollar and an increase in interest rates that could lower asset values and disrupt economic activity. However, economic theory and empirical evidence suggest that the most plausible scenario is a slow decline in the CA deficit, which would not greatly disrupt economic activity because production in the traded goods sector would be stimulated. 

The financial crisis that worsened in September 2008 would seem to be a good test case of the type of event that could lead to the feared "sudden stop" in foreigners' willingness to finance the CA deficit. While the recession deepened following the crisis, it has not been via a sudden decline in the dollar or a sudden broad spike in U.S. interest rates. On the contrary, the dollar appreciated in value in the months after the crisis and foreign demand for U.S. Treasury bonds has risen since the crisis worsened. On the other hand, there was a large decline in private foreign capital inflows beginning in 2008; had it not been for foreign government purchases of U.S. securities, the CA would have been in surplus in 2009, all else equal. 

One long-term consequence of large and chronic CA deficits has been the growing foreign ownership of the U.S. capital stock. A large CA deficit is not sustainable in the long run because it increases U.S. net debt owed to foreigners, which cannot rise without limit. A larger debt can be serviced only through more borrowing or higher net exports. For net exports to rise, all else equal, the value of the dollar must fall. This explains why many economists believe that both the dollar and the CA deficit will fall further at some point in the future. To date, debt service has not been burdensome. Because U.S. holdings of foreign assets have earned a higher rate of return than U.S. debt owed to foreigners, U.S. net investment income has remained positive, even though the United States is a net debtor nation. 

Since 1980, most episodes of a declining CA deficit in industrialized countries have been associated with slow economic growth. Only two episodes were associated with a severe disruption in economic activity. Because most of the episodes involved small countries, these cases may differ in important ways from any corresponding episode in the United States. Historically, a few other countries have had a higher net foreign debt-to-GDP ratio than the United States has at present; however, if CA deficits continue at current levels, the U.S. net foreign debt could eventually be the highest ever recorded. 

This report also reviews studies on the CA deficit's sustainability. Some of the studies suggest that a large dollar depreciation could eventually be required to restore sustainability. But the inflation-adjusted 25% depreciation of the dollar from 2002-2008 had little effect on the CA deficit, which kept growing until 2007. The CA deficit did not decline rapidly until after the financial crisis of September 2008—a period with little trend movement in the dollar.


Date of Report: April 2, 2010
Number of Pages: 16
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Inflation: Causes, Costs, and Current Status

Marc Labonte
Specialist in Macroeconomic Policy

Since the end of World War II, the United States has experienced almost continuous inflation— the general rise in the price of goods and services. It would be difficult to find a similar period in American history before that war. Indeed, prior to World War II, the United States often experienced long periods of deflation. It is worth noting that the Consumer Price Index (CPI) in 1941 was virtually at the same level as in 1807. 

During the last two economic expansions, March 1991-March 2001 and November 2001- December 2007, the inflation rate remained low by the standards of previous decades, and has remained low since this recession began. This is true regardless of which index is used to calculate the rate at which the price of goods and services rose. A low inflation rate is especially significant since the U.S. economy was fully employed, if not over fully employed, according to many estimates for the last three years of the 1991-2001 expansion and during 2006-2007. Yet, contrary to expectations, the inflation rate accelerated only modestly. Keeping an economy moving along a full employment path without igniting a burst of inflation is a difficult policy task. 

Because labor costs make up nearly two-thirds of total production costs, the rate at which they rise is often regarded as an indication of future inflation at the retail level. They tended to rise in the latter stage of the 1991-2001 expansion and to moderate during the subsequent contraction, recovery, and expansion that ended in December 2007. 

Rather than measure inflation by using the rate at which prices overall are rising, some economists prefer a measure that reflects primarily the systematic factors that raise prices. This yields the "underlying" or "core" rate of inflation. Price increases over this period have been especially sharp in food and energy, which are not included in the core rate. 

Why should the United States be concerned about inflation? This study reports the distilled knowledge of economists on the real cost to an economy from inflation. These are remarkably more varied than the outlays for "shoe leather," long reported to be the major cost of inflation ("shoe leather" being a shorthand term for the resources that have to be expended on less efficient methods of exchanges). 

The costs of inflation are related to its rate, the uncertainty it engenders, whether it is anticipated, and the degree to which contracts and the tax system are indexed. A major cost is related to the inefficient utilization of resources because economic agents mistake changes in nominal variables for changes in real variables and act accordingly (the so-called signal problem). Inflation in the United States during the post-World War II era may not have been high enough for this cost to be significant. .


Date of Report: March 29, 2010
Number of Pages: 16
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Financial Regulatory Reform: Systemic Risk and the Federal Reserve

Marc Labonte
Specialist in Macroeconomic Policy

The recent financial crisis contained a number of systemic risk episodes, or episodes that caused instability for large parts of the financial system. The lesson some policymakers have taken from this crisis is that a systemic risk or "macroprudential" regulator is needed to prevent similar episodes in the future. But what types of risk would this new regulator be tasked with preventing, and is it the case that those activities are currently unsupervised? 

Some of the major financial market phenomena that have been identified as posing systemic risk include liquidity problems; "too big to fail" or "systemically important" firms; the cycle of rising leverage followed by rapid deleverage; weaknesses in payment, settlement, and clearing systems; and asset bubbles. The Federal Reserve (Fed) already regulates bank holding companies and financial holding companies for capital and liquidity requirements, and it can advise their behavior in markets that it does not regulate. In addition, the Fed directly regulates or operates in some payment, settlement, and clearing systems. Many too big to fail firms are already regulated by the Fed because they are banks, although some may exist in what is referred to as the shadow banking system, which is largely free of federal regulation for safety and soundness. The Fed's monetary policy mandate is broad enough to allow it to use monetary policy to prick asset bubbles, although it has not chosen to do so in the past. Neither the Fed nor other existing regulators have the authority to identify and address gaps in existing regulation that they believe pose systemic risk. 

Opponents of a systemic risk regulator argue that regulators did not fail to prevent the crisis because they lacked the necessary authority, but because they used their authority poorly and failed to identify systemic risk until it was too late. They fear that greater government regulation of financial markets will lead to moral hazard problems that increase systemic risk. On the other hand, the current crisis has demonstrated that government intervention may become unavoidable, even when firms or markets are not explicitly regulated or protected by the government. 

If policymakers choose to create a systemic risk regulator, those duties could be given to the Fed or a new or existing regulator in the executive branch. The Fed's political independence has been used as an argument for and against giving it systemic risk regulatory responsibilities. Another consideration is that the Fed's existing responsibilities already have some overlap with systemic risk regulation. These responsibilities include a statutory mandate to maintain full employment and stable prices and the role of lender of last resort, as well as being the institution with the broadest existing financial regulatory powers. 

The Financial Stability Improvement Act of 2009 (H.R. 4173) passed the House on December 11, 2009. The Restoring American Financial Stability Act was ordered to be reported out of the Senate Banking Committee on March 22, 2010. Provisions of these bills involving the Federal Reserve and systemic risk are discussed in this report, including the creation of a Financial Services Oversight Council and the regulation of systemically significant firms by the Fed. Neither bill creates a "systemic risk regulator"; nonetheless, many of the potential duties that could be assigned to a systemic risk regulator discussed in this report are included in both bills. The bills spread these duties among multiple regulators, although many of the important ones are assigned to the Fed. Although this could be portrayed as an expansion of the Fed's powers, the bills also strip the Fed of certain powers and creates new checks on other powers.


Date of Report: March 26, 2010
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Monetary Policy and the Federal Reserve: Current Policy and Conditions

Marc Labonte
Specialist in Macroeconomic Policy

The Federal Reserve (Fed) defines monetary policy as the actions it undertakes to influence the availability and cost of money and credit to help promote its congressionally mandated goals, achieving a stable price level and maximum sustainable economic growth. Since the expectations of market participants play an important role in determining prices and growth, monetary policy can also be defined to include the directives, policies, statements, and actions of the Fed that influence how the future is perceived. In addition, the Fed acts as a "lender of last resort" to the nation's financial system, meaning that it ensures its sustainability, solvency, and integrity. This role has become of great importance with the onset of the financial crisis in the summer of 2007. 

Traditionally, the Fed has had three means for achieving its goals: open market operations involving the purchase and sale of U.S. Treasury securities, the discount rate charged to banks who borrow from the Fed, and reserve requirements that governed the proportion of deposits that must be held either as vault cash or as a deposit at the Federal Reserve. Historically, open market operations have been the primary means for executing monetary policy. Recently, in response to the financial crisis, direct lending has become important once again and the Fed has created a number of new ways for injecting reserves, credit, and liquidity into the banking system, as well as making loans to firms that are not banks. As financial conditions normalize, the Fed is moving back to a more traditional reliance on open market operations. 

The Fed conducts open market operations by setting an interest rate target that it believes will allow it to achieve price stability and maximum sustainable growth. The interest rate targeted is the federal funds rate, the price at which banks buy and sell reserves on an overnight basis. This rate is linked to other short term rates and these, in turn, influence longer term interest rates. Interest rates affect interest-sensitive spending – business capital spending on plant and equipment, household spending on consumer durables, and residential investment. 

In the short run, monetary policy can be used to stimulate or slow aggregate spending. While monetary policy is charged with promoting maximum sustainable economic growth, it does so only indirectly in the long run by maintaining a stable price level since the direct effect of monetary policy is primarily on the rate of inflation. A low and stable rate of inflation through the business cycle promotes price transparency and, thereby, sounder economic decisions by households and businesses. 

The Fed has frequently changed the federal funds target to match changes in expected economic conditions. Between January 3, 2001, and June 25, 2003, the target rate was reduced to 1% from 6½%. This policy was reversed on June 30, 2004, and in 17 equal increments ending on June 29, 2006, the target rate was raised to 5¼%. No additional changes were made until September 18, 2007, when, in a series of 10 moves, the target was reduced to a range of 0% to 1/4% on December 16, 2008, where it now remains. Since then, the Fed has added liquidity to the financial system beyond what is needed to meet its federal funds target through direct lending and, more recently, purchases of Treasury and government sponsored enterprise (GSE) securities. This practice is sometimes referred to as quantitative easing. 

For more information on the Fed's crisis-response actions, see CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte. Legislative changes to the Fed's duties and authority related to financial regulatory reform can be found in CRS Report R40877, Financial Regulatory Reform: Systemic Risk and the Federal Reserve, by Marc Labonte.  

 

Date of Report: March 31, 2010
Number of Pages: 15
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An Introduction to the Design of the Low-Income Housing Tax Credit

Mark P. Keightley
Analyst in Public Finance

The low-income housing tax credit (LIHTC) program is one of the federal government's primary policy tools for encouraging the development and rehabilitation of affordable rental housing. LIHTCs are non-refundable tax credits, which are allocated to developers who typically sell them to private tax credit investors to raise capital (or equity) for real estate projects. Selling the tax credits reduces the debt and/or equity that developers would otherwise have to incur. With lower financing costs, tax credit properties can potentially offer lower, more affordable rents. 

In the 111th Congress, the American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111- 5, created a temporary LIHTC-grant exchange program. The program, sometimes referred to as the Section 1602 LIHTC-grant exchange program after Section 1602 of ARRA, allows states to elect to exchange a portion of their 9% LIHTCs for grant funding. Specifically, ARRA allows a state to elect to exchange for grants all of their unused and returned LIHTC allocation from 2008, 40% of their 2009 LIHTC credit allocation, and 40% of any allocation in 2009 made from the national LIHTC pool. LIHTCs may be exchanged for grants at a rate of $0.85 on the dollar. The exchange program was intended to ensure developers were able to obtain the financing needed to complete and support LIHTC projects. Some developers had experienced difficulties selling their tax credits as a result of lower investor demand stemming from the financial crisis and economic downturn. 

On December 9, 2009, the House passed H.R. 4213, the Tax Extenders Act of 2009. H.R. 4213 was amended by the Senate in the nature of a substitute (S.Amdt. 3336; the American Workers, State, and Business Relief Act of 2010), and passed by that chamber on March 10, 2010. Both bills contain what amounts to a proposed one-year extension of the LIHTC-grant exchange program. Both bills would allow states to exchange a fraction of their annual non-refundable LIHTC allocation for refundable LIHTCs. The portion of tax credits that would be refundable would be the same as the portion of tax credits that could previously be exchanged for grants. The Treasury would then pay each state an amount equal to their refundable LIHTC election. States, in turn, would then use the funds received from Treasury to make grants to developers. Thus, the proposed modification would effectively extend the Section 1602 LIHTC-grant exchange program for one year. 

On March 24, 2010, the House passed H.R. 4849, Small Business and Infrastructure Jobs Tax Act of 2010. The bill contains a proposal that would allow LIHTC projects receiving the 4% credit and tax-exempt bond financing to receive a direct payment from the Treasury in lieu of their tax credits. The proposal is similar to the Section 1602 LIHTC-grant exchange program for the 9% credit, although administrative differences and the timing of direct payments creates a substantive discrepancy between the two programs. The 4% direct payment program would apply to buildings placed-in-service through 2010.


Date of Report: March 31, 2010
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Qualified Charitable Distributions from Individual Retirement Accounts: A Fact Sheet

John J. Topoleski Analyst in Income Security

A provision of the Pension Protection Act of 2006 (P.L. 109-280) allows tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes. This fact sheet describes the IRA Qualified Charitable Distribution (QCD) provision. The provision had expired on December 31, 2007; it was extended until December 31, 2009, by H.R. 1424/P.L. 110-343, signed by President George W. Bush on October 3, 2008. In the 111th Congress, the following bills would extend the provision beyond December 31, 2009: H.R. 4213, H.R. 2435, H.R. 1250, and S. 864. H.R. 4213, the Tax Extenders Act of 2009, would extend the provision until December 31, 2010. This bill passed the House on December 9, 2009. The Senate passed the bill (with amendments) on March 10, 2010. As of April 1, 2010, the House has not acted on the Senate amendments.


Date of Report: April 1, 2010
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Small Business: Access to Capital and Job Creation

Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in American National Government

The Small Business Administration's (SBA) authorization is due to expire on April 30, 2010. The SBA administers several programs to support small businesses, including loan guarantees to assist small businesses gain access to capital. This report addresses a core issue facing Congress during the SBA's reauthorization process: what, if any, additional action should the federal government take to enhance small business access to capital? 

Historically, small businesses (firms with less than 500 employees) have experienced greater job loss during economic recessions than larger businesses. Conversely, small businesses have led job creation during recent economic recoveries. As a result, many federal policymakers look to small businesses to lead the nation's recovery from its current economic difficulties. Some, including the chairs of the House and Senate Committees on Small Business and President Obama, have argued that current economic conditions make it imperative that the SBA be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small business economic growth and job creation. 

This report examines the pros and cons of federal intervention in the marketplace to enhance small business access to capital. It assesses recent federal credit market interventions, including the creation of the Troubled Asset Relief Program (TARP) and Term Asset-Backed Securities Loan Facility (TALF); modifications to the SBA's loan guarantee programs and other small business provisions under the American Recovery and Reinvestment Act of 2009 (ARRA); empirical evidence concerning small business lending and borrowing, including the number and amount of small business loans guaranteed by the SBA; the efficacy of the SBA's programs designed to enhance small business access to capital; and two bills introduced in the 111th Congress, H.R. 3854, the Small Business Financing and Investment Act of 2009, and S. 2869, the Small Business Job Creation and Access to Capital Act of 2009, which are designed to enhance small business access to capital. 

This report also examines legislation to extend SBA loan modifications and fee subsidies that were initially enacted under ARRA and are scheduled to expire on April 30, 2010, including H.R. 2847, the Jobs for Main Street Act of 2009, which would provide $325 million to extend those loan modifications and fee subsidies through September 30, 2010, and H.R. 4213, the American Workers, State, and Business Relief Act of 2010, which would provide $560 million to extend those loan modifications and subsidies through December 31, 2010. It also examines President Obama's State of the Union proposals—the "Small Business Jobs and Wages Tax Cut" to encourage small business job creation and wage increases and a $30 billion set-aside of TARP funds to encourage community banks to provide small business loans.

For additional resources see: http://pennyhill.net/?p=176

 

Date of Report: March 31, 2010
Number of Pages: 28
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Financial Regulatory Reform and the 111th Congress

Baird Webel, Coordinator
Specialist in Financial Economics

David H. Carpenter
Legislative Attorney

Marc Labonte
Specialist in Macroeconomic Policy

Rena S. Miller
Analyst in Financial Economics

Edward V. Murphy
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics

Financial regulatory reform is being discussed in the 111th Congress, the continuation of a policy debate that began before the September 2008 financial disruption. For example, Treasury Secretary Henry Paulson issued a blueprint for financial reform in March 2008. In September 2008, after this blueprint was issued but before congressional action, the financial system suffered severe distress as Lehman Brothers and AIG failed. This financial panic accelerated the review of financial regulation and refocused some of the policy debate on areas that experienced the most distress. 

Treasury Secretary Timothy Geithner issued a new reform plan in June 2009. House committees initially reviewed many related bills on an issue-by-issue basis. House Financial Services Committee Chairman Barney Frank then consolidated proposals into a comprehensive bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) and the House passed the bill on December 11, 2009. H.R. 4173 as passed contains elements of H.R. 1728, H.R. 2571, H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996. On March 22, 2010, the Senate Banking, Housing, and Urban Affairs Committee amended and ordered reported Chairman Christopher Dodd's Restoring American Financial Stability Act of 2010 (RAFSA). 

One issue in financial reform is the potential reorganization of the financial system regulatory architecture. Currently, the United States has many regulators, some with overlapping jurisdictions, but with gaps in oversight of some issues. This structure evolved largely in reaction to past financial crises, with new agencies and rules created to address the perceived causes of the particular financial problems at that time. One option would be to consolidate agencies that appear to have similar missions. For example, the five regulators with bank examination authority could be merged or the two regulators with securities and derivatives oversight could be merged. Another option would be to remove regulatory authority on a particular topic from the multiple agencies that might address it within their area now, and establish a single agency to address that issue. For instance, a single consumer financial protection agency or a single systemic risk regulator could be created. Both the House and the Senate are considering the establishment of a single entity to focus on consumer financial protection and some consolidation of bank regulators, although details differ. Neither the House-passed nor the Senate committee proposals would consolidate the securities and derivatives regulators or create a single systemic risk regulator. 

Other issues of financial reform address a particular sector of the financial system or selected classes of market participants. For example, both the House-passed and the Senate committee proposals would require more derivatives to be cleared through a regulated exchange and require additional reporting for derivatives that would remain in the over-the-counter market. There are several proposals to try to increase the amount of information available to regulators, investors, consumers, and financial institutions. Hedge funds would have increased reporting and registration requirements. Credit rating agencies would have to disclose additional information concerning their methodologies and potential conflicts of interest. A federal office would be created to collect insurance information. Institution-level regulatory agencies would have to share information about covered firms with systemic risk regulators. Proposed executive compensation and securitization reforms would attempt to reduce incentives to take excessive risks. 

This report reviews issues related to financial regulation. It provides brief descriptions of comprehensive reform bills in the 111th Congress that address these issues.


Date of Report: March 31, 2010
Number of Pages: 21
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