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Thursday, December 30, 2010

Upcoming Unemployment Insurance Benefit Expirations


Katelin P. Isaacs
Analyst in Income Security

Two key provisions related to extended federal unemployment benefits are temporary and, therefore, scheduled to expire.

The temporary 100% federal financing of the Extended Benefit (EB) program ends January 4, 2012.

Authorization for the temporary Emergency Unemployment Compensation (EUC08) program is scheduled to expire the week on or before January 3, 2012 (i.e., December 31, 2011, in all states except New York state, in which the program ends January 1, 2012).

Additionally, there are several upcoming expirations that affect unemployment compensation more generally. The 0.2% federal unemployment tax (FUTA) expires on June 30, 2010. After that date the net FUTA tax on employers will drop from 0.8% on the first $7,000 of each employee’s earnings to 0.6%. In addition, states have until August 22, 2011, to submit an application for their share of the $7 billion from the Unemployment Insurance Modernization Act within the stimulus package, P.L. 111-5. Any funds from the $7 billion that remain unspent become unrestricted funds within the unemployment trust fund (UTF) on October 1, 2011.

This report describes the consequences of these expirations for the financing and availability of unemployment benefits in states.



Date of Report: December 20, 2010
Number of Pages: 6
Order Number: R41508
Price: $19.95

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Wednesday, December 29, 2010

Revenue Estimates for Proposed Tax Reform

Maxim Shvedov
Analyst in Public Sector Economics

Jane G. Gravelle
Senior Specialist in Economic Policy


This memorandum responds to your request for updated preliminary revenue projections for your broad tax reform proposal, based on S. 1111 (110th Congress), as modified. This memorandum is designed to assist you in refining your legislative proposal. It does not analyze any legislation under current consideration.

We updated our previous estimates for the provisions of S. 1111 (with methodology described in detail in our memorandum to you of April 12, 2007) and also made adjustments for modifications to S. 1111. These estimates are unofficial, “ballpark” numbers, sensitive to many assumptions and limitations. Estimates of the proposal by the Joint Committee on Taxation (JCT) would, of course, constitute the official estimates.



Date of Report: February 19, 2010
Number of Pages: 3
Order Number: M-021910-B
Price: $19.95

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Tuesday, December 28, 2010

Double-Dip Recession: Previous Experience and Current Prospect


Craig K. Elwell
Specialist in Macroeconomic Policy

Concerns have been expressed that the United States may be about to experience a “double-dip” recession. A double-dip or W-shaped recession occurs when the economy emerges from a recession, has a short period of growth, but then falls back into recession. This prospect raises policy questions about the current level of economic stimulus and whether added stimulus may be needed. The pace of the recovery has been below average and is decelerating, falling from a 5% to a 1.7% annual average rate of growth between the fourth quarter of 2009 and the second quarter of 2010. Other indicators, such as high unemployment, falling house prices, reduced flows of credit, and the prospect of fading fiscal stimulus, are also worrisome.

Double-dip recessions are rare. There are only two modern examples of a double-dip recession for the United States: the recession of 1937-1938 and the recession of 1981-1982. They both had the common attribute of resulting from a change in economic policy. In the first case, recession was an unintended consequence of the policy change; in the second case, recession was an intended consequence.

Historically, there has been what is termed a “snap back” relationship between the severity of the recession and the strength of the subsequent recovery. In other words, a sharp contraction followed by a robust recovery traces out a V-shaped pattern of growth. However, unlike earlier post-war recessions, the recent recession occurred with a financial crisis. Research suggests that a slow recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis.

The prelude to the economic crisis in the United States was characterized by excessive leverage (the use of debt to support spending) in households and financial institutions, generating an asset price bubble that eventually collapsed and left balance sheets severely damaged. The aftermath is likely to be a period of resetting asset values, deleveraging, and repairing balance sheets. This correction results in higher saving, weakened domestic demand, a slower than normal recovery, and persistent high unemployment, but not necessarily a double-dip recession.

Several indicators, such as industrial production, business investment spending, and corporate bond yields, together with the prospect of an accommodative monetary policy, point to an economy that is expanding. Weighing these several forces, positive and negative, that are likely to influence economic activity over the near term, most economic projections suggest U.S. economic recovery will continue, albeit at a slower than normal pace.

This report discusses factors suggesting an increased risk of double-dip recession. It discusses other factors that suggest economic recovery will continue. The U.S. historical experience with double-dip recessions is also presented. It examines the role of deleveraging by households and businesses in the aftermath of the recent financial crisis in shaping the likely pace of economic recovery. The report concludes with a look at current economic projections.



Date of Report: December 3, 2010
Number of Pages: 13
Order Number: R41444
Price: $29.95

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Monday, December 27, 2010

Small Business Administration 7(a) Loan Guaranty Program


Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs designed to encourage lenders to provide loans to small businesses “that might not otherwise obtain financing on reasonable terms and conditions.” The SBA’s 7(a) loan guaranty program is considered the agency’s flagship loan guaranty program. It is named from section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended), which authorized the SBA to provide business loans and loan guaranties to American small businesses. In FY2010, the SBA approved 47,002 7(a) loans amounting to more than $12.4 billion.

Congressional interest in small business access to capital, in general, and the SBA’s 7(a) program, in particular, has increased in recent years for three interrelated reasons. First, small businesses have reportedly found it more difficult than in the past to access capital from private lenders. Second, there is evidence to suggest that small business has led job formation during previous economic recoveries. Third, both the number of SBA 7(a) loans funded and the total amount of 7(a) loans guaranteed have declined. The combination of these three factors has led to increased concern in Congress that small businesses might be prevented from accessing sufficient capital to enable small business to assist in the economic recovery.

This report opens with a discussion of the rationale provided for the 7(a) program, the program’s borrower and lender eligibility standards and program requirements, and program statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction, and borrower demographics.

It then examines congressional action taken during the 111
th Congress to help small businesses gain greater access to capital, including the enactment of P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), which provided additional funding to temporarily subsidize the 7(a) program’s fees and to increase the program’s loan guaranty percentage to 90%; and P.L. 111-240, the Small Business Jobs Act of 2010, which provides additional funding to extend the 7(a) program’s fee subsidies and 90% loan guaranty percentage through December 31, 2010, increases the program’s loan guaranty limit from $2 million to $5 million, and establishes an alternative size standard for the 7(a) and 504/CDC loan programs which is designed to increase the number of small businesses that can participate in the two programs. It also examines issues raised concerning the SBA’s administration of the 7(a) program, including the oversight of 7(a) lenders and the program’s lack of outcome-based performance measures.


Date of Report: December 17, 2010
Number of Pages: 32
Order Number: R41146
Price: $29.95

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Economic Effects of a Budget Deficit Exceeding $1 Trillion


Marc Labonte
Specialist in Macroeconomic Policy

The budget deficit in FY2009 equaled $1.4 trillion, or 10% of gross domestic product (GDP). In 2010, it equaled $1.3 trillion, or 9% of GDP. Combined with a shrinking economy, this increased the publicly held federal debt by 12.8 percentage points of GDP in 2009 and 8.6 percentage points in 2010. Deficits of this size are not sustainable in the long run because the federal debt cannot indefinitely grow faster than output. Over time, a greater and greater share of national income would be devoted to servicing the debt, until eventually the government would be forced to monetize the debt (finance it through money creation) or default on it.

Although the debt cannot persistently rise relative to GDP, it can rise for a time, so it is hard to predict at what point investors would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. While some of those countries have seen their relative financing costs rise during the financial crisis, Japan has continued to be able to finance its debt at extremely low costs.

If investors as a whole currently deemed the debt to be unsustainable, the yields and the cost of credit default swaps on Treasury securities would be expected to rise. Instead, both are low. This may seem surprising, given that the debt is currently growing more rapidly than output, and it is projected to continue to do so under current policy. Over the next few years, the deficit is projected to fall somewhat, but if tax provisions scheduled by law to expire are extended and discretionary spending stays at recent levels, the deficit would not fall enough under current policy to stabilize the debt. Further, the debt is projected to begin rising more rapidly in the long term under current policy because of the rising costs of Social Security, Medicare, and Medicaid. The willingness of investors to finance the federal debt at low interest rates in light of these projections suggests that investors believe that policy changes will eventually be made that will place the federal debt on a sustainable path.

Standard macroeconomics predicts that the increase in the deficit will temporarily boost overall spending at a time when there is significant slack in the economy. Were the deficit to be harmful to the economy, it would likely occur in one of two ways. First, it could result in higher interest rates that would “crowd out” private investment. Because private investment has fallen so much as a result of the recession and interest rates are currently low, there is little evidence that crowding out is a significant factor at the moment. Second, the deficit could fail to boost GDP if it led to more borrowing from abroad. This factor also does not seem significant at present, as borrowing from abroad has fallen by about half during the recession.

Once private investment demand recovers, a large deficit would be expected to limit the resources that are available to finance investment. By accounting identity, domestic investment spending equals national saving plus net borrowing from abroad. The budget deficit is currently more than half the size of private saving. Even before the increase in the deficit, national saving was insufficient to finance domestic investment spending, and the United States was borrowing from abroad at unprecedented rates. (Borrowing from abroad has since fallen, but remains high.) To sustain large deficits, the economy will require some combination of higher private saving, lower investment, and higher borrowing from abroad. Some economists have argued that borrowing much more from abroad is unrealistic, and the already heavy U.S. reliance on borrowing from abroad makes the maintenance of a large deficit even less sustainable.



Date of Report: December 13, 2010
Number of Pages: 13
Order Number: R40770
Price: $29.95

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