Reforming Credit Reform

What is it about?

In 1990, after long consideration, US lawmakers changed the budgetary accounting for federally-assisted credit from cash-basis to an accrual-basis. Specifically, they replaced current period cash-flows as the budget cost of credit with government's estimated long term loss. However, as enacted, the budget's subsidy cost of credit was significantly understated. Soon, the number and volume of credit programs reporting negative costs--net income to the government--increased. Today, the incentives of policymakers to over-produce credit assistance are very strong. This article proposes a change in the definition of subsidy cost that would equalize budget subsidy cost and the social cost of federal credt and dampen those incentives.

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