Yves here. The Congressional Budget Office is widely depicted in the media as “nonpartisan” and therefore above reproach. It’s time to treat that view as outdated. Like the Fed, the CBO continues to profess its independence but is in fact an aggressive promoter of neoliberal policies. We discussed at some length how Fed economists savaged its health care cost model, which is the driver of budget hysteria.
Jeff Madrick describes even more problems with CBO forecasts, and how they have become so significant that the public needs a shadow CBO to challenge the often-flawed official projections.
By Jeff Madrick, a journalist, economic policy consultant and analyst Cross posted from Triple Crisis
I have written before on this blog and in my Harper’s Magazine column about the distorted long-term budget projections produced by the Congressional Budget Office. The CBO’s figures are a primary source of the current alarm about the need to cut government spending even with the economy weak.
To earn its “non-partisan” label, the CBO makes unrealistic assumptions that for the most part merely project past trends into the future, and sometimes don’t even do that — underscoring the need, in my view, for a “shadow CBO” that exposes the office’s outlandish assumptions and offers us a set of alternative projections based on realistic ones. The office forecasts, for instance, that U.S. debt as a proportion of GDP will be 150 percent by the early 2030s and nearly 200 percent by 2037. Michael Linden, a highly competent economist at the Center for American Progress, has made a good start at exposing the assumptions that underlie such predictions by taking a close look at the office’s June 2012 long-term forecast:
Since CBO released its long-term outlook in June 2012, we’ve already made significant progress toward bringing down our deficits. First, contrary to CBO’s assumption, we did not extend all of the Bush tax cuts at the end of 2012. Instead, the American Taxpayer Relief Act allowed approximately $600 billion of the Bush tax cuts to expire as scheduled, thereby raising future revenue projections. Second, the most recent CBO budget outlook, published in early February 2013, shows substantially less spending over the next 10 years than was projected in June’s long-term outlook. Finally, given the scheduled drawdown in Afghanistan, it seems unlikely that we will continue spending more than $100 billion a year—as is currently projected—on foreign wars. Incorporating these changes brings the 2037 debt projection down from 199 percent of GDP to 169 percent.
Linden goes on to point out that the CBO is projecting no rise in tax revenues as a proportion of GDP, even though these revenues usually go up with the rise in personal and corporate income that accompanies economic expansion. The office is also expecting a sudden increase in non-entitlement spending in 2022 — the very spending that Congress is now working to cut. Thus, the CBO is building into its projections deficit increases that likely won’t occur. Moreover, if these programs receive additional funding in the future — and let’s hope they do — they may be accompanied by tax increases to finance them.
The CBO’s projections are further skewed quite seriously by the office’s assumption that health care costs — which drive Medicare and Medicaid spending — will increase at the same rapid rate as they have in the past couple of decades, despite the fact that these costs have risen far more slowly in the past four years.
Linden concludes that adjusting for all of these factors would cut the CBO’s 2037 debt prediction from nearly 200 percent to under 100 percent. He leaves out one additional CBO assumption, though: the “crowding out” argument, which states that government budget deficits reduce savings, in turn limiting capital investment and therefore growth. The following example underscores the problems with this assumption:
Last year, the CBO projected that without a fiscal-cliff compromise — in other words, if the economy contracted alongside in the face of reduced government spending and higher taxes — the nation would have gone into a pretty serious recession in 2013. But, it added, by 2016 or so, the economy would be better off, because it would have resumed its normal growth track with a lower deficit. And people believed that. Oh my. To repeat, the office was saying that a recession would have been beneficial to the long-term economic health of the United States. Their analysis was straight from the playbook of the Austrian economists of the 1930s and 1940s: recessions are good cleansing agents, in a nutshell.
As I said, we badly need a shadow Congressional Budget Office to challenge the authority of the current one. The alarmism of the CBO is influencing U.S. budget discussions for the worse, damaging the economy and placing the country’s long-term welfare at risk.
This piece first appeared on harpers.org
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The CBO has a number of limitations that you’ve outlined very well. I’d like to add that they assume the economy never has recessions and that they wrote, in a March 2000 report on the Trade Deficit:
“Since the effects of the deficit are small and—in important ways—positive, there is no economic reason to use trade policy to attempt to reduce or eliminate it. In fact, such use would more likely hurt the economy.”
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/18xx/doc1897/tradedef.pdf
In other words the CBO went along with the neo-liberal narrative that not only were Clinton’s surpluses great, but the trade deficit COMBINED with that was _beneficial_.
With hindsight we know that to be a completely flawed analysis, and that the private sector became overly leveraged to finance the bloated trade deficit in that exact time where the CBO was writing a report on it.
(Not all of us required hindsight to see the toxic combination of an uncontrolled trade deficit juxtaposed with years of public surpluses. James Galbraith famously took on the status quo economists who praised the surpluses and ignored the large current account deficit: http://rooseveltinstitute.org/in-the-news/modern-monetary-theory-unconventional-take-economic-strategy )
CBO criticism aside, and looping back to the main point of this article that we need a “shadow CBO”, I’m unsure of what exactly the author wants in this area.
Don’t we have an army of thinktanks that serve as a “shadow CBO” of various political leanings?
It’s almost impossible to create a purely non-partisan budget forecasting/economic analysis group. There’s always going to be partisans that disagree with certain assumptions and models, as well as forecasts under varying guidelines.
So I’m left to disagree with the author on the call for a shadow CBO. While the CBO is deserving of much criticism for its shortfalls, it’s probably about as good as a government budget office is going to get while still generally maintaining favorable opinions of both parties as a respected organization.
I can only imagine that if we create two CBOs — an “official” one and then a public “shadow” one, that it would quickly turn into a Republican CBO vs. Democrat CBO, or Liberal vs. Conservative, and that will only fuel the partisan stupidity that infects economic policy discussions in DC.
My sneaking suspicion is that the CBO’s unabashed promotion of neoliberal policies, if truth be known, is at the behest of the princes of both the Democratic and Republican Parties.
While we’re at it, why stop at a shadow CBO? Why not a complete Shadow Government©, with a(web)elected Congress & President, which can enact model Shadow Laws? Something has to be done to show those clowns Inside The Beltway how things ought to be done in the Big Time.
The author mentions Michael Linden at CAP. I don’t know Mr. Linden but just be aware that CAP has taken money from Pete Peterson and much of the economic stuff CAP spits out is also Neoliberal.
Who will watch the shadows?
Seems to me the entire government should be open sourced. It’s the existing shadows which are the problem.
In the 1974 Budget Act, the Congress in a fit of fiscal “reponsibility” decided that the CBO had to come up with projections going out 5 years, since increased to 10 years. This has always been a GIGO process. It ignores that the US has a fiat currency. Growth assumptions are always too big and projected to arrive too soon. Then there are all of the effects of new government policies. Most steer the numbers away from the projections, but then too there can interventions by government to bring the numbers back closer to the projections. Even so, I would say since about 2000 the times in which we live have become too unstable to chart. My impression is that projections one year out are only slightly better than a coin toss to be ballpark, and sometimes not even that, but that the projections rapidly degrade after that, unless government intervenes to bring them back into line. But then that is something completely different. It’s a self-referential process, and under such circumstances, projections become benchmarks. They cease to be descriptive of policy and become drivers of it.
Oh gawd, the prediction factory…
What was the CBO’s prediction in 1999?
How about 2004?
2009?
So now I’m supposed to believe they’re getting better at it?