CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Washington Post Discovers that CBO Is Not God

Washington Post Discovers that CBO Is Not God

Print
Sunday, 02 March 2014 08:40

The Washington Post is widely known as the newspaper that uses both its opinion and news pages to constantly tell readers that we have to cut Social Security and Medicare spending because the Congressional Budget Office (CBO) predicts big deficits 10, 20, or 30 years in the future. That is why it was extraordinary to see an article in the Sunday paper telling readers that CBO is often wrong and that its scores may not always be the best basis for policy decisions.

The central theme of the piece was that the Eisenhower administration was able to commit $25 billion to building the inter-state highway system in 1956 (the equivalent of $1.1 trillion in today's economy) in part because he didn't have to get this spending scored by CBO. While this was clearly a large expenditure relative to the size of the economy, the benefits would have been very difficult for a CBO-type agency to quantify.

In pointing out the errors of scoring by CBO, the piece seriously understates the case. In 1996, after all the Clinton era increases and spending cuts had already been put into law, CBO still projected a deficit for 2000 of 2.5 percent of GDP ($420 billion in today's economy). In fact, in fiscal year 2000 we actually had a surplus of roughly the same size, implying a forecasting error of close to 5 percentage points of GDP.

This was not due to further legislative changes. The tax and spending changes over the intervening four years actually added slightly to the deficit. The problem was that CBO grossly under-estimated economic growth over this four year period and over-estimated the unemployment rate, predicting a 6.0 percent unemployment rate for 2000 when the actual rate was 4.0 percent. 

Having underestimated growth in the years 1996-2000, CBO then hugely over-estimated growth and revenue in the next decade, failing to see that the stock bubble would collapse, sending both the economy and revenue plunging. As a result, we never came close to paying off the national debt, Federal Reserve Board Chairman Alan Greenspan's big fear when he argued in favor of the Bush tax cuts in 2001.

And of course the CBO completely missed the collapse of the housing bubble and the fact that it would tank the economy. As a result, the Washington Post was highlighting concerns about the relatively small deficits of 2006-2007, while completely ignoring the bubble that was about to devastate the country.  

More recently CBO has likely been exaggerating deficit concerns by failing to fully incorporate the slowdown in health care cost growth in its projections of future spending. If this slowdown continues, then not only will near-term deficits be relatively modest, but even the longer term deficits highlighted by the Post will also be easily contained.

One issue this article gets wrong is the nature of the data at CBO's disposal. We have very reliable data on GDP dating back to the early post-World War II years. The Bureau of Labor Statistics is a reliable source of inflation data for 100 years. CBOs problem in its scoring does not stem from a lack of data.  

Comments (4)Add Comment
...
written by urban legend, March 02, 2014 1:07
Why should we ever care about "paying off" the national debt? For that matter, is there any such thing as "the" national debt? All there is is a few million individual debts, each of which will be payable at various times over the next 30 years. The only things that matter is whether we can readily handle the cost of servicing those debts, and we can pay those debts when they come due. Neither of these has ever been a concern in our 230 year history, nor will it be a concern under any conceivable scenario for the next 230 years.

What is the Washington Post's answer to these truisms? "Well, sure, but. . . but . . . everybody (who's anybody) knows the deficit and national debt are huge problems. We've been saying that for as long as we can remember, all our friends say it, and we're not going to let logic stop us now."
The national debt and national identity
written by Squeezed Turnip, March 02, 2014 5:02
Alexander Hamilton thought of the common national debt as a means to forge 13 diverse states into a stronger unity. Later in history, Chase borrowed all that money for the Civil War, I doubt he gave a second thought to being able to pay it off if the war was won.

Looking back over the forecasts of the CBO and like entities, one can admire how well they've done in predicting the future, which we know nobody can really do. This over-concern with the debt is just like a massive cancer that has invaded VSP thinking, even to the extent, apparently, of infecting CBO analysis with the latest political flavor. Can you imagine, working at the CBO and getting pestered by "but what about the debt?" questions? of course you're going to obsess on the debt: it's classic pavlovian training ;-)
The WaPo, urban legend...
written by ifthethunderdontgetya™³²®©, March 02, 2014 5:28
.
Can be counted on to stop caring about the deficit the second there's another chance to stampede the country into a war.

Boeing and Lockheed are big advertisers, you know.
~
...
written by JSeydl, March 03, 2014 10:02
"One issue this article gets wrong is the nature of the data at CBO's disposal. We have very reliable data on GDP dating back to the early post-World War II years. The Bureau of Labor Statistics is a reliable source of inflation data for 100 years. CBOs problem in its scoring does not stem from a lack of data."

Agree and disagree. We do have tons more macro data to draw on than in the past. In theory, this should improve our ability to forecast. But there are many methodological reasons why it wouldn't, starting firstly with the fact that the macroeconomy is a chaotic and (probably) non-deterministic system, which is very sensitive to initial parameter conditions and which contains so many relevant variables (the number of which continues to increase) that it's impossible to model all of them in a co-deterministic way. In other words, we have an epistemic problem. If the CBO thinks it can accurately predict what GDP will be 20, 10, or even 5 years out, it is fundamentally not acknowledging this epistemic problem. In the philosophy of science, we call this "epistemic arrogance".

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives