August 03, 2010
In response to a find by Dean Baker and myself, the Congressional Budget Office (CBO) today issued a correction to their recent Long-Term Budget Outlook. The issue at hand was the unusually large crowding-out of investment reported by CBO. As deficits crowd out investment, this leads to slower economic growth as seen in the original CBO figure shown below:
As Dean Baker pointed out last week, the deficits in the Alternate Fiscal Scenario had hardly changed since the previous long-term estimates last year. Thus, the deficit costs to economic growth implied in this graph could not be consistent with the smaller costs reported last June. The updated figure from CBO released today shows much smaller effects on GDP.
CBO should be commended for its rapid response in addressing this error.
