The Anti-Economist — March 12, 2013, 5:02 pm

We Need a Shadow CBO

The trouble with the Congressional Budget Office???s long-term budget projections

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. 

Share
Single Page
writes the Anti-Economist column and blog for Harper’s Magazine.

More from Jeff Madrick:

Context July 16, 2015, 12:59 pm

A Deeply Integrated Europe

The euro and its discontents

Context July 10, 2015, 10:15 am

How Germany Reconquered Europe

The euro and its discontents

From the February 2014 issue

How Germany Reconquered Europe

The euro and its discontents

Get access to 165 years of
Harper’s for only $45.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

June 2016

Trump’s People

= Subscribers only.
Sign in here.
Subscribe here.

The Old Man

= Subscribers only.
Sign in here.
Subscribe here.

The Long Rescue

= Subscribers only.
Sign in here.
Subscribe here.

New Television

= Subscribers only.
Sign in here.
Subscribe here.

The Improbability Party

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Post
Helen Ouyang on the cost of crowd-sourcing drugs, Paul Wood on Trump's supporters, Walter Kirn on political predictions, Sonia Faleiro on a man's search for his kidnapped children, and Rivka Galchen on The People v. O. J. Simpson.

The new docudrama The People v. O. J. Simpson: American Crime Story (FX) isn’t really about Orenthal James Simpson. It’s about the trials that ran alongside his — those informal, unboundaried, court-of-public-opinion trials in which evidence was heard for and against the murder victims, the defense and the prosecution, the judge, the jury, and the Los Angeles Police Department, to say nothing of white and black America. History has freed us from suspense about Simpson’s verdict, so that the man himself (played here by Cuba Gooding Jr.) is less the tragic hero he seemed in the mid-Nineties than a curiously minor character. He comes to the center of our attention only once, in Episode 2, at the end of the lengthy Ford Bronco chase scene — which in real life was followed by a surreal cavalcade of police cars and media helicopters, as well as an estimated 95 million live viewers — when Simpson repeatedly, and with apparent sincerity, apologizes for taking up so much of so many people’s time. It is an uncannily ordinary moment of social decorum, a sort of could-you-please-pass-the-salt gesture on a sinking Titanic, in which Simpson briefly becomes more than just an archetype.

Photograph (detail) © Eve Arnold/Magnum Photos
Article
Trump’s People·

= Subscribers only.
Sign in here.
Subscribe here.

"All our friends are saying, load up with plenty of ammunition, because after the stores don’t have no food they’re gonna be hitting houses. They’re going to take over America, put their flag on the Capitol.” “Who?” I asked. “ISIS. Oh yeah.”
Photograph by Mark Abramson for Harper's Magazine (detail)
Article
The Long Rescue·

= Subscribers only.
Sign in here.
Subscribe here.

He made them groom and feed the half-dozen horses used to transport the raw bricks to the furnace. Like the horses, the children were beaten with whips.
Photograph (detail) © Narendra Shrestha/EPA/Newscom
Article
The Old Man·

= Subscribers only.
Sign in here.
Subscribe here.

The new docudrama The People v. O. J. Simpson: American Crime Story (FX) isn’t really about Orenthal James Simpson. It’s about the trials that ran alongside his — those informal, unboundaried, court-of-public-opinion trials in which evidence was heard for and against the murder victims, the defense and the prosecution, the judge, the jury, and the Los Angeles Police Department, to say nothing of white and black America. History has freed us from suspense about Simpson’s verdict, so that the man himself (played here by Cuba Gooding Jr.) is less the tragic hero he seemed in the mid-Nineties than a curiously minor character. He comes to the center of our attention only once, in Episode 2, at the end of the lengthy Ford Bronco chase scene — which in real life was followed by a surreal cavalcade of police cars and media helicopters, as well as an estimated 95 million live viewers — when Simpson repeatedly, and with apparent sincerity, apologizes for taking up so much of so many people’s time. It is an uncannily ordinary moment of social decorum, a sort of could-you-please-pass-the-salt gesture on a sinking Titanic, in which Simpson briefly becomes more than just an archetype.

Illustration (detail) by Jen Renninger
Article
New Television·

= Subscribers only.
Sign in here.
Subscribe here.

With its lens shifting from the courtroom to the newsroom to people’s back yards, the series evokes the way in which, for a brief, delusory moment, the O. J. verdict seemed to deliver justice for all black men.
Still from The People vs. OJ Simpson: American Crime Story © FX Networks

Amount an auditor estimated last year that Oregon could save each year by feeding prisoners less food:

$62,000

Kentucky is the saddest state.

An Italian economist was questioned on suspicion of terrorism after a fellow passenger on an American Airlines flight witnessed him writing differential equations on a pad of paper.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!

HARPER’S FINEST

Mississippi Drift

By

Matt was happy enough to sustain himself on the detritus of a world he saw as careening toward self-destruction, and equally happy to scam a government he despised. 'I’m glad everyone’s so wasteful,' he told me. 'It supports my lifestyle.'

Subscribe Today