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Just How Much Should We Trust the Congressional Budget Office?


Politicians and political pundits love to cite CBO studies, but it's important to keep in mind that even the CBO itself says its numbers are far from perfect.

MINYANVILLE ORIGINAL In a hyper-polarized political world, the Congressional Budget Office, or CBO, has become the go-to source for politicians whenever they want to argue their cases, because of its reputation of non-partisanship, which instantly confers credibility.

Democrats, for example, cite the CBO when asserting that the Affordable Care Act will save billions in health care costs, while Republicans say the CBO agrees that economic growth would be compromised if the Bush tax cut were not extended.

But just how accurate are CBO economic reports?

A study done by economists Kevin Kliesen and Daniel Thornton published at the start of 2012 found that CBO budget outlooks are not that reliable.
"Using CBO deficit projections over the period 1976-99, we found that the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus," the duo wrote in the January/February issue of the Federal Reserve Bank of St. Louis Review.

Kliesen and Thorton highlight a key source of the CBO's deficit projection error:
[W]hen the CBO constructs its baseline projections it cannot – unlike private-sector forecasters – anticipate future changes in fiscal or monetary policy that affect future economic growth, outlays, and revenues. Instead the CBO by law uses what is know as a "current services baseline." That is, it must assume that existing laws that govern outlays and receipts will prevail over the projection horizon.

Philip Joyce, a public policy professor at the University of Maryland, former CBO staffer, and author of The Congressional Budget Office: Honest Numbers, Power, and Policymaking, agreed that in terms of long-term deficit projections, CBO's hands were tied by current laws. "Congress could change the law and allow the CBO to exercise its own judgment concerning what it thought was going to be allowed to happen and what it thought was not going to be allowed to happen. At that point, CBO's not a neutral presenter of facts; they're a predictor of what Congress and the president are going to do," Joyce tells Minyanville.
"I actually think in a sense, CBO has been remarkably responsible and has gone a little further than might even be comfortable on this particular issue. For the last couple of years, CBO has developed this thing called the alternate fiscal scenario, and the alternate fiscal scenario simply says: Here's what our baseline looks like - our baseline assumes the Bush tax cuts will expire," Joyce adds.
"But how would the world look under an alternate scenario where the cuts were extended? CBO has shown the difference between the trajectory of the budget under the baseline, which I agree can be unrealistic, and what would happen under this alternate scenario. [But] that doesn't change the fact that the baseline itself is something that CBO is stuck with," he continued.

It's not just that the CBO is subject to strict rules when scoring legislation or projecting deficits; some argue that CBO reports will always be flawed because the data inputs it uses to crunch numbers are highly skewed to whatever goal a member of Congress hopes to achieve. It's "garbage in and garbage out," so to speak. Economist Paul Krugman explained the problem in a blog post for the New York Times:
What you need to realize is that the CBO is the servant of members of Congress, which means that if a Congressman asks it to analyze a plan under certain assumptions, it will do just that - no matter how unrealistic the assumptions may be. CBO will tell you what's going on, but it will do so deadpan, doing nothing in terms of emphasis or placement to highlight the funny business.

Joyce, however, says that the CBO does not necessarily accept assumptions it is presented with from Congress at face value. "If a proposed bill creates something that that never existed before, then the job CBO has in terms of cost estimates is to go out and collect information, and from any source that it can, to get an idea of how much it will cost. That could mean collecting information from federal agencies, asking federal agents who are going to implement the program how much they think the program will cost," he explains
"They don't just take whatever information that's provided from some federal agency and say, well just because this agency said this is going to happen, we'll take that as our estimate. They may try to get info from multiple sources and come up with their best estimate of how much something will cost," Joyce continues.

Even if the CBO corrects for flawed input numbers and accounts for changes in laws and policies over a bill's scoring period, conservatives still criticize the bill, saying that its modeling reflects a Keynesian bias.

The complaint non-Keynesians hold is that CBO studies employ the use of Keynesian multipliers, which, in the case of government stimulus projects, guarantees the finding that a stimulus will create jobs and boost the economy.

At Forbes, Paul Roderick Gregory writes:
[The Keynesian multiplier assumes] growth will decline because taxes are going up (and higher taxes have a negative multiplier) and because lower government spending will have a negative effect on the economy. The CBO Keynesian model must conclude that lower government spending reduces growth and employment. Non-Keynesians dispute the mechanism whereby higher taxes reduce growth and do not accept that lower government spending reduces growth. History shows that one-shot changes in taxes do not affect consumption, and increased government spending can reduce consumption due to fears of higher taxes.

Here's the take at Bloomberg from University of Chicago's John Cochrane:
If the government borrows $1 billion and spends it, the CBO will project that this action raises gross domestic product by $1.5 billion. Government workers are counted as "producing" what they cost, so borrowing money to keep them employed generates the same GDP as building a bridge. If the government just gives the money to people, this also raises the CBO's GDP estimate. Reducing government spending and transfers has the opposite effect.

If, like me, you think that spending less money on useless projects is good for the economy, or that taking money from A and giving it to B has little overall effect, you would come to much different conclusions from the CBO's.

Similarly, the CBO says raising tax rates hurts the economy because taxpayers will consume less, lowering "aggregate demand." If, like me, you think that taxes hurt the economy not so much because of how much people have to pay rather than lend to the government, but because higher (marginal) rates discourage work, saving, investment, business formation and growth, then the CBO's numbers are meaningless to you.
Joyce tells Minyanville that CBO has tried to adjust for differences in economic beliefs. In particular, Republican-appointed CBO director Douglas Holtz-Eakin experimented with dynamic scoring of President George Bush's budget in 2003, conducting nine separate estimates of the effects of his budget that would consider tax cuts as stimulative to the economy, rather than just counting them as lost revenue.
"What they actually found was that, yes, there were some additional positive economic effects from cutting taxes, but it was almost completely offset by the negative effects of some of the spending policies. So in the end, the CBO didn't reach a fundamentally different place after doing this dynamic scoring of the budget than they did before," points out Joyce.

Though while there may be flaws in CBO reports, Joyce still believes that the world is better off with the CBO than it was without. "Before there was the CBO, if somebody had a proposal for a particular piece of legislation, and you ask how much that is going to cost, that cost estimate would either come from the committee or the member of Congress who was proposing the legislation, or it would come from the Office of Management and Budget, in which case the estimate might be higher or lower depending on whether the president happened to agree with the policy or not," says Joyce.

"If you didn't have CBO, then you wouldn't have anybody, when a piece of legislation is being considered, who would be taking a neutral objective look at that piece of legislation."

The CBO, Joyce adds, would be the first to point out that it is far from being infallible. "In my book, Douglas Holtz-Eakin told me: 'Everybody thinks that CBO's null hypothesis is CBO is right. But it's not,'" he says. "In fact, the only thing CBO knows is that they're wrong. It just doesn't want be wrong in a biased direction."

Ultimately, the CBO is simply an economic analysis agency whose job is to provide non-partisan cost projections, which Congress can choose to use, ignore, or spin into something it likes. "Nobody gave the CBO any power to make Congress do something that it doesn't want to do, or to stop them from doing something they do want to do," Joyce states.

The way CBO knows that it's doing its job is to see if they get yelled at by an equal number of Republicans or Democrats, Joyce shares. "As long as if over the course of, say, a month, they had made both parties unhappy – though that might not be an indicator that they were right – it's an indicator that they were somewhat objective."

Twitter: @sterlingwong
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