Irresponsibly Following the Congressional Budget Office

Suppose that a prominent member of Congress were to press for spending an additional $450 billion a year over the next three years on infrastructure projects. Suppose that they did this at a time when the unemployment rate was near 4.5 percent, the definition of full employment used by the Congressional Budget Office (CBO) and in most econometric models.

The CBO modeling of this proposal would show that infrastructure spending would lead to almost no increase in employment. It would show that the effect of the additional spending would be higher interest rates, which would crowd out investment and other forms of expenditures. The spending would also raise the deficit and lead to larger interest rate burdens on our children.

This prominent member of Congress would undoubtedly be denounced as irresponsible on the editorial pages of the Washington Post and by other respectable pillars of the Washington establishment. However, if it was the winter of 2007, this prominent member of Congress would have been performing an extremely valuable public service, especially if she was able to push her plan through Congress.

The reality is that the U.S. economy was about to fall off a cliff in the winter of 2007, but CBO and most other economic forecasters were completely oblivious to the problems that stood in front of their face. They either did not see the housing bubble that was collapsing around them or somehow thought that its collapse would not have any major impact on the economy. As we all now know, CBO was hugely wrong.

This is not the only time that CBO has been wrong in a really big way. They often miss major economic turning points. For example, in January 2001, the projections showed a respectable 2.4 growth rate for 2001 and a 3.4 percent growth rate for 2002. The unemployment rate was projected to average 4.4 percent in 2001 and 4.5 percent in 2002. There was no hint of the recession that began just two months later.

CBO did not even recognize that the collapse of the stock market bubble, which was already in progress, would affect capital gains tax revenue. This caused it to overestimate capital gains tax revenue by more than $300 billion over its 10-year projection period, an amount equal to approximately 1 percent of the budget and 10 percent of the deficit.

It's not just economic turning points that CBO tends to miss. They sometimes badly misjudge the impact of specific programs. Last summer Congress funded a program to keep homeowners facing foreclosure in their homes. CBO projected that 400,000 loans would be modified under this program by 2011. Through April of 2009 there had been fewer than 1000 applications, and only 51 completed modifications.

A column in the New York Times last week noted how CBO had repeatedly underestimated the cost savings that resulted from various efforts to restrain medical care costs. Jon Gabel, a researcher at the University of Chicago, argued that CBO assumes zero cost-savings for any legislated changes where the benefits are not known.

As Gable argues, the issue is not that the CBO is partisan or biased in any obvious way; there is no basis for questioning its integrity. Nor is it a lack competence; CBO is staffed by hard-working professionals.

However, they are nonetheless fallible. CBO does make mistakes, and often they are large and important mistakes. The failure to recognize the housing bubble, and that its collapse would have a devastating impact on the economy (and the budget deficit) was an enormous error. The economists at CBO may take solace in the fact that most of the economics profession made the same mistake, but this fact provides little consolation to the tens of millions of workers who are unemployed or underemployed as a result of the failure of CBO and others to warn of this impending disaster.

The fact that CBO is fallible is important for how members of Congress view its analysis and projections. Members of Congress would be foolish to ignore the projections provided by CBO, however they would be irresponsible if they treated this analysis as the final word.

Members of Congress are responsible for getting the policy right, not doing what CBO tells them. This means that if they have reason to believe that a CBO projection in a specific area is wrong, they should act based on their judgment, not on the CBO projection.

Constituents have every right to hold their representatives in contempt if they try to blame their mistaken judgments on CBO projections. Members of Congress get paid for getting the policy right, not listening to CBO.

To take the specific example mentioned at the start of this column, members of Congress should have been pushing large infrastructure projects at the beginning of 2007. These projects would have kicked in just when the collapsing bubble was sucking the life out of the economy.

Pushing for major infrastructure spending at the start of 2007 would have caused members of Congress to be denounced as irresponsible by the Washington Post and the rest of the Washington establishment. But it is much better to be denounced as irresponsible than to actually be so -- and blindly listening to CBO is incredibly irresponsible.

Comments

[edgoldman1]

When it comes to health care “reform”, CBO estimates are fodder for the insurance companies and right-wing obstructionists who tout the high cost of change. CBO only counts government expenditures and possible savings, totally ignoring the savings to 300 million Americans.
• How much would Americans save by avoiding personal bankruptcy because of high medical bills? Fifty per cent of all bankruptcies occur because of overwhelming medical bills, and 60% of those occur to people that did have health insurance. This cost doesn’t include all the emotional toll caused by these bills and shifting expenditures away from the family (hurting the economy) to pay for medical costs until totally engulfed by them.

• How much would be saved by families that paid less for insurance coverage, whether through lower premiums or taxes for comprehensive health insurance, than they now spend?

• How much would businesses save by not having to contribute toward health insurance for their employees (at least those who do provide some coverage)? How much of that savings might go into higher wages to those same employees, generating additional wage tax and social security taxes to the government?

• How much would families save by having no co-pays, deductibles or other out-of-pocket costs, including out-of-pocket costs for pharmaceuticals?

• How many work days now missed because of being sick might be avoided if everyone had access to a doctor?

[poplock]

I always talk about not falling victim to the JEDI MIND TRICK .What i mean is the play on words that the media use to provoke anger mistrust and in some case's violence.if we understood the way our government should work we may be passionate about our ideas but the unknown would not be as scary the CBO report was an analysis of some ideas and some of the cost saving measures was not even included in their finale report cause somethings has to be calculated over time.but the so called journalist will report it as though what the CBO reporting on, was the finale bill. so they can get so called pundits authors former congress members to try and explain something that is not come too pass.and we wounder why we are so confused this is the process.th­is is what i like about Obama being a constitutional lawyer he knows that congress has the job of making law and allocating money.he say hey this is what i will accept and this is what i will not.and then each member of congress must represent their state and constituents knowing that people (respectfully) sometimes don't know what we don't know.the process will move forward then hopefully we meet at the ballot box.

[gino618]

If you want to TRULY remark about fallability in an institution, why don't we start with the lawmakers & government itself?

Please - if you would - show me any government program which ended up costing LESS than or even exactly what was initially projected.

Medicare costs are 10 times what were initially projected.

And we're to believe the Administration & Democratic politicians when they say that we'll save money with their public option health care????

Seriously????

[fatnugly]

I don't know about the public options ability to save anyone money. But if you look at other nations and how much they spend as a percentage of GDP the US spends by far the most by far http://economix.blogs.nytimes.com/2009/07/08/us-health-spending-breaks-from-the-pack/. Most if not all of these other countries have some kind of socialized health care or insurance. So you might draw from this that if you want to control health care costs a government run option might be the best option.

[edgoldman1]

Cost overruns? You mean like the private sector in Iraq? Or Grumman? General Dynamics? Blackwater? Halliburton that built barracks in Iraq at enormous cost overruns, left half-finished buildings, and had electrical standards that caused soldiers to be electrocuted in the shower? KBR received contracts in the billions to rebuild Iraq's oil industry and six year's later Iraq pumps less oil than it under Hussein. Where did the money go? At least when the government programs to help people cost more than expected, the people get something in return.

The private sector's better and more efficient? Been to a bank lately? What's your 401(K) worth? I'll take the government over the marauding and amoral private sector in a heartbeat.

[fatnugly]

Seems like your saying government is bad cause iraq is like a big government run operation.

[successandhealth99]

I don't believe the CBO is infallible. BUT, it's the only decent non-partisan tool we have. Are we supposed to believe the Administration's numbers? Which would obviously be slanted favorably?

[FoonTheElder]

You can't believe ANYBODY'S numbers without analyzing where they come from and what they project. It's all in the assumptions. If the assumptions end up wrong, the projections are wrong.

Most projections are WAGs, wild a## guesses.

[codycap]

http://www.newser.com/story/67821/cbo-is-usually-wrong-on-health-reform-numbers.html
The Congressional Budget Office is a much-respected institution, and its integrity is beyond question, but it’s got a really lousy record when it comes to estimating the effects of health care reform, writes researcher Jon Gabel in the New York Times. It has drastically underestimated savings from each of the last three major Medicare reforms. It thought the '80s switch to flat-fee payments, for example, would save $10 billion over three years; it saved that much in 1986 alone.
It underestimated the savings from 1997’s fraud prevention methods by 50%, and from 2003’s prescription drug reforms by 40%. The problem is the CBO’s forecasting methodology, which operates on historical data. If something’s never been tried before, the savings are considered “unknown,” which often translates to “zero” no matter how illogical that is. Its discounted similar cost-cutting measures in the current debate, making reform harder to pass than it should be. —Kevin Spak

[robbrian]

Not only is the CBO guilty of comission but they have failed, for decades to present budget alternatives as they exist. However, as captives of Goldman-Sachs they cannot disclose those option to the public.

For instance, there is the option to cut to zero the interest rate charged by the -private Federal Reserve to the public U.S. Treasury for borrowed funds that fiinance public goods and services.

There is the option to require higher reserves for all banks to reduce the amount of debt-money created by bank lending. This reduces inflation and bears on future costs of funding the budget.

There is the option to monitize public debt, liquidate all short and medium term debt instruments---just take them out of circulation --to reduce the threat of inflation.

Yes, those who slavishly adhere to CBO estimates are not our critical thinkers. They are part of the problem and it's only geting worse.

[northstar11]

greenspan would talk to them and say there is no need for action the markets will self correct.

and congress would defer to his"wisdom­"------the keynsians would lose to the laissez faire mantra of the right

[dadw5boys]

Estimates are not facts and the Congressmen need to get out on the streets and see what is really going on in the world. Take a week and hit the major cities and rual centers to see how people are living. Are the Restruants full onThursday,Firday , Saturday or Sunday's ? Are their people in the parks, lot of people on the lakes, or in the malls on weekends ?

If you do not see a lot of people out that is because they have no money. Or look at the change in traffic counts along major connectors in your state. If they go from 30,000 cars a day to 14,000 a day people are not shopping they are laying low and saving money. They are hurting.

[chocolatecity]

Yeah, remember how the CBO used to say that Clinton's tax hike would slow growth in the economy.

[CalexenderJ]

True. It's interesting that members of congress also seem to insist the CBO is infallible when it confirms the positions that they already hold. If they think universal healthcare isn't a good idea, well would you look at that, the CBO says it's going to cost a trillion dollars. When the CBO revises it's estimates and says that healthcare reform will have negligible costs over the next 10 years, well that can be ignored, and we'll just keep quoting the old numbers.