Garbage In, Garbage Out: Why Real Revenue Will Lag CBO Forecasts
For decades, three fundamental certainties of Uncle Sam’s finances have been that:
- Tax collections resulting from tax increases are always less than what the Congressional Budget Office (CBO) predicts.
- Tax collections resulting from across-the-board and investment-related tax cuts always exceed CBO predictions.
- The annual growth rate of federal spending always exceeds inflation.
Perhaps the excesses of the Obama administration and the rise of the tea party movement will finally do something about Item 3. But for the moment, let’s look at Items 1 and 2. To do that requires a closer look at the CBO.
First, let me be clear that what follows isn’t necessarily a knock on the people who work there. From all appearances, the folks at the agency, which has been particularly beleaguered since Barack Obama took office, do their jobs professionally and effectively. Despite apparent attempts by the administration to put pressure on the CBO and CBO Director Doug Elmendorf — including inappropriately summoning Elmendorf to the White House last summer (he reports to Congress, not the executive branch) — I haven’t seen any indication that CBO has twisted its data, projections, or reports to favor any predetermined conclusion on its own (the key words are “on its own,” which I’ll explain shortly).
But the CBO has three problems. The first is common to any financial forecasting, which is that it’s about as predictable as the weather. There are simply too many variables that are beyond anyone’s control. Assumptions that appear reasonable now often look downright silly in retrospect, but that’s the nature of the beast. Despite this obvious shortcoming, establishment media reporters all too often treat CBO projections — especially the ones containing conclusions that they like — as if they have a special kind of clairvoyance. Katie Couric at CBS News described the CBO’s ObamaCare report released a few days before the legislation’s passage as having a “certified price tag.” That statement by Couric is certifiable.
A second and more serious problem is that politicians are more frequently and brazenly telling CBO what to assume. From what I can tell, as long as these dictated assumptions aren’t completely ridiculous, CBO has to use them. This problem reared its ugly head during the run-up to ObamaCare’s passage in the House, and the extent to which it forced a preordained conclusion is probably unprecedented. Elmendorf & Co. were ordered to use a set of assumptions that led it to “conclude” that Medicare spending growth will trail its historical average by a couple of percentage points. That conclusion runs counter to over four decades of history, and in a 10-year projection probably understated total future costs by hundreds of billions of dollars. CBO qualified its report as much as it could, but it could not change the, ahem, “certified” numbers.
As long as Keynesian economic theory continues to rule the roost in DC, I don’t believe the powers that be will recognize the peril they have wrought in their haste.
Do you mean Keynesian economics or Kenyan? Our Dear Leader seems determined to drive this country to Third World status.
Another reason revenue will fall is reflected in an ‘index’ that the government does not even track!
Businesses to small for the government to take notice of are failing or failing to form.
The author argues that since there is not a universal agreement as to how much tax changes affect economic behavior, we should just stay with the assumption that tax changes don’t affect economic behavior. In other words, since we can’t agree what the perfect answer is, we should just stick with the worst one.
Past experience with tax changes has shown the rough outlines of how the economy responds to changes in tax rates. It shouldn’t be hard to come up with a minimum factor that a large majority of economists could agree to. Then over time, refine that number.
As to the CBO losing credibility if not everyone agrees with the basis for their projections? Heck, the CBO has no credibility now. Not with those who have any knowledge of economics.
#3 Mark, I’m not saying that dynamics shouldn’t be part of the discussion, just that CBO shouldn’t be roped into predicting the degree of dynamism — unless you think an agreed-upon minimum factor can be arrived at. I don’t think it can. If it can be shown otherwise, I’m open to seeing it.
Politicians who believe in supply-side econ need to make the case, either on their own or with the help of the think tanks. If they want to hang a number or percentage of the dynamic difference, they’re free to do so. If they end up being right over time, they’ll get more respect from the voters (and hostility from Keynesians, but they get that already).
Depends on what you mean by “agreed upon”. If it means 100% consensus, then that will never happen. Then again, we don’t have a 100% consensus that the CBO should stick with the static model either. I do believe that there is a consensus that the economy is dynamic, in that it responds to changes in the tax code. It shouldn’t be hard to find a number at which 90% of economists would be willing to say that the dynamic change in tax rates would be “at least this much”.
The goal is not perfection, but a number that is at least marginally less imperfect than the static model.
acworth, I think A.M. meant Kenyanesian.
I would be so bold to say that in the entire history of this country there has NEVER been a government project that didn’t cost more than predicted. Obama’s illusions of health care grandeur for all will take us to the brink of bankruptcy, and probably over the cliff.
Fortunately, the U.S. has survived nincompoop Presidents before, and might this time. However, all the signs of failure are present: high unemployment, a bigger and ever-expanding tax burden, and a struggling housing and auto market. Combined with Obama’s plan to relegate us to third world status, our only hope is the hardworking, decent, honest American people. If they haven’t already, they will catch on to Obama’s antics, and reject them soundly. Doug Schoen, a Democratic pollster says the election results in November will be a unmistakable message from the voters.
As long is no one is hiring, who is going to pay all of these taxes? Unemployed people don’t buy things and they don’t pay taxes.
Aren’t you supposed to always say “non-partisan” CBO? The admin / congress are at war with reality, and so things are continually worse / less / higher… than expected.
It only stands to reason that a static world is easier to define for people of lesser intelligence, such as Congress, bureaucrats…
In the pre-scientific days before the Enlightenment, all models were based on a static, unchanging world. At least those folks had an excuse; today, there is none.
The classic problem with static analysis was exposed back in the 1980s. A Republican in Congress asked the CBO to determine the tax revenues that placing a 100% tax on income over $100,000/year would yield. The analysis stated that it would yield “X” dollars on Year 1, and that revenues would increase by at a 5% compounded rate due to cost of living raises given to those making over $100K annually would be receiving — ignoring the basic fact that once you hit the 100% bracket, you had no incentive to ask for a raise of any kind, and that corporations had less than zero motivation to pay such raises. (After all, salaries reduce profits, so if increasing an employee’s salary provides no benefit to the employee, why reduce profits?)
The CBO has decades of reliable data to use to predict non-static behavior changes. Yes, prior performance does not guarentee future behavior but the CBO knows it is NOT STATIC.
What the CBO can and should do it point to past examples and say something like, “Tax increases on high earners have show an x change in behavior in the past” at the end of their static analysis.
They don’t have to predict exactly what will happen but they should be allowed to point out that …
1) tax increases do not raise as much tax as the static analysis predicts
2) government spending does not keep pace with inflation as the static analysis predicts
The CBO is being used and should not allow that to happen. The longer they do so the less they will be believed as a non-partisan referee … (they may have already past the point of believability)
“I don’t think it’s possible with any degree of precision, and it would therefore be a mistake to allow CBO to try. While static analysis is far less than perfect, it can at least be calculated, defended, and understood. Any attempt to apply dynamic analysis would very quickly erode CBO’s hard currency of credibility even more quickly than the mandated assumptions problem previously noted.”
They should do a dual report. What static analysis shows would happen, compared to what dynamic analysis shows would happen. They keep their credibility, and can spend some time working on their dynamic models.
“I don’t think it’s possible with any degree of precision, and it would therefore be a mistake to allow CBO to try. While static analysis is far less than perfect, it can at least be calculated, defended, and understood.”
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For some reason, this argument reminds me of the story of the drunk who was looking for his keys under the lamp post.