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.