Budget

CBO Knows?

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Over at Ezra Klein's blog, Dylan Matthews compares the Congressional Budget Office's projected revenues and outlays for the last ten years with the fiscal reality of the last decade. Here's the result:

Notice how the lines don't match?

From this, Matthews draws the following conclusion:

The discrepancy here does not prove that the CBO is wrong or bad at making these kinds of predictions. It just shows that they don't know what Congress is going to do over the course of the decade. For one thing, the outlays estimates assume that discretionary spending will grow at the rate of inflation, which they obviously did not.

But more important, the CBO in 2000 did not know that we were going to invade and occupy two foreign countries. They did not know two major tax cuts representing trillions in lost revenue would be passed. They did not know Medicare would start covering prescription drugs.

In other words, the CBO does not know what Congress is going to do, and it does not factor guesses about how Congress might change its policies into its projections. Nor does it have any idea what or how various external events might effect its scores.

Get it? (C)BO knows?

This is what the CBO was getting at with all those caveats about the likelihood of the health care law's Medicare cuts being implemented successfully. And it's one of the major reasons why critics of the health care bill did not take the CBO's projections of the PPACA's deficit effects as proof positive that the law would actually result in a smaller deficit. The CBO's projections are, by nature, tremendously uncertain, especially when dealing with the multi-decade complexities of something like the PPACA (as the CBO noted, the "imprecision" of its second-decade scores for the law reflected an "even greater degree of uncertainty" than the uncertainty of the usual 10-year estimate). And historically, as Matthews' chart shows, there are big gaps between what the CBO projects will happen and reality.

It's not that the analysts at the CBO are bad at their jobs, or biased in some way. To the contrary, every single economist I've spoken to, on both sides of the aisle, vouches for the organization's overall carefulness and competence. Instead, the problem CBO faces is a problem faced by any researcher or scientist attempting to forecast the future, no matter how rigorous and data-driven their methods. As former CBO director Rudolph Penner explained to Congress in 2002, "No one forecasts anything very well. That is true whether one looks at pundits forecasting the course of the war in Afghanistan, demographers forecasting worldwide birth rates, or pollsters forecasting the French presidential election." As for the CBO's projections in specific, Penner's assessment was fairly blunt. "I recently studied the history of errors," he said, "and I would like to submit my results for the record. They are pretty discouraging."

Does this mean that we should simply write off everything the CBO says? Not at all. Given the choice between having the CBO around and getting rid of it, we're far better off with it—especially since it competes with the administration's Office of Management and Budget, and thus helps keep the administration's budgeting somewhat more honest. But let's not buy into the idea that its projections represent anything other than a murky, and frequently mistaken, vision of the future if everything goes more or less as expected.

Lots, lots more on the CBO's history and methodology here.

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  1. That vast gulf between “actual outlays” and “actual revenues” is what call a “Gaping Krugap.”

    1. *two thumbs up* (that’s the old version of “+1”)

    2. I really wish I hadn’t watched that “krugaping” video.

    3. I immediately did a semi-voluntary mental photoshop mashup of Krugman and goatse.

    4. No, the gap is the “Republicans spent like drunk sailors while pissing away trillions on tax cuts” gap.

      1. Budget deficit fiscal year 2006 (The last year Repubs controlled Congress)- $140 billion.

        July 2010 monthly budget deficit- $160 billion.

        Love that “Republican” spending!

  2. Too late. Suckers!

  3. It was all over once they crossed the streams.

  4. Totally couldn’t guess which line was which without consulting the legend. I am shocked and amazed that this is the track record of guesses projections versus reality.

    Shocked and amazed, I say.

  5. This “murkiness” isn’t limited to the public sector. Just as a venture capitalist about projections on revenue he gets from applicants.

    1. Birds and rocks and things|8.27.10 @ 1:04PM|#
      “This “murkiness” isn’t limited to the public sector. Just as a venture capitalist about projections on revenue he gets from applicants.”
      Uh, you ignore a difference about as big as those on the chart: It’s not taxpayer money being risked by a VC.

      1. Successful VC outfits also apply a discount to their prospects’ projections, and are very careful to read the formulations (ie: ‘We expect to grow by 1000% per year because Facebook did even though we make widgets and would have to build 3 new factories a year [not included in outlay projections] to achieve this rate of growth’) for bullshit and wishful thinking; something the CBO is required by their mandate NOT to do.

    2. He’s venturing HIS fucking money, not mine and yours.

  6. “The discrepancy here does not prove that the CBO is wrong or bad at making these kinds of predictions.”

    So what would a graph showing “wrong or bad” predictions look like?

    1. So what would a graph showing “wrong or bad” predictions look like?

      Here is a “bad” prediction…

      I prefer “accurate” predictions like this one from January, 2010.

      Any questions?

      1. I love the second link… That’s the same dude/i> that was McCain’s economic advisor during the campaign-and he now works for Obama!

        Which Team do you think paid for the free blow jobs?

  7. So they are making prodictions based on major factors that are certain to change. I don’t see how this gets any better results than the chimp and dart board method.

    1. We are demonstrably more accurate.

  8. Bo knows this and Bo knows that but Bo don’t know jack, cause Bo can’t rap.

    1. She knows horse racing, though.

  9. Does the political cover that CBO gives to Congress outweigh whatever good they do as a counterweight to OMB?

    It seems like CBO has enough historical data to build in a correction to its predictions going forward:

    “Based on the historical excess of actual spending over projected spending, we are correcting these projections by adding x% per year in excess spending.

    “Based on the historical shortfall of actual revenues over projected revenues, we are correcting these projections by subtracting x% per year in revenue shortfalls.”

    1. It would be hard. There are 4 distinct regions in that graph. And the 6 years before would probably look a LOT more like the projection lines. Look at the starting points. They thought they were being cautious.

    2. “”It seems like CBO has enough historical data to build in a correction to its predictions going forward:””

      You can only make decent predictions if the rules don’t change. Since Obama and this dem congress is notorious for changing the game, I’m not sure if any prediction could be worth a damn.

    3. Megan McArdle reviewed this question a while back. Her answer came to “Sure, they game the system now, but if they weren’t gaming the system they’d be screwing the taxpayer even harder.” She gave some good examples, I had to agree.

      To CBO’s credit, they have done things (to people like Klein’s chagrin) such as saying about the Medicare cuts “we’re scoring them, but we want to point out there is very little chance these will ever actually happen.”

  10. “It just shows that they don’t know what Congress is going to do over the course of the decade.”

    I’ll give them a hint: Spend more money.

  11. “CBO, you don’t know diddly.”

  12. I don’t think this is all bad.
    That chart shows a gap of 10% of the GDP between costs and income. That simply cannot last and right now (looking at the income trace), we are ‘starving the beast’, which is the *only* way expenses will ever come down.

  13. I don’t know….

    But I’m pretty sure I saw that Green Trend Line holding up a racist/birther placard at a Tea Party Rally/’Birth of a Nation’ fanclub meetup.

    Or perhaps that’s just cracker spit in my eye.

  14. I think that that chart was developed in 1999 when everybody assumed that the economy was going to be booming for the rest of eternity.

  15. It appeared on Ezra Klein’s blog.

    This story is a non-story simply because no one can trust anything coming from the Jurnolist crowd.

    It may be true it may not, it may be worse. who knows?

    There are a billion sites and sources that look at this stuff…why on earth would you look at Ezra Klein’s blog version of it?

    1. OK, got any differing data?

    2. I believe that chart is essentially accurate. It really just proves three things that we already knew:

      1) The CBO can’t predict anything with much accuracy.
      2) Tax revenue in America is far more closely tied to the general strength of the economy than the tax rates.
      3) The feds have gone stark raving insane with spending in the last three years.

      1. 3) The feds have gone stark raving insane with spending in the last three 30 years.

        FTFY.

        The Federal Gov’t never spent $1 trillion in a year- until 1979.

        It never spent $2 trillion/yr- until 2001.

        The Fed Gov’t will spend more than $4 trillion/yr in 2011.

        If I can figure a “trend-line”… The Federal Gov’t will be spending approx $9 trillion/yr by 2016.

        Do you really need to see a cool Fucking graphic to accept that we are Dooooomed!?

  16. Sorry, have to do it…

    “…But (c)Bo don’t know Jack, cause (c)Bo can’t rap!..”

    http://www.youtube.com/watch?v=JFZLq6R-ZtM

  17. Things look a little different now when it comes to Murray Rothbard’s influence, though it’s unlikely anyone at National Review will note it?except maybe in the context of an attack on Rep. Ron Paul (R-Texas). The rise of Paul and his loud and enthusiastic and young fan base, which Buckley could not have foreseen (I, who was writing an intellectual history of libertarianism from 1996-2006, also failed to see it coming), contradicts Buckley’s contention that Rothbard’s divisive radical intransigence doomed him to irrelevance.

  18. mark here~~YREFDHFDD

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