CBO Knows?


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.