Live By the CBO's Rules, Die By the CBO's Rules

The Washington Post's Suzy Khimm has a helpful piece explaining why the Congressional Budget Office matters so much in legislative spending battles. The bottom line? The CBO has proven willing to deliver unhelpful news to both parties, regardless of who's running the agency. Because the CBO doesn't make policy recommendations, and because it has managed to stick to a consistent set of rules and stay above the partisan fray, frequently serving as a check on the rosy estimates offered by White House budgeters, it's become one of the most respected institutions in Washington politics. 

That's more or less as it should be: A Congress with consistent, independent budget estimates is better than one without; imagine how easy it would be to overspend if there were no legislative price tags. And the more consistent, conservative (in the risk-averse sense), and rule driven the budget-scoring process, the better.

But the rules, while important, can still create problems. Congress critters frequently like to exploit that respect by gaming the scoring rules and portraying the agency's estimates and projections as certainties. That's what happened with the health care bill. As former CBO director Douglas Holtz-Eakin told me, "Congress used CBO to get the score it wanted. I get that. I ran the CBO. They used me too." And, as Holtz-Eakin writes in Reuters this morning, those rules have helped make it easy to pass legislation that turns the federal government into a 10-figure lender, because they require the CBO to assume they'll earn back big bucks:

Budget law requires the Congressional Budget Office (CBO) to assume that loans made directly by the government earn huge profits, with virtually no risk that such estimates could be wrong.  As a former CBO Director, it is easy for me to point out that most of the governments financial transactions are fraught with risk – the support of Fannie Mae and Freddie Mac being the prime examples that came back to haunt the taxpayer.  So it is a paper fantasy that the federal government will surely recoup more money than it lends out.  If a bank were to use the same accounting, the Securities and Exchange Commission would charge them with overstating their earnings and throw the book at them.  Congress gets to call these phantom profits "savings."

It's not that the budget analysts at CBO are unaware of this either:

CBO understands the pitfalls ,and has told Congress that in the two largest federal lending programs – federal direct student lending and housing loans made by the Federal Housing Authority (FHA) – the estimates ignore real-world risks and put taxpayers on the hook for huge inevitable future shortfalls. Worse yet, Congress spends the fictional "savings" the day legislation is passed, while leaving unsuspecting taxpayers to pick up the tab down the road.

But CBO's clear caveats haven't stopped Congress from turning the federal government into a high-dollar lender:

Consider student loans.  Armed with a CBO projection of $68 billion in taxpayer "savings" from establishing the Department of Education as a student loan monopoly, Congress and the President drastically increased the government's role in delivering student aid. Secretary of Education Arne Duncan has a tough enough job as head of U.S. education efforts.  Why ask him to also be a banker? Nobody could perform both roles well.

It gets worse.  Congress and the President turned around and spent the so-called "savings" that have no guarantee of materializing.

Read "The Gatekeeper," my January 2010 feature on the CBO's history and development, here.