James K. Galbraith’s short piece in The Washington Post Outlook section proposed that we ought to toss the Congressional Budget Office (CBO). I couldn’t agree more. This post is a commentary intended to amplify the argument.
Jamie begins with:
”The forecasts of the Congressional Budget Office are holy writ in Washington, and they fuel scary headlines about an impending federal debt disaster. This is a shame, because the CBO’s projections are indefensible, internally inconsistent and economically impossible.”
And, I’d add, the CBO projections, given the way they are presented, focusing on only one point of view on projecting budgetary outcomes, along with the CBO’s primary charge of analyzing the budgetary impact of legislation, indicates that the CBO’s function is to propagandize for the view that budgetary deficits, the national debt, and the debt-to-GDP ratio, are important measures of fiscal sustainability in the American Economy. If they were to project other than dire future results, their function would become de-valued. So, their institutional interest is to exaggerate the down-side continuously and to continually imply that the United States cannot run continuous deficits without dire consequences, in spite of the fact that except for a very few years in its history the US Government has run deficits of varying size. Jamie goes on:
”The CBO predicts that unemployment will fall to near 5 percent by 2014 and stay there. It also expects a rapid recovery in the next few years, followed by a steady 2.4 percent GDP growth rate thereafter. Inflation is expected to stay below 2 percent indefinitely.
”But alongside these rosy numbers, the CBO also projects that short-term interest rates will increase from less than 0.2 percent now to 4 percent in 2014 (and higher later), while rising health-care costs will drive Medicare expenditures ever higher. These figures imply that interest payments on the federal debt will by 2020 "rival the defense budget," as Clinton-era Treasury official Roger Altman recently wrote in the Financial Times.”
In making such a projection for interest rates, also, CBO makes a political assumption. Specifically, that Treasury will continue to issue debt instruments in rough proportion to the gap between Federal spending and tax revenues. If it doesn’t make this choice, however, or makes it only a small proportion of the time, short-term interest rates will fall to nearly zero, as they have in Japan, there will little or no “burden of Federal debt,” and the CBP projection will be invalidated. So, the projection of 4% of GDP as interest costs is a political projection even more than an economic one, going beyond the supposed expertise of CBO, and as such it is something that the Government and a knowledgeable citizenry can do something about about. Jamie goes on to question the projection on economic grounds, as well:
”These things cannot happen together. If the CBO’s happy growth scenario is right, with low inflation and low unemployment, why would short-term interest rates rise? Conversely, if the CBO’s assumptions about health-care costs and interest rates are correct, how can inflation stay low? Ballooning interest payments and health-care spending would spur the economy to full employment and drive up prices — but also slow the rise in debt as a proportion of the nation’s gross domestic product.”
That is, the CBO’s projections cannot be based on a coherent economic model and simulations. If they were, the contradictions in projections that Jamie points to would not be possible. So, now Jamie gets to the most important point:
”So where does the CBO get its numbers? That miraculous return to full employment and those higher interest rates both come from thin air. More likely, given the passivity of today’s banks, high unemployment and low interest rates will linger, unless the government moves on a real jobs program. And that won’t happen, because of fear-mongering about the debt — buttressed by the CBO.”
Thin air, indeed, and there is little basis for them in history. At the beginning of April I discussed the CBO projections in posts on deficit hawk columns by Fred Hiatt and Robert Samuelson, also appearing in the Post. In my earlier discussion of Hiatt’s latest Hooverite contribution to the annals of deficit hawkism, I pointed out that the CBO projections were very sensitive to small changes in assumptions. And in particular, to the assumption that GDP would grow only by 1.55 between 2010 and 2020, and also the assumption that interest rates on the public debt would rise from .023 to ,045 over the period of that decade.
Tables One and Two from my post on Hiatt, show the changes that result if one assumes that the growth ratio will be more in line with historical levels, at 2.0, and also that the Government takes steps to ensure that interest rates stay constant at .023. Those two changes result in a totally different picture in which the absolute value of the national debt increases from $9.2 Trillion in 2010 to $10.7 Trillion in 2020, and the debt to GDP ratio declines from 69% in 2010 to 37% in 2020.
Now, one can certainly argue over whether my assumptions are reasonable to use in projecting the next decade’s economic performance, as I’ve done in the tables. However, three things are clear. First, CBO, along with everyone else, is very bad at projecting actual GDP growth out more than a couple of years, and as its projections get into the second half of a decade you can forget about any kind of accuracy in their GDP or revenue or cost projections. They are pure fiction. If you doubt that look at their record. Second, as Jamie says, CBO is certainly on insecure ground in predicting the rise of interest rates on Federal debt. In addition to his reasoning, to see this all you have to do is look at the Japanese example, where national debt much higher than the United States co-exists with nearly zero interest rates on debt instruments. So, there is plenty of reason to think that the CBO projections of interest costs and opinions based on them are alarmist in the extreme. And third, as Jamie says, CBOs assumptions come from thin air as do my own (though, as I’ve said, they, at least, are more in line with history than CBOs). But if both of these things are true, then why do we have any more reason to rely on CBOs projections than on the ones I offer in these tables?
The answer is that there is no more reason to rely on them. There is only politics and neo-liberal ideology, along with the customs of Congress and the political culture of Washington, that makes the CBO projections more weighty than mine. It is the pure political weight of authority, unencumbered by reason or analysis that is at issue here. It is an authority that is no way based on evidence, facts, or good theory. It is an authority that is based on and employs pure propaganda and not economic science to maintain its influence and to continue to keep us in thrall to the deficit hawks. As Jamie says:
”If we’d had a CBO in the 1930s, Franklin Roosevelt could never have gotten the New Deal off the ground.”
He is dead right about that. And if we want to get our desperately-needed New Deal 2.0 off the ground now, we will have to “toss” the CBO, and replace it with a Congressional Impact Office (CIO) whose job would be to assess the probable impact of legislation on our society, economy, environment, and, more generally, on the public purpose, rather than its impact on deficits, debts, and debt-to-GDP ratios, which are quite meaningless in an economy whose Government is sovereign in its own currency and therefore has no solvency risk regardless of the size the national debt.