US Deficit Projections: Is the CBO on Drugs?

♠ Posted by Emmanuel in at 8/25/2009 04:13:00 PM
There is an interesting political economy of budget projections alive and well at the heart of American politics. In days gone by, it was more or less the sole responsibility of the executive to prepare budget forecasts. Hence, the Office of Management Budget (OMB) was tasked with preparing forecasts under White House's auspices. However, congressmen in the early Seventies gradually became wary of a steady diet of White House numbers that were--how do I put this--massaged and frequently underestimated federal budget shortfalls. Hence, the Congressional Budget Office (CBO) came into existence in 1975. The OMB was tasked with giving a less partial budget picture in second-guessing the OMB.

It was thus no surprise when, early in 2009, the CBO came out with a far larger ten-year deficit forecast ($9.3 trillion) than the OMB ($7 trillion) during the February/March period when the 2010 budget was being debated. However, imagine my surprise today after finding out that the revised 2010-2019 deficit midyear estimates offered by the OMB ($9.05 trillion) and CBO ($7.14 trillion) switched places. Yes, the White House now predicts a smaller 10-year deficit than the Congressional watchdog.

A deeper look at these estimates, however, reveals shortcomings in the CBO estimates. The CBO estimates make rather unrealistic assumptions that Alternative Minimum Tax (AMT) loopholes will be closed and that Bush's tax cuts will not expire in 2010. Straight from the CBO horse's mouth:
Those projections generally follow the rules, originally established in law, that have traditionally governed baseline projections. However, some of the resulting assumptions may underestimate potential deficits. Because they presume no changes in current tax laws, the projections incorporate increases in revenues that would result from the expiration of tax reductions enacted earlier in this decade and provisions that have kept the alternative minimum tax (AMT) from affecting many more taxpayers.
Right there you have a damning statement about the realism of CBO assumptions coming from, well, the CBO. However, continuing to read the CBO entry reveals pretty wild forecasts for US growth over the next few years:
Specifically, CBO estimates positive economic growth during the second half of calendar year 2009, at an annual rate of 1.6 percent, following declines at an annual rate of 6.4 percent in the first quarter and 1.0 percent in the second quarter. In CBO’s forecast, real GDP grows by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010, by 3.8 percent in 2011, and by an average of 4.5 percent in 2012 and 2013.
!!!??? I think it's more likely that we'll find Bigfoot and Sasquatch going on a joyride atop the Loch Ness Monster while Kraken swam alongside in the next ten years than we are to see these sorts of US growth figures. As I always like to say, only a minimum of investigative sleuthing can quickly reveal flaws in what the headlines (or blogs for that matter) are saying. Try it for yourselves; it's good for you. Also consider that there is no question made of foreigners' unlimited willingness to buy US IOUs in these projections.

As for the CBO, I offer my regular routine: this is your brain [I show viewers an egg]. This is your brain on whatever the CBO is smoking. Any questions?