Now that the elections are over the focus in Washington is shifting towards the fiscal cliff. As a reminder, these are the tax increases and spending cuts that are a self-imposed slap on the wrist of a Congress that couldn’t come to a better agreement. These cuts are strong enough to get us back into a recession and send the unemployment rate back up above 9%. This is according to the non-partisan Congressional Budget Office.
Instead of focusing on what’s in the fiscal cliff or how it could be averted, let’s ask whether or not we should listen to the CBO. The CBO is supposed to provide estimates and statistics that government can use to frame policy. But only when it’s politically advantageous does anyone question the validity of those estimates. In the case of the fiscal cliff, no one has any reason to question it for political reasons. Perhaps we should question anyone’s ability to make the projections and whether or not they’re useful though.
The CBO would make their projections based on a number of things. For the most part it is based on how much money will be taken out of the economy and the multipliers that were applied to it. For example: if the government spends $1 on defense that dollar gets taxed and $0.75 is spent on wages or something else. This continues to the point of maybe a multiplier of $2. So for every dollar the government doesn’t spend on defense takes $2 out of the economy. The same applies to new taxes which might have been money we would have otherwise spent that will now just help close the deficit. All this is added up and some other numbers factored in and you get the CBO projection.
As charts like this indicate, the CBO and pretty much any other economic forecasting service kind of suck. Back in the early days of the financial crisis, the CBO was one of many to point out how bad the economy would get without a stimulus bill. But even with the stimulus, they were way off. Critics of the stimulus use that to claim the programs didn’t work. That isn’t true. But estimates provide the basis for such claims. In fact, the CBO estimates made it impossible to make the stimulus bigger.
Now we have new estimates for the fiscal cliff. If the CBO is off to such a degree that we make the wrong policy decisions, what is the value of their service? As someone that has as working knowledge of the budgets and economics, I can make the case for still having the data. But not without sounding like an economist. People simply don’t have the appetite for that any more. Economic projections just aren’t reliable enough yet to even bother being shared with the public. We’re barely able to forecast direction with any integrity and nowhere near trajectory.
The problem today is the data is either treated as gospel or trash when it is convenient. That’s not the point of the service so the mandate, or at least publication process, needs to be reexamined. It’s irresponsible for the combination of the government and media to provide data that insiders well understand, but outsiders do not.
So I ask to you the reader, should we care what the CBO says?