UPDATED 3/23/2013
“GIGO” is a bit of an overstatement. The issue is the impact of flawed assumptions on economic forecasts and political actions which come about as the result of flawed forecasts.
The pros and cons of budget proposals are often argued on the basis of short, medium, and long term economic forecasts. For example, the respective parties like to show charts indicating what they believe will happen to the national debt five, ten, twenty years down the road if their budget proposal is enacted. The Congressional Budget Office (CBO) generally acts as the neutral arbiter of these forecasts. Basically, the owner of the budget plan gives the CBO the proposed tax laws, presumed spending activity, etc. The CBO then integrates that information with their own numbers and produces an economic forecast. I’ve always trusted the CBO to be neutral – and I still do. However, just because an entity is politically neutral doesn’t mean its models are good. The following is a story of apparent flaws in the CBO’s forecasting approach. Evidence suggests the flaws are significant. I think the extent to which the shortcomings of the CBO’s methodology were responsible for the godawful Fiscal Cliff deal is debatable but it’s a concern to be taken very seriously. (What’s the saying: “Those who do not remember history are doomed to repeat it.”)
James Kwak on the issue with the CBO’s forecasting methodologies:
Ezra Klein [on March 13] highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”
The basic problem is that the alternative fiscal scenario simply assumes, without further support, that laws will mysteriously change in ways that reduce tax revenue and increase spending (relative to current law). As I put it a while ago,
“ The definitive report on our long-term budget gap implicitly assumes that we do nothing about that budget gap — that we keep cutting taxes and blocking spending cuts at every opportunity.”
Or, in other words, it assumes that Republicans win every fight over taxes and Democrats win every fight over spending.
…
It’s almost as if, as Congress does things that reduce the long-term national debt (like the Budget Control Act of 2011, which may be a stupid bill, but did reduce the debt under current law), the CBO moves the goalposts further away so the problem remains the same size…
As Klein says,
“Because everyone was used to a fake baseline that assumed their full extension, a supposedly deficit-obsessed Congress managed to resolve the so-called ‘fiscal cliff’ in January by passing a huge tax cut that added trillions to deficits while calling it, amazingly, a fiscally responsible tax increase.”
If only more people had pointed that out beforehand, maybe Congress wouldn’t have been able to get away with that one.
The shortcomings of the CBO’s “alternative fiscal scenario” are documented by Michael Linden and Sasha Post in The United States’ Long-Term Debt Problem Isn’t as Bad as You Thought. Linden and Post are not out to paint a rosy picture. Their objective is produce more reasonable forecasts. In this case the news is good – relatively speaking.