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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 756916  
Subject: CBO budget outlooks are not reliable. Date: 10/14/2012 10:31 AM
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Just How Much Should We Trust the Congressional Budget Office?

"A study done by economists Kevin Kliesen and Daniel Thornton published at the start of 2012 found that CBO budget outlooks are not that reliable.

"Using CBO deficit projections over the period 1976-99, we found that the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus,” the duo wrote in the January/February issue of the Federal Reserve Bank of St. Louis Review.

Kliesen and Thorton highlight a key source of the CBO’s deficit projection error:

[W]hen the CBO constructs its baseline projections it cannot – unlike private-sector forecasters – anticipate future changes in fiscal or monetary policy that affect future economic growth, outlays, and revenues. Instead the CBO by law uses what is know as a “current services baseline.” That is, it must assume that existing laws that govern outlays and receipts will prevail over the projection horizon.

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Economist Paul Krugman explained the problem in a blog post for the New York Times:

What you need to realize is that the CBO is the servant of members of Congress, which means that if a Congressman asks it to analyze a plan under certain assumptions, it will do just that — no matter how unrealistic the assumptions may be. CBO will tell you what’s going on, but it will do so deadpan, doing nothing in terms of emphasis or placement to highlight the funny business."

http://www.minyanville.com/business-news/politics-and-regula...

Huh. That's weird. Krugman actually made a good point.
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