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Re: The Perils of Economic Forecasting



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Veronique, many thanks for highlighting the Frankel paper, which deserves a lot of attention. Here’s another quick chart to show the way those perils of forecasting can translate to forecasts about government finances. It compares the projections of federal spending and taxes (and therefore deficits and surpluses) that CBO made in 2000 for the years 2000 to 2010 against the actual levels of deficits or surpluses in that decade.
 

As you see, the contrast is not exactly encouraging about CBO’s ability to project government finances. This of course had to do not only with CBO’s unreasonably rosy projections about economic conditions but also with major changes in law and policy in the course of those years—as spending went up and (at least at the very beginning and end of the decade) revenue went down. That means the fault is not exactly CBO’s, but rather it falls on everyone in Washington who demands and expects reliable fiscal projections and makes plans based on the details of those projections.
 
All of us who think about and work on policy do that, and it’s unavoidable: We have to have some baseline against which to compare different proposals. I certainly use CBO projections all the time, including quite long-range projections. But it’s important to remember now and then that while these projections may serve as a baseline for comparison, they should not be mistaken for reliable predictions, even in the near term.


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