It’s budget season, and the House and the Senate are working on their respective budget resolutions for FY2010. But according to Congressional Quarterly this morning, “Democrats are wrestling with how to write a budget resolution as they brace for congressional economists to release their assessment of President Obama’s tax and spending proposals.” CQ notes that “Senate Budget Chairman Kent Conrad, D-N.D., said his blueprint will be unsettled until the Congressional Budget Office (CBO) finishes scoring Obama’s proposals.”
Why? Because it’s likely that CBO’s projections of next year GDP growth won’t be as optimistic as the ones advertised in the administration’s budget. That would mean less revenue and bigger deficits. Also, it is possible that CBO will conclude that some of Obama’s new spending programs are more expensive than what was assumed in the budget. CBO could also score Obama’s tax increases or cost-saving policies as bringing less revenue than projected. As Conrad explains “The administration also assumed that a variety of policy changes to Medicare and Medicaid would save the government $316 billion over 10 years, money that would be dedicated to paying for an overhaul of the health care system. CBO may not project those policies as saving as much as the White House budget assumes they would.”
And, if this is the case, then even Democrats will push back on some of the president’s big spending projects.
While this sounds like good news, I would like us to be wary of using bad analysis, even when it generates the right conclusion. I do it and I know I am not alone. That’s because it is powerful to write “the stimulus package won’t work. Even the CBO says that in the long run it won’t work.” (for me doing this exactly this, read that). The main problem with CBO is that its model is Keynesian in the short-run, and assumes deficits everywhere and all the time in the long-run. For instance, the CBO model assumes that stimulus spending for unemployment-reduction purposes does create the maximum number of jobs-per-dollar-of-increase in the federal deficit before it returns to large deficits. That means that their GDP projection, while not as misleading as the administration’s, will still be overly optimistic in the short-run.
But what’s wrong with that if it helps us make our point today? We might regret it in the future. For instance, the next time CBO has to score the effect of a proposed tax cut for the same purpose, it is likely to say that a tax cut is very inefficient because some of that tax cut might be saved. In CBO models, the number of jobs created by a tax cut is always much less than from a similarly-sized spending program. The question is: Can we praise them today, criticize them tomorrow, and still be credible?
— Veronique de Rugy is an economist at the Mercatus Center at George Mason University.