The Corner

What Do the Stimulus and Obamacare Have in Common?

The stimulus bill of February 2009 and the health-care bill of March 2010 have something in common: Their adoption rested on seriously faulty budget scores and economic predictions, which their advocates (often the same people in both cases) were willing to believe would materialize.

Take the stimulus for instance. The chart by economists Christina Romer and Jared Bernstein on the impact of the stimulus showed projected unemployment falling with the proposed spending bill while climbing without it — it was a powerful argument for the bill’s passage. So was CEA’s scoring, which projected that the stimulus would create millions of jobs. Those projections and that chart were reproduced over and over again by advocates of the bill. Its opponents (including me) warned that these projections were unlikely to materialize, but the bill still became law.

Today, everyone admits that these projections were wrong. Advocates of the stimulus are quick to offer arguments for why the bill failed to deliver on the promises made by CEA and illustrated by the Romer/Bernstein chart. But the reality is that the public was misled. Whether it was intentional or not doesn’t matter at this point.

Now take President Obama’s health-care law. One of the winning arguments for the law was the score provided by the CBO about how the bill would reduce the deficit by $143 billion over the next ten years — including $86 billion coming from revenue increases thanks to the Community Living Assistance and Support Services (CLASS) Act. Critics of the ACA (like libertarian health-care guru Peter Suderman) pointed out (here and here) that much of the deficit-reduction scoring for this bill was the product of budget gimmicks, that the CLASS Act in particular was not as sound as its proponents claimed, and that the savings therefore would likely not materialize. Yet advocates of the law claimed that this was nonsense, that the law would save money and reduce the deficit, maybe even more than projected by CBO. And the bill passed. 

Yet these predictions were wrong, again. As it turns out, the CLASS Act is unworkable (like Suderman, the Washington Examiner’s Philip Klein, and others predicted) and the administration pulled the plug on Friday. This means that the ACA reduces the deficit over ten years by about $70 billion rather than the $143 billion touted before and after the bill was passed. And this deficit reduction is, of course, conditional on other projected savings in the act (such as the reimbursement cuts) actually materializing. However, as we know, experts like Medicare’s chief actuary have warned repeatedly that these cuts are unlikely to be sustained. The bottom line is that, once again, the public was misled.

The stimulus and the CLASS Act should serve as yet more evidence that budget scores and economic projections must be taken with a grain of salt, if not with extreme skepticism. For one thing, the projections are often wrong because models used by the CBO and others to assess the impact of policies fail to take into consideration the fact that they deal with, you know, actual human beings. What looks good on paper as modeled by a computer can be widely different from what happens in real life. That’s because people react to incentives. People react to changes in policies. In most cases, they react in ways that are unaccounted for in these models. For instance, the stimulus advocates assumed that states would spend the money they received rather than use it to fill their budget gaps. They were wrong. Another reason why these projections rarely materialize is that they overestimate policymakers’ commitment to enforcing budget cuts or unpopular fixes (such as the doc fix). And then, of course, there is the fact that sometimes lawmakers actually know that the policy won’t deliver on their promises but pass the bill anyway, as was the case with the CLASS Act.

How many times do these mistakes have to happen for the public to recognize the unreliability of these projections? How many times will we have to go through the exercise of proving that budget scores and projections are overly optimistic? How long until advocates of policies that look good on paper start doubting their faith in government intervention, whether it’s a stimulus bill, health-care reform, or military intervention?

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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