Patrick wrote yesterday about the WSJ editors’ call to abolish the CBO. Their argument is that the CBO has a built-in Democratic bias:

The point isn’t that CBO’s economists are dishonest or part of a conspiracy. The problem is that they have been operating for decades under liberal principles embedded in Democratic legislation. As another example, thanks to the Federal Credit Reform Act of 1990, CBO must use accounting methods that even the CBO admits are bogus when evaluating federal student loans, the Export-Import Bank, and other Washington subsidy programs.

The reference to the Federal Credit Reform Act (FCRA) is odd for a couple of reasons. First, as Patrick points out, the main accounting change made by the FCRA was a bipartisan step toward more budgetary transparency. It wasn’t a liberal coup. Second, the controversial portion of the FCRA — the part that conservatives don’t like — has been actively opposed by the CBO for decades. When the WSJ writes about “accounting methods that even the CBO admits are bogus,” it is dramatically minimizing the CBO’s role in the movement to reform the FCRA.

A little history: Before FCRA was passed in 1990, federal loans were accounted for on a “cash” basis, meaning all disbursals, repayments, fees, etc. did not affect the budget until the year they occurred. Politicians had learned to game the system by favoring loan terms that would back-load costs. So FCRA created an “accrual” system, in which all projected costs and benefits would be counted against the budget in the loan’s origination year. Both parties consider accrual accounting more transparent.

The controversial aspect of FCRA was how to discount the future revenue streams. Republicans wanted to use market interest rates (which would incorporate a cost for uncertainty in the projections), while Democrats wanted to use the rate on Treasury bonds (leaving out the cost of uncertainty). As a matter of financial economics, Republicans were correct, but Democrats won the political argument in 1990. Ever since then, advocates of “fair value” accounting have been pushing Congress to modify the FCRA to require market discount rates.

Here’s where the WSJ’s argument breaks down: By far the most vocal and principled advocate of fair-value accounting has been the CBO itself. It has gone out of its way to publish fair-value estimates even when the law does not require it. Without the CBO, conservatives would not have the data to show, for example, that there is no federal student loan “profit.” The CBO is also the only major organization to be consistent in its support for fair-value. Although Republicans are generally in favor and Democrats are generally opposed, the parties have periodically switched positions on fair-value depending on the program in question.

From my perspective on the fair-value story, the CBO is the hero, and the politicians on both sides are the villains. So let’s continue to reform the budget process, but don’t abolish the CBO. The last thing we want is accounting back in the hands of the villains.