My friend Dylan Matthews is about to leave D.C., and he’s written a last Research Desk of the summer as a parting gift. I think Dylan has been doing a terrific job, despite my disagreements with him on a number of issues. After noting that the CBO’s projected revenues and outlay for the 2000s did not reflect actual revenues and outlays, he writes:

The discrepancy here does not prove that the CBO is wrong or bad at making these kinds of predictions. It just shows that they don’t know what Congress is going to do over the course of the decade. For one thing, the outlays estimates assume that discretionary spending will grow at the rate of inflation, which they obviously did not.
But more important, the CBO in 2000 did not know that we were going to invade and occupy two foreign countries. They did not know two major tax cuts representing trillions in lost revenue would be passed. They did not know Medicare would start covering prescription drugs. They definitely did not know that the financial sector would collapse in upon itself, leading to a dramatic drop in revenues and necessitating trillions in spending to fuel a recovery. Policymaking is messy and unpredictable, and those sorts of thing just can’t be factored in ahead of time.

I’m a critic of the Bush tax cuts. I favor a sustainable tax reform that places a heavy emphasis on flatter consumption taxes. But I think Dylan is missing some important parts of the story.

Keith Hennessey, in describing the budget outlook in 2000, writes:

It is true that 10 years ago we had a budget surplus of more than $200 billion, and that CBO projected surpluses “stretching out toward the horizon.” When CBO built its budget baseline for 2001, they had not yet accounted for the bursting of the late 90’s tech stock market bubble and the effect it would have on federal revenues. Like families, businesses, and investors, CBO made a mistake: they projected future revenue growth that was never going to occur. Critics of the Bush Administration hinge their comparative argument on this single mistaken budget projection which in hindsight analysts from both parties acknowledge was wildly inaccurate. [Emphasis added.]

That is not an inexcusable error. But it is an error: the tech bubble wasn’t going to swell capital gains tax revenues forever. Moreover, Dylan writes that the CBO did not know that Medicare would start covering prescription drugs. That is a fair point in that the CBO had no reason to adjust its baseline on that assumption. It is also true, however, that everyone believed that Medicare would start covering prescription drugs as both Republicans and Democrats endorsed expanding Medicare along those lines, as Keith has also explained:

It is also true that President Bush proposed, and in 2003 the Congress passed and President Bush signed into law, a Medicare drug benefit that was not offset by other spending cuts or tax increases. It is true that this benefit significantly increased the already large unfunded liabilities of Medicare.
What the Democratic critics fail to mention is that the Democratic alternative proposal cost significantly more than the Bush proposal and the enacted law. (This predates Mr. Obama’s time in the Senate.)

This shouldn’t let the Bush administration off the hook. It does raise the question of the Democratic alternative: did they want a more expansive and expensive prescription drug entitlement funded by higher taxes? That is an entirely fair view. But let’s be explicit about it.

My Economics 21 colleague Christopher Papagianis writes:

Had government spending grown at just the rate of inflation over this period, the federal government would have run a $414 billion surplus in 2007. Allowing government spending to grow at three times the inflation rate from 2000 to 2002 (as actually occurred) and then slowing spending growth to the rate of inflation thereafter would have resulted in a $250 billion surplus in 2007.

I’m happy to endorse the view that we should not have expanded Medicare without making offsetting spending cuts and that we should have spent more time thinking through the costs and benefits of invading Iraq. But keeping the total tax take in light with the post-war historical average doesn’t seem like a crazy thing to do.

If we tried to keep spending in line with tax revenues, perhaps we’d see a more constructive debate in which liberals and conservatives would debate the relative merits of spending on early childhood education or increasing our military footprint in Central Asia and sub-Saharan Africa, understanding that raising taxes, in the present or in the future (i.e., deficit spending), is not desirable.