All of the sudden there’s a spate of pieces casting a jaundiced eye in the direction of those pristine nerds over at the Congressional Budget Office:
–I weighed in the other day with a critique of their minimum wage job loss estimate; not that they got it wrong, but that their weighting of the evidence looked off to me and others.
I think the problem is actually less with CBO, whose work represents state-of-the-art economic thinking, while largely maintaining a non-partisan rep in a town where that’s really hard to do, and more with the economic thinking itself. There’s a risk of shooting the messenger here. (If you insisted, I’d come up with a different critique: their reports are increasingly impenetrable and difficult to digest; assumptions are increasingly hard to follow–you have to track back through links like a Dan Brown mystery novel; the reports don’t hang together like they used to–at least to my eyes, they increasingly read like a movie script written by a large committee).
Take the finding to which Norris/Krugman object. As far as I can tell, CBO’s just making the conventional assumption that once we’re back to full employment, interest rates will revert to more normal levels. The fact that potential GDP will be lower doesn’t change that result. Norris and Paul reasonably argue that if demand is weak then interest rates will be lower than CBO expects. But CBO doesn’t expect demand to be weak. Their markdown of growth comes from the economy’s supply side. (BTW, I’ve got a piece on this coming out maybe tomorrow on the NYT Economix blog—a call for “reverse hysteresis!”—IKR!—exciting!)
Many other assumptions made by CBO that drive some, particularly on the left, nuts, are again standard issue, textbook economics: the idea that deficits crowd out investment and raise interest rates in expansions, the behavioral reactions to tax changes at the margins (as in their recent ACA analysis), the job loss effect from the minimum wage increase, the assertion of quantifiable outcomes decades away, the “straight-edged projections” that missed the bubbles, followed by the subsequent building of the now lower trend growth into future forecasts (the focus of my piece tomorrow)—all of these represent the current state of knowledge of mainstream economics, which CBO practices quite meticulously.
Thus, the problem is twofold: first, their assumptions (which is to say the state of contemporary economics), and second, their power. It’s the same problem Alan Greenspan had when everyone thought he was the economy’s Maestro. He too was operating from flawed assumptions (and in his case, ideologies) which led him—along with multitudes of others—to miss bubbles inflated by vastly under-priced risk while assuming markets would self-correct.
And he too was considered infallible. You know the old DC joke: the tourist couple goes up to a vendor and asks, “how much does a hot dog cost?” The reply: “whatever CBO says it costs.” (I know—we’re such laugh riots down here…)
Again, not their fault—listen to CBO director Elmendorfer and he’s generally quite straightforward and realistically cautious about the uncertainty of their findings (though I’d encourage them to lean more on ranges and less on point estimates). But once those findings get injected into the fractious politics of the moment, they become immutable truth, and that is both wrong and dangerous, as Karabell points out, for the advancement of useful policy. That’s the Greenspan risk that CBO faces today: when policymakers assign too much credibility to highly uncertain forecasts and projections, the policy process will suffer.
What’s really needed here is a much more realistic skepticism about the ability of economics, as practiced by CBO or anyone else, to accurately forecast trends and behaviors next week, much less ten and twenty years from now (a point estimate of the labor supply reaction to the ACA in 2024??…really??). I don’t expect CBO to change, other than to continue to slowly and carefully evolve along with the economics’ literature. So it’s going to be up to the rest of to read their reports with a big saltshaker close at hand.