CBO needs more fans!

June 24th, 2015 at 10:06 am

Though his title veers into hyperbolic clickbait, Howard Gleckman makes an important point in a post this AM, one I’ve made as well. Gleckman argues that in their recent analysis of the impact of repealing the Affordable Care Act on deficits and growth, the budget office was unable to give us a reliable, accurate point estimate.

The problem is that it’s beyond our analytic capability to reliably know the impact of taking a complex policy like the ACA out of a complex economy. Too damn many moving parts in both the economy and the policy. Gleckman correctly notes, for example, that guessing the impact of repeal on health care prices or labor supply within a meaningful range is, if not impossible, near enough that trying to do so will not provide policymakers with useful, usable information. (At least with labor supply, CBO is probably right that repeal would increase it, for one reason by re-instituting job lock; but pinpointing the magnitude over a decade is beyond our skill.)

Gleckman points out that to their credit, the budget office clearly admits their limits in this case (from their report; my bold):

“Although CBO and JCT’s best estimate is that repealing the ACA would increase federal budget deficits by $137 billion over the 2016–2025 period…the effects…could differ, in either direction, from the central estimates…by a sum that exceeds that amount. Thus, the uncertainty is sufficiently great that repealing the ACA could in fact reduce deficits over that period—or could increase deficits by a substantially larger margin than the agencies have estimated.”

In other words, this is case where the degree of uncertainty is such that the forecast may cross zero and end up with a different sign. That’s a big deal for policy makers trying to make sense out of the proposal in question (yes, I know…that assumes fact-based policy making, which is in itself an assertion with a very wide confidence interval).

While I appreciate the text, I think it would be a real advance if the CBO would use “fan graphs” for all of their forecasts. These are figures, like the one below, which explicitly plot the bands of uncertainty around the central forecast.

First, pictures are worth a lot of words, and I don’t care how sophisticated you are, most of us look at a graph with a line going into the future and tend to think of it as more accurate than it usually is. Putting it the fan would counteract that tendency.

Second, there are estimates wherein we can be confident that they will have a consistent sign around a confidence interval. Implementing policy X is likely to lower the deficit, for example, though we can’t be sure by how much. But when the fans cross zero, as they would in this case, that tells us something else we need to know about the uncertainty of this particular forecast.

So I hope you’re listening CBO. If you want more fans, add more fans!

cbo_fan     Source: CBO



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3 comments in reply to "CBO needs more fans!"

  1. Peter K. says:

    A lot depends on the future fiscal-monetary mix and value of the dollar, i.e. macro policy.

    If the Fed decides to raise rates prematurely and on a steeper path than necessary because of a fear of phantom inflation, then the budget outlook will be worse. If we get full employment and tight labor markets then the budget outlook will improve besides much else.

  2. Jill SH says:

    I hadn’t even finished reading the post but that graph sure made me laugh!

    Yes, more fans!! Just to remind us that the future it guess work. Maybe informed guess work, but guess work nonetheless.