More on CBO and the Limits of Economic Analysis

March 9th, 2014 at 3:58 pm

Jeff Madrick–whose work I’ve always enjoyed and learned from—misinterprets a recent post of mine, perhaps because I wasn’t clear enough in my exposition.

It’s worth revisiting because there are portentous issues embedded in this broader argument.  My piece argued while some recent work by the Congressional Budget Office is certainly worthy of critique (and I linked to one of my own recent critiques), it’s a mistake to shoot the messenger.  The problem is not the CBO, it’s the limits of the type of economic analysis they’re typically called upon to do and the fact that any acknowledgement of those limits gets quickly and totally lost in the mix.

Jeff, on the other hand, thinks CBO itself is at the heart of the problem by continuing to ply incorrect assumptions and not being forthright enough about the limits of their forecasts and predictions.

I am pretty sure I’m right.  Re-staff CBO with a different bunch of the nation’s top economists and their former grad students and the results would be the same.  Yes, if an economist like Dean Baker were directing the agency, then maybe the results would be very different.  But the mandate is for mainstream economic analysis and like it or not, much of mainstream economic analysis is fraught with the problems I mentioned in my original post:

Many other assumptions made by CBO…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—all of these represent the current state of knowledge of mainstream economics, which CBO practices quite meticulously.

Jeff seems to think, perhaps because I wasn’t explicit enough, that I buy these assumptions.  When he writes, “Jared notes that the CBO assumes public spending will crowd out private spending as an example of how it follows textbook economics. That’s right, it does, and often entirely incorrectly” it sounds like he thinks I agree with CBO and the mainstream on that point.

I don’t.  The assumptions I tick through in that ‘graf are all ones I thoroughly question—almost daily on these pages!

As I mentioned—and Madrick correctly dings me for mentioning it in passing when it’s central—CBO should certainly do more to warn their readers about the fragility of their estimates, especially anything that’s numerous years away.  But I dare say that wouldn’t change much.  While sound, cautious economics should lead them to be extremely explicit about the range of plausible outcomes, partisans would just grab the midpoint if it suited them.

Paul Krugman has called 10-year budget forecasts “a particularly boring type of science fiction.”  I’ve stressed that if we are really very hard pressed to estimate the monthly employment numbers without being constantly surprised, what makes us think we can get a bead on the labor supply response to the Affordable Care Act–which is btw changing all the time anyway such that if CBO redid their analysis from a few weeks ago it would give different answers–10 years from now??!!

I conclude here the same way I did last time I wrote about this:

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…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.

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5 comments in reply to "More on CBO and the Limits of Economic Analysis"

  1. Larry Signor says:

    If the CBO did not exist, we would have to create it, if for entertainment purposes alone. Fortune tellers, magicians and mainstream economists are American favorites. Give me Dean Baker any day.

  2. Michael says:

    So what you are arguing is that Economics is basically enthrall to corporate and political interests who have a monetary impulse to a) sustain the economic status quo as being ‘normal’ and b) discredit any contradictory analysis that might reveal them to be emperors without clothes? And like any good anti-organization, they sponsor/buy off economists with positions of power to help promote their economic view of the world, kind of like Intelligent Designers getting their theory into Texas schoolbooks?

    You, and others like you, have seriously got to stop calling these people ‘mainstream economists.’ You can’t discredit bad thinking by giving it legitimacy. Somebody, PLEASE do a Joseph Welch and ask these people “Let us not assassinate this [scientific field any] further…You’ve done enough. Have you no sense of decency…?” In one respect, Mr. Madrick is right. Even if the CBO is simply a product of canned Economic spam, they still need to have their noses rubbed into it. Simply ‘following orders’ (on a academic level) isn’t an excuse to give bad advice.

  3. Tammy says:

    I’m on board with you. I can’t even print your blog out (printer communication problem). Things will work out and thank for the song.

  4. Nathan Kerr says:

    Krugman had no problem (to my recollection) with the Affordable Care Act predictions from the CBO when legislation was going through (unconstitutionally) the Senate and then the House. Besides, even with the CBO numbers pointing to 500,000 jobs losses initially, the added economic impact of real stimulus will re-add those jobs and many more in the long run. Even the Libertarian Ron Unz is on board with that. (read here

  5. Min says:

    I have long pointed out that CBO projections are worthless without error estimates. GIGO! GIGO! GIGO!

    The CBO should follow the example of the Bank of England, which produces fan charts. E. g.,