Tag: congressional budget office

More Keynesian Primitivism from the Congressional Budget Office

I never watched That ’70s Show, but according to Wikipedia, the comedy program “addressed social issues of the 1970s.”

Assuming that’s true, they need a sequel that addresses economic issues of the 1970s. And the star of the program could be the Congressional Budget Office, a Capitol Hill bureaucracy that apparently still believes - notwithstanding all the evidence of recent decades - in the primitive Keynesian view that a larger burden of government spending is somehow good for economic growth and job creation.

I’ve previously written about CBO’s fairy-tale views on fiscal policy, but wondered whether a new GOP-appointed director would make a difference. And I thought there were signs of progress in CBO’s recent analysis of the economic impact of Obamacare.

But the bureaucracy just released its estimates of what would happen if the spending caps in the Budget Control Act (BCA) were eviscerated to enable more federal spending. And CBO’s analysis was such a throwback to the 1970s that it should have been released by a guy in a leisure suit driving a Ford Pinto blaring disco music.

America’s Greek Fiscal Future

Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Chairmen of House and Senate Budget Committees Propose Good Fiscal Frameworks, Particularly Compared to Obama’s Spendthrift Plan

Earlier this year, President Obama proposed a budget that would impose new taxes and add a couple of trillion dollars to the burden of government spending over the next 10 years.

The Republican Chairmen of the House and Senate Budget Committees have now weighed in. You can read the details of the House proposal by clicking here and the Senate proposal by clicking here, but the two plans are broadly similar (though the Senate is a bit vaguer on how to implement spending restraint, as I wrote a couple of days ago).

So are any of these plans good, or at least acceptable? Do any of them satisfy my Golden Rule?

Here’s a chart showing what will happen to spending over the next 10 years, based on the House and Senate GOP plans, as well as the budget proposed by President Obama.

Keep in mind, as you look at these numbers, that economy is projected to expand, in nominal terms, by an average of about 4.3 percent annually.

The most relevant data is that the Republican Chairmen want spending to climb by about $1.4 trillion over the next decade (annual spending increases averaging about 3.3 percent per year), while Obama wants spending to jump by about $2.4 trillion over the same period (with annual spending climbing by an average of almost 5.1 percent per year).

Why Do Some Advocates of Small Government Want to Keep a Democrat Appointee at CBO?

Since I’ve accused the Congressional Budget Office of “witch doctor economics and gypsy forecasting,” it’s obvious I’m not a big fan of the organization’s approach to fiscal analysis.

I’ve even argued that Republicans shouldn’t cite CBO when the bureaucrats reach correct conclusions on policy (at least when such findings are based on bad Keynesian methodology).

So nobody should be surprised that I think the incoming Republican majority should install new leadership at CBO (and the Joint Committee on Taxation as well).

So why, then, are some advocates of smaller government - such as Greg Mankiw, Keith Hennessey, Alan Viard, and Michael Strain - arguing that Republicans should keep the current Director, Doug Elmendorf, who was appointed by the Democrats back in 2009?

Before answering that question, let’s look at some of what was written today for the Washington Post’s Wonkblog.

Immigration Illusions Part One: “Average Wages” Severely Muddled

The Senate immigration bill would ease quotas on legal immigration (particularly for highly-skilled and farm workers), and also allow those now here unlawfully to apply for a green card after ten years if they pay a fine and back taxes.  In an effort to defend our current tight but leaky immigration quotas, a few legislators and commentators seized on the first half of a sentence in the Congressional Budget Office report on this bill:  “CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023… under the legislation than under current law.”  The CBO goes on to predict average wages would be “0.5 percent higher in 2033” (roughly in line with academic studies).  But the CBO cannot possibly predict such data with any precision for a year ahead, much less 10 or 20.  The larger problem is a common yet severe misunderstanding of what “average wage” really means.

If the Senate bill were enacted, claims Alabama Republican Senator Jeff Sessions, “the wages of U.S. workers – which should be growing – will instead decline… It would be the biggest setback for poor and middle-class Americans of any legislation Congress has considered in decades.” Indeed, if it were to pass, he added, “the wages of American workers will fall for the next 12 years. They will be lower than inflation rates.”

This is quite mistaken.  The CBO never said wages of U.S. workers would fall for even one year, much less twelve, nor did the CBO claim wage gains might be “lower than inflation rates.” All the CBO did was to predict that average nominal wages might end up one-tenth of one percent (0.1%) lower in 2023 than they would be if legal immigration remained as restrictive as it is under current law. If the average wage would otherwise have risen to $45 an hour in 2023, for example, it would instead turn out to be just $44.996 with the Senate bill.

Under the current law baseline, the CBO projects that the employment cost index would rise by 3.7 percent per year from 2014 to 2023, while prices would rise by only 2 percent. That means real compensation (the projection includes benefits, not wages alone) is projected to rise by 1.7 percent a year over the next decade, with or without immigration reform.  

If you add up all the yearly increases, the estimated cumulative rise in worker compensation would be 48.7 percent from 2014 to 2023 under current law, or 48.6 percent − 0.1 percent lower − with the Senate immigration bill.  The difference is doubly insignificant, because CBO ten-year projections are no better than throwing darts.  But for a U.S. Senator to misidentify such as trivial 0.1 percent difference over 12 years as a 12-year spell of falling wages, and for Fox News and others to report that error as though it had substance, involves monumental misunderstanding.  

Food Stamps and the House Farm Bill

Debate on the House Agriculture Committee’s version of the next farm bill will begin in the Republican-controlled chamber in June. One of the most contentious issues will be spending on the Supplemental Nutrition Assistance Program (SNAP, a.k.a, food stamps). The House Ag bill would cut SNAP spending by $20.5 billion over 10 years versus the Congressional Budget Office’s baseline. That’s too much for Democrats and it might be too little for conservative Republicans. 

Earlier in the week I wrote that the federal government should not administer or fund anti-poverty programs. Unfortunately, both Republicans and Democrats support big government so that isn’t an option. So let’s put the proposed cuts in food stamps in perspective.

The first chart shows the dramatic increase in inflation-adjusted SNAP spending since 2000. (See here for a quick background on what caused SNAP spending to more than triple since 2000).


The second chart shows the projected amount of spending under the House Ag bill versus the CBO’s baseline. Sum up the difference and you get the $20.5 billion over 10 years in cuts. On an annualized basis, it becomes clear that we’re hardly talking about major cuts to the food stamps program. Moreover, as the first chart shows, spending would remain near the elevated levels of recent years.


CBO’s Tax Expenditure Report Uses Wrong Benchmark, Overstates Loopholes

As a long-time advocate of tax reform, I’m not a fan of distortionary loopholes in the tax code. Ideally, we would junk the 74,000-page internal revenue code and replace it with a simple and fair flat tax - meaning one low rate, no double taxation, and no favoritism.*

The right kind of tax reform would generate more growth and also reduce corruption in Washington. Politicians no longer would have the ability to create special tax breaks for well-connected contributors.

But we won’t get to the right destination if we have the wrong map, and this is why a new report about “tax expenditures” from the Congressional Budget Office is so disappointing.

As you can see from this excerpted table, CBO makes the same mistake as the Tax Policy Center and assumes that there should be double taxation of income that is saved and invested. As such, they list IRAs and 401(k)s as tax expenditures, even though those provisions merely enable people to avoid being double-taxed.

Likewise, the CBO report assumes that there should be double taxation of dividends and capital gains, so provisions to guard against such destructive policies also are listed as tax expenditures.

CBO Tax Expenditure List