The growing significance of federal budget politics inthe American political dialogue cannot be dismissed. Thesums involved are fairly described as staggering and willlikely have a major impact on the performance of the Americaneconomy. Consequently, budget policies have become a topic ofconsiderable concern. Supply-side economists commanded national attention when they questioned the revenue (tax-raising)policies of the federal government, which they say pose aserious threat to economic prosperity. Many of their critics, in turn, point to potentially disastrous effects offederal deficits running into the hundreds of billions ofdollars. Special interest groups with a major stake in someaspect of government outlays voice vigorous opinions on thealleged shift in federal priorities from social services todefense with some of the partisans warning of dire consequences should the shift continue and others of dire consequencesshould it be checked.
The Reagan administration has helped force budget politics to the top of the American political agenda with itsstated determination to check a number of fiscal trends whichhave been gaining momentum for at least a decade. Less appreciated, perhaps, but no less significant than the new administration in focusing attention on the federal budget is the cumbersome congressional budget process itself. It ensures thatbudget politics consume an inordinately large portion of eachcongressional session to the inevitable exclusion of manyother issues.
One important aspect of the federal budget that is frequently overlooked, however, is the reliability of forecastsof major budget components such as the deficit, outlays andreceipts, Gross National Product (GNP), unemployment, andinflation. In examining previous forecasts on these economicvariables in federal budgets between 1971 and 1982, it isevident that the forecasters' records have been very poor,that many indicators such as GNP and unemployment are seriously deficient as mirrors of economic reality, and that theuncritical acceptance of aggregate budget figures by the massmedia, policymakers, and citizens alike is wholly unwarranted.
Aside, perhaps, from compiling the historical tables inorder to monitor the results of previous economic forecastsused in the budget, much of the following analysis is notoriginal. Academic economists as well as economists in thefederal agencies who compile the data making up each of theaggregates under discussion regularly point to their deficiencies. Most opine that these deficiencies can be overcome intime with more complete statistical information and greaterconceptual refinement. Others are not sure that it will everbe possible to make the aggregates accurately reflect economicreality.
As an academic pursuit, the efforts to quantify data andmake predictions may be unexceptionable. Serious errors inacademic pursuits often prove beneficial so far as they serveto educate. But such errors obtruding upon public policymaking or codified in law have pernicious effects far beyondtheir educational value. More attention needs to be focusedon the limitations of these various budget components and ofefforts to forecast changes in them.
Policymakers' attitudes toward these concepts, however,seem to reflect a trend that is moving in just the oppositedirection. President Reagan recently proposed "triggering"stand-by income tax increases on a ratio between two of theaggregates under discussion here -- the deficit and the GNP.The Humphrey-Hawkins full employment bill of the last decadeproposed the unemployment rate as a "trigger" for wideranging public works projects. Other instances of this sortcould be noted. In addressing this trend of relying uponaggregate economic statistics, a recent study by the Government Accounting Office discusses GNP figures:
The accounts help Federal policymakers pursuethe goals of the Employment Act of 1946 -- fullemployment, price stability, and economic growth.Federal economists use the accounts for short termfiscal, monetary, and wage-price policy analysis,for managing the nation's employment and anti-inflation goals, and analyzing long-term demands forskilled labor and financing for capital formation.Major users include the Council of Economic Advisers, the Federal Reserve Board, the Office of Management and Budget, and the Departments of Treasuryand Commerce....
Although the analytical uses of the accountsare primary, additional uses are being made. TheTrade Act of 1974 (P.L. 93-618) specifies the useof annual GNP estimates in determining limitationson preferential treatment extended to countriesexporting goods to the United States. The GNP pricedeflator is used as a component in the inflationadjustment factor in the Natural Gas Policy Act of1978 (P.L. 95-621) and the Crude Oil Windfall Profits Tax Act of 1980 (P.L. 96-223) for determiningthe ceiling price on certain types of natural gasand the windfall profits on crude oil, respectively....
Proposed legislation in the 96th Congress wouldhave further extended the use of GNP beyond that ofan analytic tool and could have generated concernabout what it represents and how well it does so.Federal spending would have been affected by thedefinition and accuracy of GNP.
One proposed amendment to the Employment Actof 1946, H.R. 2314, would have limited Federal outlays in the President's Budget to equal the Councilof Economic Advisers' estimated Federal receipts.The receipts would have been based on real economicgrowth using real GNP estimates as part of the formula for the calculation.
Another proposed bill, H.R. 4610, would havelimited Federal outlays to a specific percentage ofGNP for the last complete calendar year occurringbefore the beginning of the fiscal year. Fiscalyear 1982 spending, for instance, would have beenlimited to 23% of calendar year 1980 GNP.
Lastly, H.R. 7112 proposed an antirecessionassistance program for aid to State and local governments to be triggered by two consecutive quarterlydeclines in real GNP and real wages and salaries.Allocation of funds to States and local governmentswere to be based in part on the aggregate real wagesand salaries component.
An equally long recitation might also be made for policyuses of other aggregates like the unemployment rate or theConsumer Price Index (CPI). Clearly, the tendency to acceptofficial economic projections at face value cuts across partyand ideological lines. It is common in the executive bureaucracy and is becoming more so within Congress. The honestdisclaimers from government agencies that compile the dataand from economists who have studied the concepts are lost inthe rush, or perhaps it comes closer to the truth to suggestthey are ignored under pressure to seize upon "official"statistical data on the economic forces policymakers hope toaffect.
A common belief, which may blunt the concern over thelimitations of making forecasts from economic aggregates, isthat forecasting is a scientific procedure which is slowlybut surely undergoing refinements which make its measurementsand projections more exact. Such scientific exactitude, however, must exhibit two criteria: 1) a high probability ofaccurate projections and 2) concepts that are themselves clearand objectively meaningful. By way of assessing the "scientific" status of budget forecasts, therefore, we will assesseach of the selected components on the basis of the accuracyof past projections and the clarity and meaning of the concepts themselves.