Monday, October 4, 2010


This morning, I finished going through the Congressional Budget Office report The Long Term Budget Outlook that I mentioned last week.  Readers may recall that my main interest was to know how sensitive the forecasts were to assumptions about future economic growth, and whether the CBO was being more optimistic than I would be on that score.

Well, the interesting, if slightly disturbing, thing is that there is no documentation whatsoever in the document of the CBO's assumptions about the future path of economic growth, or of inflation.  There is no chart or table of the assumptions, nor is there any sensitivity analysis.  I would have liked to see a couple of cases like "what if the US economy looks like Japan after 1990" and so forth, but there is nothing quantitative about macroeconomic assumptions.

Here and there, there are little comments like (p 53):
In addition, the economic recovery and the interaction of the tax system with cumulative inflation and real (inflation-adjusted) growth in income would produce higher average tax rates—that is, taxes as a share of income.
and (p57):
Economic Recovery. CBO projects that revenues will grow faster than GDP in 2011 and 2012 as the economy continues to recover, with most of that growth coming from individual income taxes. Certain sources of income that had been unusually low during the downturn (for instance, capital gains realizations) are expected to recover and return to levels consistent with an economy slowly moving closer to its long-term growth path.
These suggest to me that the CBO is working on the assumption that we'll have a pretty robust near-term recovery, and after that economic growth will then return to historical levels (whatever that is, the rate has been declining over time).

So I continue to be worried that the CBO is being too optimistic, and is not even thinking about the possibility of gloomier economic scenarios - the recent crisis was unforeseen, and they can't wait for the unexpected interruption to their worldview to be over and times return to normal.  I don't think that's a good way to be thinking at this moment in history.

Since there is no documentation of the assumptions, there is also no basis to guesstimate what alternative assumptions might do to their scenarios.  I will go poke around their website some more in hope of finding other documents that shed light on the questions.

1 comment:

jay said...

Even if they do give docs it is not going to make much difference since that is some conjecture figures like the past. The reality of the situation is from tweaking interest rates now the fed is on to literally printing money(QE). The repurcussions nobody knows. The two sources I respect (Mish & Financial sense(Jim puplava)) have diametrically opposite view of the outcome(deflation vs Inflation). Though Mish points to Japan as the path we follow and hence deflation the problem is Japan is a net creditor Nation and US is not.
Historically debtor Nations have inflated and hence inflation leading to hyperinflation as per Jim. He points to Hitler time Germany and Chile.
I am Curious (No pun Intended) about your take on this