The ancient Greek gods used to amuse themselves sometimes by such things as testing men with difficult tasks or simply tormenting them with mischief, riddles and puzzles.
It would be easy to imagine the gods, arrayed in their robes, clapping each other on the back and laughing as their mischief plays out in our annual sitcom: producing a federal budget and struggling with the economic principles that should anchor it. They especially enjoy the news media’s gleefully reported sniping between the Congressional Budget Office and the White House over their dueling forecasts.
The basis for the gods’ laughter is the same that underlies many sitcoms on TV: the audience knows something that the performers do not. On a TV sitcom, for example, we laugh as a character blusters into the boss’s office thinking he is to be fired when in reality he is being promoted.
The budget process is different from a sitcom but not as much as we might think or would like. In our current circumstances, for example, the main drivers of a federal budget are productivity and economic growth — the economic processes that we know the least about. It sure sounds like mischief. No wonder the gods are laughing.
The annual federal budget process involves several different structures and models. The final product, as signed by the president, is, like all budgets, an attempt to predict the future. And as diverse individuals such as Nobel prize winning chemist Niels Bohr and legendary New York Yankees catcher Yogi Berra have said, “Predictions are difficult, especially when they involve the future.”
With that limitation in mind, then, the budget shows us how the presidential priorities and policies will affect the size and allocation of federal revenues.
Driving the amount of federal revenue is an economic growth model. The reason for its key position is that the rate of economic growth is closely related to the employment rate, which directly affects personal income and indirectly affects business and banking profits — all of which affect federal revenue from tax collections.
To illustrate the importance of the economic growth rate on federal revenue, we have only to look at the analysis of the current president’s budget by the Congressional Budget Office. The CBO’s report states, “The deficits that CBO estimates would occur under the president’s proposals are larger than those estimated by the administration. Nearly all of that difference arises because the administration projects higher revenue collection — stemming mainly from a projection of higher economic growth.”
The president’s forecast sees a return of the U.S. economy to a time before it was mugged by uneven global trade and uncontrolled immigration. In those years an economic growth rate of 3 percent was considered normal. The CBO, by contrast, takes the view that the recent, depressed rates of economic growth are the new normal.
It would seem to be a clear case of an optimistic view vs. a pessimistic one. But it is more than that. The differences go deeper; enough to make the two forecasts not equivalent. Much of this stems from the CBO’s tasking from the Congress.
When it was created in 1974, the CBO was the outgrowth of a struggle between Congress and the presidency over control of federal spending. The initial and still primary tasking had to do with questions about how new or expiring legislation affected spending and the federal deficit.
At the heart of the CBO is an intricate accounting model rather than an economic model. An accounting model gives more accurate and reliable answers to the questions the CBO was initially asked to address. Over time, though, in a process the military calls “mission creep,” Congress began to add questions that were more economic than financial in nature.
The CBO’s original task remains unchanged. In its recent presentation, the CBO stated that its economic forecast is used “primarily as an input to CBO’s federal budget projections and analyses of legislative proposals. It is a 10-year forecast based on current law.”
In many ways, then, from purpose to models to tools, the president’s budget and the CBO’s forecast are not strictly comparable. The CBO’s “based on current law” stricture creates an accounting model to reveal the effect of a single piece of legislation, leaving everything else unchanged.
A presidential budget, though, is a deliberate attempt to change things. What president takes office not intending to change things and shake up the mix? This makes the two forecasts different. It doesn’t make either one the “right one.”
And it certainly doesn’t justify the schoolyard-level sniping between the CBO and the White House. We’ve got enough real problems to deal with. Let the gods find something else to laugh at.
James McCusker is a Bothell economist, educator and consultant.