The Congressional Budget Office’s annual economic outlook came out today, and for the life of me, I can’t figure out why anyone cares.
Yes, I know – the CBO’s forecasts on the size and direction of America’s federal budget deficits strongly influence the biggest domestic economic policy debates conducted in the nation. And the Office seems truly nonpartisan, and therefore presumably more reliable than more self-interested studies put out by Democrats and Republicans.
The problem is, the CBO doesn’t seem to be very good at forecasting the growth of the economy. And if it’s considerably off-base on the gross domestic product (GDP), it’s hard to imagine it’s going to be a lot more accurate for budget deficits and surpluses. After all, because the levels of employment and taxable income in the United States greatly affect the deficit’s magnitude (along with many other important factors, including policy measures, which the CBO can’t reasonably be expected to foresee), getting growth wrong would appear to be a big problem.
How bad has CBO been? To its credit, the agency itself acknowledges its failings. For starters, check out Figure 15 in this report, which compares its crystal ball with the economy’s actual performance through 2007. As you can see, the errors are considerable, and most are overestimates.
But has CBO gotten better since then? Not even close. In its January, 2008 Outlook, the agency predicted inflation-adjusted growth of 1.7 percent. The actual figure? -0.3 percent. Part of the problem was CBO’s view that the economic slowdown whose signs it detected “would not be large enough to register as a recession.”
A year later, it was apparent that a recession had taken place – the worst since the Great Depression. But CBO still erred on the side of optimism, predicting that the economy would shrink by 2.2 percent versus the actual 2.8 percent contraction that was suffered.
For 2010, CBO evidently fell victim to the “once (twice?) burned, twice shy” syndrome. Its forecast of 2.1 percent growth lagged the 2.5 percent gain that was logged. Unfortunately, in 2011, the Office fell back into polyannism. Its 3.1 percent real growth forecast was nearly twice the 1.6 percent improvement.
The following year, though, CBO undershot again, predicting less growth (2.0 percent) than the economy actually achieved (2.3 percent.). And its 2013 underestimate was even worse (with its forecast 1.4 percent after inflation GDP rise dwarfed by the final 2.2 percent advance.
We don’t have the final 2014 U.S. growth figure, but for the record, CBO anticipated a 3.1 percent performance, as well as a 2.8 percent gain for 2015. It’s true that CBO has revised all such projections in the middle of all the years mentioned above. But even improvisations that wound up sharpening the agency’s vision (I haven’t examined those forecasts), would only reinforce my original point: From an economic standpoint, the CBO’s annual economic outlooks are nothing-burgers.