The Folly of Long-Term Projections (Still the Punditiest Pundit EVAH!)

For reasons I don’t understand, pundits are finally starting to realize that most-long term economic projections are ridiculous–and, yes, we were out in front of the curve on this. While this is wonky, it really does matter: politicians use these estimates to justify cutting your future benefits–if the assumptions are wrong, you’ll be getting screwed for no reason. Put another way, despite claims to the contrary, the ‘non-partisan’ Congressional Budget Office (‘CBO’) is quite ideological. James Kwak (boldface mine):

Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”

The basic problem is that the alternative fiscal scenario simply assumes, without further support, that laws will mysteriously change in ways that reduce tax revenue and increase spending (relative to current law).

Jeff Madrick (boldface mine):

To earn its “non-partisan” label, the CBO makes unrealistic assumptions that for the most part merely project past trends into the future, and sometimes don’t even do that — underscoring the need, in my view, for a “shadow CBO” that exposes the office’s outlandish assumptions and offers us a set of alternative projections based on realistic ones. The office forecasts, for instance, that U.S. debt as a proportion of GDP will be 150 percent by the early 2030s and nearly 200 percent by 2037….

Last year, the CBO projected that without a fiscal-cliff compromise — in other words, if the economy contracted alongside in the face of reduced government spending and higher taxes — the nation would have gone into a pretty serious recession in 2013. But, it added, by 2016 or so, the economy would be better off, because it would have resumed its normal growth track with a lower deficit. And people believed that. Oh my. To repeat, the office was saying that a recession would have been beneficial to the long-term economic health of the United States. Their analysis was straight from the playbook of the Austrian economists of the 1930s and 1940s: recessions are good cleansing agents, in a nutshell.

I’ve also noted that the CBO ludicrously underestimates the rate of real GDP growth:

But that CBO estimate is based on an annual real GDP rate of growth of 2.5%.

Zoiks! OK, I realize those of you who have managed to stick it out this far might not understand the implications of what a RGDP rate of growth of 2.5% implies (heathens!).

That rate would be so historically abysmal that, since going off the gold standard, we have never had a thirty year period with an average rate of growth of 2.5%. Ever.

In other words, this is a dreadfully pessimistic estimate. How bad is it? Well, let’s first look at the annual rates of ‘chained’** GDP growth in the U.S. since 1932:

RGDPgrowthannual

Yes, there are some bad years, but since 1932, the average rate of annual GDP growth** is 3.4%. From 1949 on (Truman’s second term), it’s 3.2%. But let’s look with a wider lens: an eleven year average (i.e., the rate for 2000, would average the increases from 1995-2005):

eleven-yearavg

Here, there are only five ‘eleven-year windows’ out of 67 that fell below 2.5%–and three of those overlapped with the post-WWII slump. And two overlapped with the Collapse of Big Shitpile (it’s worth noting that in 2010, even with a crappy economy, GDP growth still was higher than 2.5%). Other than that, GDP growth is much higher than 2.5%. In fact, as Dean Baker has been noting for over a decade, it’s high enough that Social Security is ‘solvent’ in perpetuity without any changes.

The real crisis is that, if Social Security is unable to meet its obligations, the U.S. economy will have horribly underperformed for 27 years. And even if that ahistorical scenario comes to pass, we can still solve the problem with tax increases then (which would be considerably lower than the two previous increases, which increased the tax by 100% and 50% respectively). Alternatively, we can remove the cap on income today and the problem essentially vanishes.

There’s more about this here and here.

I’m glad to see that this is finally starting to break through. Nothing like desperation to focus the mind, I suppose…

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