CBO Cuts Forecast Of Cumulative 2012-2021 Deficit By 50%, Admits It Is Probably Dead Wrong
Today, the CBO whipped out its trusty old magic 8 ball, and released its revised forecast of the future. Since there is a substantial difference from the March forecast for the cumulative 10 year deficit over the 2012-2021 period, to the tune of $3.250 trillion, or just about 50% of the last deficit forecast of $6,737 billion, which is now a ridiculous $3.5 trillion, it is about that time for us to, in turn, whip out trusty old history and demonstrate just how worthless and criminally incompetent the CBO's estimates of the future are. Here is what we posted two short weeks ago: "While we reserve judgment for S&P's effectiveness at being accurate in anything they do (they are, after all a rating agency and as such they goal seek results to comply with what their paying groupthink seeking customers demand), we would like to redirect to the modest topic of CBO predictive efficiency (the organization that is at the basis of the current credibility spat between Treasury and S&P, and which, incidentally has created the baseline forecast against which the debt ceiling compromise plan is supposed to cut $2.1 trillion over the next decade), by pointing out according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion. We won't comment on the error interval in CBO forecasts when compared to actual 2011 results, and we most certainly won't comment on the idiocy of the Treasury chastising someone, anyone, for erring, or disputing, forecasts." We will comment now: the CBO was off by tens of trillions. And it will be again. Expect massive future revisions to the August CBO baseline, which just cut the future decade cumulative deficit by 50%, however with one caveat: even the CBO admits it will most likely be horribly wrong.
First a pretty, if totally wrong chart:
So what does the current CBO budget incorporate? Well, the biggest boon to future deficit reduction is the $2.1 trillion Budget Control Act... which nobody has any idea what it will be. Indeed, of the $2.1 trillion in cumulative deficit cuts, $1 trillion is based on "policy changes" (Box 1-1, footnote 'b') which is nothing but a placeholder whose details not one person knows.
Additionally, that a $2.1 trillion debt ceiling expansion compromise will somehow lead to $3.25 trillion in actual deficit cuts requires some magical math that only the CBO appears to be privy to.
Other hilarious details:
- Real GDP growth in 2011: 2.3%, in 2012: 2.7%, then 3.6% in 2013-2016, and 2.4% in 2017-2021
- Unemployment rate of 8.9% in 2011; 8.5% in 2012; then a plunge to 5.3% in 2016 and 5.2% in 2021. This is surely feasible... if the labor force drops to 30% of the population.
- Interest rates on the 10 Year at 3.2% in 2012, then rising to 5.3% in 2021.
Where will the surge in revenue come from:
Much of the increase through 2014 is attributable to the expiration of tax provisions enacted since 2001 and, to a lesser extent, to other scheduled changes in tax rules.
In other words, if there is no tax-hike, everything the CBO has forecast is absolutely, dead wrong.
It gets better:
In addition, certain structural features of the individual income tax will cause receipts to rise gradually over the next 10 years, and factors related to the economic recovery (such as anticipated rebounds in wages and salaries and in realizations of capital gains that are expected to outstrip projected growth in GDP) are projected to increase revenues further relative to GDP. Together, all of those forces push federal revenues in CBO’s baseline to 20.9 percent of GDP by 2021 (excluding any changes arising from provisions of the Budget Control Act related to the deficit reduction committee). Over the past 40 years, federal revenues have averaged 18.0 percent of GDP.
So in the period following the second great depression top line government revenues will grow at above the historical average? Good luck.
But even if one assumes that somehow tax hikes for the rich do happen: something which will not be a reality if a republican president takes the White House in 2012, the CBO still expects GDP to continue growing as if taxes are 0.00% across the boar? Even more good luck.
Yet if one ignores all of the above, the only take home reading is the following:
"The budgetary challenges facing the fede ral government are not fully reflected in CBO’s baseline projections because current law provides for substantial changes to tax and spending policies in coming years. If those changes did not occur and current policies were continued instead, much larger deficits and much greater debt would result."
Beyond 2016, CBO’s economic forecast is based on the assumption that real GDP will grow at its potential rate, because CBO does not attempt to predict the timing or magnitude of fluctuations in the business cycle so far into the future. Thus, CBO’s projections for 2017 through 2021 reflect the agency’s assessment of economic conditions when real GDP is at its potential level
And this punchline:
The forecast described in this report does not reflect any other developments since early July, including the recent swings in financial markets and the annual revision to the national income and product accounts (compiled by the Bureau of Economic Analysis). Incorporating that recent news and economic data would have led CBO to temper its near-term forecast for economic growth.
And there you have it: since Obama's "compromise" means that a tax hike will not happen, and since economic growth has now plunged based on developments "since early July" the CBO has effectively said all of its projections are totally worthless. Q.E.D.
Charting the projections:
Source: CBO Update