When it comes to long term economic modeling there are two critical variables. (I) population and its relative growth over time and (II) labor force participation rates. If you get these two numbers right the job of forecasting the future gets easier. As a result, there is a significant amount of academic analysis of these factors.

The CBO is out with a report on the topic. A very thorough job at that. This is a clinical economic analysis. Just the facts maam. This is the language that the CBO uses to describe America’s illegal migration:

Unauthorized Residents.
CBO estimates that, on net, about 400,000 unauthorized residents (foreign-born people who are not authorized to live, work, or study in the country) left the United States in 2010. It anticipates little change in the number of unauthorized residents in 2011, but it projects net inflows of about 1.4 million in 2014 and again in 2015 as the economy recovers and demand for labor strengthens. Beginning in 2016, the projected net flows of unauthorized residents taper off and reach 270,000 (the same as SSA’s projection) in 2020.

I don’t want to initiate a debate on what America should or shouldn’t do on the emotive topic of illegal migration. Instead focus on how nutty it is that we actually model our economic outcome based on the current status quo. And the assumption is that nothing will change until 2020 at the earliest.

I don’t fault the economist who came to these conclusions. This is the “base case”. It is part of the broader macro economic outlook that the CBO uses to look into the future and make baseline economic predictions. I read most of the stuff from the CBO. Everything they produce has this Subject To:

What is a baseline?

A budget baseline is a projection of future spending and revenues based on the general assumption that current laws and policies remain unchanged.

Now I’m confused. There is no question that the CBO’s assumptions are not based on Current Law. There is nothing legal at all about the expectation of 5mm ‘Unauthorized Residents’. Therefore the forecast must be made based on the assumption that Current Policies will remain in place.

But what are the policies? The ones set forth by the President? These are his words from the State of the Union. I don’t read this to mean that it is US “Policy” to have millions of illegals.

• Continue to make border security the responsibility and priority of the federal government,
• Hold accountable businesses that break the law by exploiting undocumented workers,
• Make those living in the United States illegally take responsibility for their actions, and
• Strengthen our economic competiveness by creating a legal immigration system that meets our diverse needs.

The US is spending about $4b a year in the Border Patrol. They just spent $1b on a new high-tech surveillance plan. Then they scrapped it. Surely the CBO is aware of these on budget expenses. It’s hard to see billions being spent and then conclude that it is the “Policy” of the US to allow 500k Unauthorized Residents a year into the system.

So the CBO definition of, “What is a baseline?” should be changed to read:

A budget baseline is a projection of future spending and revenues based on the general assumption that current laws, policies and or predictable illegal activity remain unchanged.

But that won’t happen. To change the CBO language to reflect Reality would make the whole process look foolish. But actually when you look at it, it is foolish either way. We’re kidding ourselves at so many levels.

On Wall Street this kind of stuff used to be called the “Wink and nod”. I’m not familiar with the equivalent in D.C. Any suggestions?