It's in the news today that Obama's budget is projected to have massive deficits. "Trillion dollar deficits for a decade". "U.S. Federal Deficit Soars Past Previous Estimates" writes the Washington Post.
The problem is that all of these estimates cite the Congressional Budget Office (CBO) projections. Now, a few years ago if you had told me the CBO was projecting $X trillion deficits over the next decade if a certain budget is passed I would have thought there would probably be $X trillion deficits over the next decade if a certain budget is passed.
A few years ago if you had told me Moody's had rated a bond AAA, I would have thought it had virtually no chance of default. If you had told me all the economic analysts were predicting only a shallow recession in 2008 I would have believed you. If you had asked me whether Alan Greenspan was a genius who could see the future with at least some degree of accuracy I would have said yes.
What do the CBO, Moody's, economic analysts, and Alan Greenspan all have in common? They are all Emperors with no clothes. The CBO no less than any of the others.
The CBO has no crystal ball to see into the future. It uses models based off of assumptions to come up with its data.
The CBO itself admits this:
The federal budget is highly sensitive to economic conditions. Revenues depend on the amount of taxable income, including wages and salaries, other (nonwage) income, and corporate profits. Those types of income generally rise or fall in tandem with overall economic activity. Spending for many mandatory programs is pegged to inflation, either directly (as with Social Security) or indirectly (as with Medicaid). In addition, the Treasury regularly refinances portions of the government’s outstanding debt—and issues more debt to finance any new deficit spending—at market interest rates. Thus, the amount that the federal government spends for interest on its debt is directly tied to those rates.
In fact, the CBO's report, 'How Changes in Economic Assumptions Can Affect Budget Projections', it finds that a change of 0.1% of average GDP growth can turn a $300 billion deficit into a balanced budget, and vice versa.
Had the CBO been right in 2001, we would be sitting on a $5.6 trillion surplus:
SURPLUS ESTIMATE HITS $5.6 TRILLION
By RICHARD W. STEVENSON
Published: Wednesday, January 31, 2001
Even as projections of the federal budget surplus were revised upward once again, the Bush administration squared off with Democrats today over whether the government can afford everything the new president promised during the campaign, from a big tax cut to a national missile defense system.
Despite growing concern about an economic downturn that could put a crimp on tax revenues this year, the Congressional Budget Office informed members of Congress late today that it expects the surplus to swell to $5.610 trillion over the next decade, in line with estimates that have been circulating on Capitol Hill for weeks.
A far cry from its projection on January 26, 1995:
After reaching a trough in 1995, the deficit will rise to $207 billion in 1996 (2.8 percent of GDP), grow again in 1997, and then level off in 1998. Those projections assume no change in current policies governing taxes and mandatory spending; they also assume compliance with the limits on discretionary appropriations that are in place through 1998. Under the assumption that spending for discretionary programs increases at the rate of inflation after 1998, deficits will grow to $284 billion (3.1 percent of GDP) in 2000, the last year of CBO's regular projections. Under an alternative baseline that assumes that discretionary spending remains frozen at the dollar level of the 1998 caps, deficits increase only to $243 billion in 2000.
At that time the CBO was projection multi billion dollar deficits all the way to 2000!
Is there any mention in the press that the CBO 'estimates' are highly flawed and have historically reflected the conditions and moods that existed at the time of the issuing of the report than actual future reality? Not that I see of. More critical reporting from the so called liberal media.