Tuesday, February 06, 2007

It's Budget Time

One of my favorite times of the year is upon us. The President has released his FY 2008 Budget Recommendations to Congress. Okay, so I admit I’m just a bit odd, but come on can’t you just feel the excitement? Well maybe not unless you’re an armchair economist, political junkie, or work for OMB, CBO, or the Budget Committees in Congress does this get your blood pumping, but it should. Why? Well, because other than elections, I can’t think of any other time when there is more inaccurate, misleading, politically spun, and horribly wrong prognostications and predictions about the future of the economy as a whole, economic growth specifically, tax policy, spending priorities, and everything else called for in a document that doesn’t actually mean anything. Remember the President doesn’t make the budget, Congress does. He only gets to “recommend” certain expenditures and allotments; Congress decides whether a President will actually realize his budget targets and goals.

Before I launch into yet another tirade about the division of power in our government, and how we and the press always gives the President way too much power and influence, let me say that everything you will hear, read, and see, from Congress, the President, Republicans, and Democrats, is a farce. Its been spun, rinsed, scrubbed, oversimplified, and spun again, all for your quick 30 second or less consumption on the evening news and in the newspapers. Bottom line, none of it is accurate. But don’t take my word for it, just read the fine print and understand a few simple things. First, remember, no one can predict the future. This is important because that is what all budget prognosticators try to do. Regardless of whom they work for or what their agenda is, they are all trying to sell you a view of the future from their particular point of view. Problem is, none of them know what the hell they are talking about. Oh sure, they are all very smart economists, accountants, political consultants and the like, but there is not a Nostradamus in the bunch; besides what was he for predictions, 1 for 10 million, or something like that. If there were, we’d have a lot rosier future I can tell you that.

Second, remember there are no rules governing the President/OMB in his budget recommendations, except the due date. There are, however, strict statutory guidelines for CBO, the Congressional Budget Office, to follow. This difference usually explains about 80-90% of the “gaps” between what the President predicts and what CBO “scores.” Sometimes, the President is closer to correct, other times its CBO that was “right,” neither is ever 100% accurate. The biggest difference, CBO is required to predict the future based on what the law actually is as of the date of its proposals. The President is allowed to use whatever means he wants, including assumptions about what the law is likely to be, or what he would like it to be in a given year. Tax policy is usually the place where this difference is starkest. For example, this year the President has predicted that in 5 years (2012) there will be a significant federal surplus, where as CBO has projected a substantial deficit, though not as large as current deficits. Why the difference? Well for one thing the President assumes that Congress will extend his tax cuts, currently set to expire in 2010. CBO is prohibited from using the same model by statute, because the law currently says no more cuts after 2010. Moreover, the President assumes a robust percentage of growth in GDP and, therefore, substantial increases in tax revenue. CBO can’t follow such predictions, as they are required to use model and averages based on actual happenings over the last few years. This prevents CBO from both being overly optimistic or overly pessimistic in its forecasting. This is not to say CBO’s methods are better or worse, just to point out that they are constrained, and for some very good reasons. CBO is supposed to be neutral and non-partisan, they are to be “objective” or as objective as possible. Congress needs untainted, unvarnished opinions and forecasts, and they are not going to get them from the President -- whether a Republican or a Democrat -- hence the cabining of CBO’s methods. Final point to remember. War costs have been primarily “off budget” menaing that the President has not been including them in recent submissions because they are considered emergency or supplemental spending. Word is that they have included some of the costs this time around, but not all of them. CBO includes all expenditures, emergency or otherwise, in its predictions, as required by statute. So they assume a higher amount of spending over the next 5 years than the President allows for.

Short story, CBO predicts higher spending and lower revenues than the President, hence CBO claims deficit where the President claims balanced budgets and surplus by 2012. Bottom line, they are both crap. Both methodologies are seriously flawed and neither is to be taken seriously. Will this happen? No, of course not, but every once and a while it would be nice to pull back the curtain and see that there really isn’t anyone pulling the strings who has a clue. Or maybe that’s just me.


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