Saturday, July 16, 2011

The Things We Can Learn from the CBO

If you don’t know the CBO, you don’t know political economics.  Sure, you can argue about some of their projections, bound as they are by the governing legislation (see the PPACA for a good example).  However, they do some very simple and compelling analysis that everyone should see.

Here’s one example where the CBO attempts to account for the changes from their 2001 projection by going year by year to assess the changes in spending and revenues from their projection and the source of these changes.[1]

So what can we learn from this fairly complicated analysis from the CBO.[2]

As a starting point, let’s look at how the changes break out by source.

Other interesting facts we can gather from the CBO assessment.

  1. Revenue changes and spending changes were roughly equally responsible for the differences between what the CBO projected in 2001 and the next 10 years.  Revenue shortfalls were 53% of the change and spending overruns were 47%.
  2. The “Bush tax cuts” were a relatively small portion of the difference.  Over the 10-year period, the Bush tax cuts caused revenue to come in $1.75 trillion lower than the CBO projected or around 15% of the total.  The Bush tax cuts for wealthier taxpayers (the top 2 bracket changes) were about a third of that or 5% of the total.  Said differently, the tax rates that the Democratic party wants to change account for 5% of the total change from 2001 projections to 2011.
  3. Medicare part D was also a very small number in context.  Total costs of Medicare part D were $271 billion over the period, roughly 2.3% of the total change.  This ignores the fact that at some point Medicare Part D should not be uniquely assigned to President Bush since the program was expanded as part of the ARRA.
  4. Changes implemented by President Obama in only 2 years account for nearly $2 trillion of the total difference.  Said differently, the current President’s changes have the nearly the same impact on the projections as the total of the “Bush tax cuts” and Medicare Part D.
The CBO assessment is far more complete than other assessments, for example, this one published by the CBPP[3] because the CBO analysis focuses on history which is more knowable than the future and focuses on the total change relative to the baseline rather than the just deficit as the CBPP analysis does.

One lesson learned from all of this is come back to the CBO to try to find a comparable analysis whenever you see one from an ideologically oriented think tank whether it be on the left or on the right.

[2] For the purposes of this analysis, costs are assigned by policy with the exception of discretionary spending which is assigned by year with 2002 to 2008 assigned to President Bush and 2010 and 2011 assigned to President Obama.  2009 is not assigned to avoid a debate on the best assignment approach.  Other spending and taxes (not identified by policy) is also not assigned.  Economic is labeled economic and technical changes by the CBO.

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