Saturday, April 27, 2013

A Question for Zandi and Blinder

Back in the days of the ARRA debate, a great deal was made of a study by Mark Zandi and Alan Blinder that described the effects of the stimulus using a complex economic model.   I don't want to renew the whole stimulus debate but a post on a different topic caused me to dust off the Zandi/Blinder paper and look at some of the forecasts for GDP that were in the model.

Here are five interesting numbers for you.  The first four are forecast GDP in 2012 (in $2005 dollars) according to the model.

No policy response (no fiscal or monetary policy) - $12620
Monetary stimulus (no fiscal policy) - $14216
Fiscal stimulus (no monetary policy) - $13774
Both fiscal and monetary stimulus - $14552

Actual GDP in 2012 - $13593

In other words, the GDP in 2012 was nearly 7% smaller than was predicted by the Zandi/Blinder model in 2010 and indeed was nearly 5% smaller than predicted by the model in a world where the stimulus never happened.  These are large differences to be sure and in a very short period of time.

My question for the authors is "why?"

A couple of answers occur to me. 

  1. Fiscal and monetary policy were far more restrictive than envisioned by the model for 2011 and 2012.  While possible, this seems highly unlikely because smaller deficits were forecast for 2011 and 2012 in 2010 than actually occurred.  To the degree the authors were using public data, they would have assumed more austerity on the government side than actually existed.
  2. The model's long term effects are either flawed or undermined by exogenous factors.  Again, while this is possible, it seems unlikely, particularly given the magnitude of the observed differences.
  3. The model isn't very good and its conclusions are suspect.  In the absence of an alternative, this seems the most likely answer.
I'm quite sure I'll not get a reply from the authors but it just goes to show that periodically checking on the predictions of models is a good way to think about validating them, albeit it's often after the smoke of the debate has cleared.

Thursday, April 11, 2013

The Timing of Savings

Several commentators have made the point that the President's budgetary savings are back end loaded.  I wanted to test this theory so I calculated the savings in each budget relative to the CBO baseline and the percentage of the savings that come in the first 5 years of the budget versus the second five years.  Frankly, it doesn't make much of a case for optimism about any of the forecasts.

First to set a baseline, let's determine the percentage of spending that comes in the first five years versus the last as a reasonable expectation of how the savings "should" come.  Using the CBO baseline, we get that 43.1% of the spending in the CBO baseline occurs in the first five years so a reasonable expectation is that 40 percent or so of the savings should come in the same time period.

So how do the different budgets do?  The Ryan budget comes closest to our 40 percent benchmark

In the Ryan budget, 32% of the savings come in the first five years.  In the Murray budget, the number is far lower, at 14%.  But the worse by far is in the President's budget where negative 9% of the savings come in the first five years, meaning the President's budget actually adds more to the debt over the next five years than is planned to be the case in the CBO baseline.

A budget that says more than 100% of the pain will come after you've left office isn't much of a budget at all.

Monday, April 1, 2013

Why Our Way of Discussing Budgets Must Be Reformed

The following appeared in an article at The Hill online
Republicans are betting that the public will be receptive to the Ryan plan’s measures to balance the budget in just 10 years, through lowering tax rates, $5.7 trillion in spending cuts and a repeal of the president’s healthcare reform law. 
 Of the three claims, one is partially true but misleading, one is false (in any reasonable world) and one is true.  The last one is true...the Ryan budget does repeal the President's health care law but the other two are misleading at best and false at worst.

First the misleading part...the lowering of tax rates.  Yes, the Ryan plan lowers tax rates and balances that with limitations on or eliminations of deductions in the current tax code.  Leaving aside my point of view on Ryan's tax plan, we should be able to agree that the average person, reading the words "through lowering tax rates" could be forgiven for assuming that Ryan plans to reduce government revenues to some degree.  Of course, as I've pointed out, this simply is not the case.  The Ryan plan proposes to increase government revenues by an average of 6.2% per year for the next decade.  It may well be that we should increase revenues more (as other budgets have proposed) but it is certainly not the case that Congressman Ryan has proposed cutting revenues.

Now the false part - $5.7 trillion in spending cuts.  There are no $5.7 trillion in spending cuts in the Ryan budget.  The budget proposes growing spending by 3.4% per year on average for the next 10 years.  Perhaps, some day we will realize that we can't grow spending by 3.4% per year while cutting it by $5.7 trillion.  Clearly today is not that day.