Asymmetrical Information

Maybe only time will tell, but, based on past track records, I'm willing to make a bet if you are, Jane.

You say that OMB has been more optimistic than CBO, but which one has been more *correct*?

In theory, shouldn't it be simple to look at past projections and compare them with the actual results?

(note the use of the popular "in theory" caveat)

Over the past three years, the CBO has been more correct. Tim, I'm definitely not willing to bet either way -- too little information at this point. When teh numbers turned good in the late 1990's, they surprised the hell out of everyone; ditto when they turned bad in 2001. Forecasting is a mug's game.

I'm too lazy to search for it; does anybody know off-hand what the historical mean has been for the annual deficit, as a percentage of GDP,
since the end of WWII?

Actually, I meant to ask about the median, not the mean.

I guess this is good news, sort of. Kind of like "The cancer hasn't spread to your liver...yet". After all, even if this forecast is correct, the deficit will be higher than last year's, which was a record (in pure dollar terms, not as a percentage of GDP) and will we probably have to do a supplemental appropriation to help pay for the wars we are fighting. Futhermore, the prescription drug plan hasn't kicked in yet, nor has the full effect of the Bush tax cuts and the entitlement programs continue to grow. You also have to consider the fact that this administration's projections about the price of anything have never been close to accurate. I don't think I will be celebrating for a while.

Jane:

Correct me if I'm wrong (b/c this is half remembered stuff), but my recollection is that, since at least Reagan, CBO has had a much better reputation regarding projection than OMB. The exception may have been during Clinton's term (but that's even less-well remembered). Also, IIRC, OMB is almost always too optimistic; the exception was again Clinton (I think).

As far as the bet goes - I don't want to bet on the specific numbers, I want to bet on whether CBO or OMB will be closer (I get CBO). And betting on a specific number in a forecast may be as foolish as betting on perfect love, but determining who's competent and trustworthy and then turning you energies elsewhere is 50% of life. I know where I'd put my money; I just want to know where you'd put yours.

Jane,

Before you celebrate, you might want to read this:

http://www.j-bradford-delong.net/movable_type/2004_archives/001198.html

Yes indeed, BushCo is playing the same game this year as last. Overforecasting the deficit so when the actual number is revealed it looks like the deficit is falling. They did the same thing last year with an $80 billion overforecast.

They are correct in claiming that the deficit is lower than they forecasted but they are wrong in claiming the deficit is not growing.

Anyway an announcement like that is like telling a patient instead of losing an eye and a leg, both arms must be sacrificed.

No more happy prose on this matter.

Will Allen,

I think that Table 11 has some of the information you are looking for:

http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0

It doesn’t provide a mean or mean but it does tell you the deficit and national debt as a percentage of GDP from 1962-2003.

According to the table Thorley links to, we have gone from a 1.3% surplus (2001) to a 1.5% deficit(2002) to a 3.5% deficit( 2003) and might repeat that performance in 2004, if we leave aside all the fudges (does this figure include the cost of Iraq?).

It is "in line with historical averages" only because it is lower than many deficits run up under Reagan and Bush I. It is higher than any non-Reagan/Bush deficit in the table except 1976, and the table covers the Vietnam period.

Yes, Bernard, and the deficits under Reagan and Bush I led to the disastrous 90s. I tremble with fear. All axe-grinding qualifications aside, the 42 year mean and median appear to be in the area of 2.25 (just glancing quickly), so 3.5 isn't remarkably out of line. I would prefer it be lower, but a little perspective can be useful, as much as it confounds the axe-grinding.

Will,

Well, if "deficits don't matter," then why the cheers and celebrations over this (phoney) improvement in the forecast. Sounds like people having it both ways:

"The Reagan-Bush I deficits had great results, so isn't it wonderful we're reducing the deficit now."

You might recall that there were some (shudder) tax increases early in the nineties that brought deficits down. You remember, the increases that were going to wreck the economy, etc. I don't suppose you or Jane would ever concede that they did any good at all, but that's your particular brand of willful blindness.

Finally, it is hardly axe-grinding to point out that the reason 3.5% is "in line" is because the eighties, primarily, pulled the line towards higher average deficits.

You seem to pride yourself, Will, on your disdain for both parties, but here you are swallowing a load of Republican hogwash.

Well gosh, Bernard, since you wish to ascribe to me positions that I do not hold, why don't you just argue with yourself?

I never state that deficits don't matter. The statement that you placed in quotations doesn't belong to me, so I don't understand your point. I have previously been labeled a "leftist" for describing the inanity of the Republican hand-wringing over tax increases in the early 90s, just as I describe the inane Democratic hand-wringing over the current fiscal situation.

You see, as much as you want to argue about something I didn't say, my point is that most political debate regarding fiscal policy is entirely overblown and lacking in perspective. "OH MY GOD!!! THE DEFICIT AS A PERCENTAGE OF G.D.P WAS AS HIGH AS 5% IN THE MID 80S!!!!" or "YEEEEEEEHHHHH!CLINTON RAISED MARGINAL RATES FROM 33 TO 39 PERCENT!!!!"

In reality, it is rare that fiscal policy has anywhere near the effect that the hand-wringers yelp about. It is mostly just a lot of yammering. Does that mean that "deficits" don't matter, that we should just blithely run deficits at 10% of GDP? No, of course not. What is does mean however, is that a deficit at 3.5 or even 4.5 percent of GDP is not a harbinger of bad times ahead.

If deficits look like they are going to be higher than is prudent in a consistent fashion, well it may have escaped you, but Congress meets regularly. I just wish thay found it as easy to cut domestic spending as they find it easy to raise taxes, but that is the nature of a political culture in which the use of state power by coalitions of citizens to acquire property for solely private use is seen as legitimate.

OK Will,

So your view is that it isn't anything to worry about because Congress will take care of it by raising taxes. Sorry I misunderstood.

I take it then that you would support such tax increases if the deficit approaches what you consider to be imprudent levels.

Nope, Bernard, I'm going to advocate that spending be cut, starting with entitlements.

Does anyone represent true fiscal conservatives these days?

Here is question that I rarely hear in discussions of the federal deficit: Should the federal governments budget be balanced every year or should it be balanced over the business cycle? Given the choice, I would opt to balance the federal budget over the business cycle. This choice would lead to surpluses in the late 1990's and deficits in the past few years, which is what occured. Note that this point of view does not necessarily justify the fiscal policy of the past decade, but it does provide a bit more framework for discussion.

Um, that would be a "NO," Begbee. It's much easier to get people to vote for you when you give/promise them money.

Good news? I thought the deficit was a great tool to hold down spending, not a bad thing; shouldn't you be upset it's dropping?

http://www.janegalt.net/blog/archives/003890.html

Will,

Fair enough, but suppose those efforts fail?

Will Allen wrote:

Nope, Bernard, I'm going to advocate that spending be cut, starting with entitlements.

There’s a site that actually let’s you increase or decrease portions of the federal budget, however it doesn’t deal with entitlement reforms aside from making percentage increase/decreases on programs

http://www.budgetsim.org/nbs/

I agree that we ought to start with reforming entitlement programs (Medicare and Social Security) preferably by phasing in a higher retirement age, means-testing both programs, reducing the COLAs which overstate inflation, and switching from wage-indexing to price-indexing for Social Security. I’d also reduce discretionary spending by repealing the farm subsidies, eliminating business subsidies and the Departments of Agriculture, Education, HUD, Commerce, Energy (sans the portions related to atomic energy/weapons), and much of HHS.

I dunno, Bernard, what if your efforts to raise taxes fails; will you join me in advocating that entitlements be cut?

Actually, I'll attempt a compromise, extend my hand in good faith, and make this proposal for new taxes, and an estate tax at that! One catch, however. It has no minimum exempted and is limited to recovery of all benefits paid to the deceased in Social Security and Medicare benefits. Anyone who wishes to avoid this tax, for purposes of preserving a small business, can immediately decline all benefits in the future, for both the current retiree and their heirs. What are the odds of getting that past the baby boomer consituency, eyeing mom and dad's home that has been appreciating for 40 years?

Will,

Not sure I understand your tax. All it does is recover SS and Medicare benefits paid. So how is my heirs' lust for my house affected one way or the other?

As for your question, the answer is yes as long as the options are laid out in an honest fashion, with a team of objective number-crunchers ready to yell "bullshit" at the first sign of faith-based arithmetic.

Any way that it is sliced, a projected downward movement in the deficit estimate is a good thing for everyone, no? If they continue to project out this trend over the next, say 4 years, I do believe we have room in there to throw in another costly war! hehe.

I keep seeing references to the annual deficit here. But we don't pay interest on just the annual amount. We pay interest on the total debt. Just how high do you think it can go without destroying our economy? I also see references to "reforming" entitlements. If you mean reform, fine. If you just mean cut them in some simplistic manner forget it. It's like tort reform being defined as just cutting the amount of awards. If you want to reform that system take malpractice and similar things out of the court system entirely and create a system where instead of a lawyer and a group of laypeople (aggrandized by the title jury) hearing expert medical or scientific testimony make it a panel split between lawyers and experts in the field. Sometimes it's just a case of people not being perfect and making a mistake, sometimes it's something that just couldn't be helped and then again sometimes it's blatant neglect or a willful refusal to fix something and somebody ought to be nailed. If you can't do that I'm all in favor of really painful penalties for any lawyer or plaintiff who is found to have brought a frivolous lawsuit, including a point system for the lawyers. Similar to the driver's license system points will be assessed every time a lawyer brings a frivolous lawsuit and once you reach your limit you're disbarred. Now THAT would be reform.

Well Bernard, say your house represents a good chunk of your net worth, say 80%. Say you run up a $200,000 medical bill in your last year of life. It may be that after liquidating your estate to repay that bill, and all the other beenefits you received, there isn't anything left for your heirs. A lot of boomers have parents living in expensive homes which represent a good chunk of their net worths, which such a tax would absorb.

Does anyone represent true fiscal conservatives these days?

Fiscal conservatism is dead and buried. All politicians want to do today is spend other people's money.

Fiscal conservatism is dead and buried. All politicians want to do today is spend other people's money.

There have been eras in American history when politicians made a fetish of fiscal discipline. Look up the history of the Bonus March if you want an example.

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