January 14, 2015 | Commentary on Budget and Spending, Budget Process

Budget accuracy has a conservative bias

There is hubris in every government project. The unspoken idea behind bills as comprehensive as the Affordable Care Act and Dodd-Frank is that legislators can understand how a system works, tinker with it and improve it.

Psychologically, it is unreasonable to expect that anyone is unbiased about her own grand idea, so legislating has a built-in bias toward government overreach. The budget impact “score” — an analysis of how a legislative proposal would affect federal revenue and spending — should serve as a reality check: an accurate assessment of how the “grand idea” would affect taxpayers.

In economics, accurate assessment demands that major behavioral and feedback effects be taken into account. Shockingly, Congress has passed some extremely large pieces of legislation without the benefit of an accurate budget estimate.

The Congressional Budget Office and Joint Committee on Taxation took into account some behavioral effects — such as increased enrollment in Medicaid — when estimating the prospective budget effects of the Affordable Care Act.

But the CBO did not take into account the macroeconomic feedback, even the consequential drop in U.S. employment that the CBO predicted in a later, nonbudgetary publication. Since the newly nonworking people no longer would be paying taxes, and some of them would receive welfare benefits instead, that effect should have been included in the initial budget estimate. It was not, and exponents of the bill used the inaccurate “score” to argue in its favor.

The analysis accompanying the Dodd-Frank bill, a major overhaul and regulation of the U.S. financial sector, was even worse. Although the express purpose of Dodd-Frank was to significantly alter the ways Americans take financial risks, the CBO and Joint Committee on Taxation scored the bill like the opening of a post office.

Their analysis ignored intended and unintended changes in investor behavior, ignored macroeconomic effects that surely will follow so great a change in financing, and ignored intended and unintended effects on macroeconomic stability. Neither the costs nor the benefits of Dodd-Frank were estimated, but a budget score was assigned to the bill nonetheless.

It is inconceivable that a professional economist would write so facile an analysis in any other context. Imagine a business economist analyzing a proposed change in prices without considering the market’s response to the price change. Is he fired or merely laughed at? Academia is even more rigorous.

When scored accurately, the analysis takes into account not just the effects that the bill’s authors intended, but likely unintended consequences as well. Good analysis also points out where large uncertainties lie. Will Dodd-Frank lead to more bailouts? How expensive will those be? How comfortable are members of Congress with taking a risk in the hundreds of billions of dollars?

Inaccurate (“static”) budget scores give comfort to legislators who are already psychologically compromised by the desire to “do something” and become famous. The static approach turns a blind eye to feedback effects and reports a comfortably precise cost estimate. Because so much is assumed away, the estimates contain fewer question marks.

Accurate analysis, by contrast, contains question marks and lots of uncertainty because reality is uncertain. Congress should have to face the discomfort of sometimes not knowing whether a bill will improve or worsen finances. Another implication of psychology is that people are risk-averse, so that false assurances of certainty will cause them to take risks they would rather have avoided. Because of the prevalence of unintended and unpredictable consequences, accurate estimates that include them may appear to raise the bar for those hoping to justify a new government program.

Liberals may call that conservative bias. So be it. Surely Americans want a Congress that hears the truth, and tells the truth, about the laws it intends to pass.

Some have suggested that the new Congress‘ changes to the CBO — requiring dynamic analysis and replacing Doug Elmendorf as director — will hurt the CBO’s reputation. They need not worry: Accuracy, not statistical chicanery, is the best check on government overreach.

 - Salim Furth is the senior policy analyst in macroeconomics at The Heritage Foundation’s Center for Data Analysis.

About the Author

Salim Furth, Ph.D. Research Fellow, Macroeconomics
Center for Data Analysis

Originally appeared in The Washington Times