Still Crazy After All These Years

For the past several years, the Congressional Budget Office has been offering frightening forecasts about government debt growing out of control unless strong action is taken. While these forecasts have played a prominent role in policy debates, the CFE’s Jonathan Wright and Bob Barbera have for several years been arguing that those forecasts are, well, crazy. Or as the headline on Bob’s 2014 FT piece put it: “Forecasts of U.S. Fiscal Armageddon are Wrong.” The key to their argument—in the FT, here, and here —is that the CBOs economic growth and interest rate projections jointly make no sense. For the more complete argument see their pieces, but the gist is that under the CBO’s projected tepid growth projection, interest rates were highly unlikely to rise to the assumed levels.[1]

Jonathan discussed these issues with CBO forecasters in early 2014, arguing that it was implausible that government borrowing rates would rise to the levels CBO was projecting in the main scenario. Checking back today, same story. The CBO is projecting that the Treasury 10-year yield will rise above 3 percent in Q4 this year. Taking bets on that? The implausibly high rates continue to greatly exaggerate the debt problem.[2]

We were glad to read in Greg Ip’s recent column that Doug Elmendorf, the CBO director responsible for those forecasts until recently, now agrees. Elmendorf and Louise Scheiner of the Hutchins Institute make the argument that,[3]

…the fact that U.S. government borrowing rates are at historical lows and likely to stay low for some time, implies spending cuts and tax increases should be delayed and smaller in size than widely believed.

It was Elmendorf’s CBO that helped stoke those widely-believed views now labelled as misguided. And as noted above, the CBO is still stoking.

For the sake of coherent public policy, we hope that the CBO will listen to Elmendorf and Scheiner.

Notes:

1. The interest rates were plausible, perhaps, but only if growth rebounded. In either case—low interest rates and growth or higher rates and higher growth—the budget picture looks much better. [back]

2. We are arguing, like Elmendorf and Scheiner discussed in the text, that the fiscal issues are far less severe and less pressing than they’ve been portrayed. We can still have a lively discussion regarding just how much of a problem, if any, remains once we take this fact on board. [back]

3. Hutchins Working Paper 18[back]