Committee for a Responsible Federal Budget

In Expressing Concerns over CBO's Role, Zachary Karabell Actually Makes a Strong Case For CBO's Role

In a Washington Post article last weekend, Zachary Karabell takes issue with the importance placed on CBO scoring of legislation, arguing that the focus on cost estimates prevents the country from spending on projects that could strengthen long-term economic growth. Karabell's real issue appears to be an objection to the budgetary constraints that require lawmakers to take costs of legislation into account and consider trade-offs before enacting legislation. He also complains about the uncertainty of projections, but that is no reason to sweep budget scores under the rug and ignore the fiscal impacts of legislation.

Interestingly enough, Karabell recognizes the risks of lawmakers' proposals not being subject to nonpartisan analysis, which lends support to a focus on objective budget scores and the long-term trajectory we face. He states that without independent analysis, partisans would rely on their own assumptions to produce results that suit their interests, playing up the benefits and downplaying the costs. CBO estimates are often subject to complaints from advocates of various policies precisely because they offer a nonpartisan analysis of legislation that gives an objective assessment of potential costs of legislation.

Although Karabell recognizes the value of nonpartisan analysis, he criticizes what he sees as the outsized role of CBO scores in the consideration of legislation. However, the article also seems to conflate spending restraint and deficit restraint:

As all Washington insiders know all too well, before any spending bill passes, it must be “scored” by the CBO for its effects on long-term budgets and future deficits. To assess that, the CBO relies entirely on a set of government statistics. The primary ones are gross domestic product growth, inflation and tax receipts (which is largely a product of the first two). Those numbers constrain what the government can spend, to the point where passing anything remotely resembling a long-term investment bill such as the interstate highway (absent a crisis such as 2008-09) is impossible.

This is a call for removing a straitjacket that we have only recently donned. Government and societies around the world are actively investing public funds in much-needed public goods — China, of course, but also dozens of others. Infrastructure is the most obvious, and one that is sorely lacking in the United States. So, too, are public-private partnerships that split the costs of job training, skills education and public works, from an efficient energy grid to better transportation networks to high-speed Internet and cell phone coverage.

There is no reason why lawmakers could not consider new spending initiatives if they decided they were worthwhile simply because CBO attributed a significant cost to that initiative. Just because a proposal has a cost does not mean Congress cannot or should not enact it. It simply means that if Congress considers the proposal to be worthwhile, they should be willing to find a way to pay for it by cutting spending in other parts of the budget or increasing revenues. In fact, the example Karabell cites of a policy that would not have been enacted if it had been subject to CBO scoring -- the creation of the interstate highway system -- was subject to analysis of projected costs and debate about how to pay for them, resulting in an increase in the gas tax and other dedicated revenues to finance the projected spending. This demonstrates that when Congress decides a certain policy should be a priority, it can acknowledge the cost of the policy and pay for it.

Inherent Uncertainty in Projections

Karabell spends several paragraphs arguing that the inherent uncertainty in projections of any kind should lead us to take CBO's analysis with a grain of salt, if not ignore them altogether when the situation demands it. He cites how CBO's estimates of Medicare Part D did not pan out exactly as expected -- CBO estimated a ten-year cost of $550 billion while the actual cost was $375 billion -- just as estimates of the 2010 health care law have changed.

Budget projections are by their nature subject to uncertainty. CBO itself acknowledges this uncertainty, explaining that its estimates reflect the midpoint of a range of possible outcomes and providing information about the sources of uncertainty in its estimates, particularly for major legislation. CBO works assiduously to improve accuracy of estimates by frequently incorporating new data and academic studies into its methodologies. CBO consults with a wide variety of experts and academics and talks to government agencies responsible for implementing legislation. They are quite open about their process

Although there is always uncertainty in projections, we can often be confident in the overall direction and magnitude of future trends. It's important to realize that Karabell's examples (including the creation of Medicare Part D prescriptions drug benefit and coverage provisions of the Affordable Care Act) were new programs with a greater degree of uncertainty than, say, construction of a new infrastructure program, and that in both instances the direction of the change remained constant (i.e. deficit increasing or deficit reducing) and the swing in estimates was relatively limited.

Karabell complains that CBO estimates fail to reflect potential benefits that certain policies would have for the economy or society, and the potential savings that would accrue as a result. These are important considerations that policymakers should take into account when deciding whether the costs of a policy are worth incurring, not a reason to ignore the costs. If Congress believes new or increased spending from legislation will produce significant economic or societal benefits, it should be willing to make room for it in the budget by cutting spending that would not have similar benefits or increasing revenues to cover the costs. The potential budgetary savings that may be realized as a result of economic benefits of legislation should be treated as a bonus to help address our debt and an additional selling point for legislation, not as an offset for the more certain direct effects of legislation.

CBO often provides supplemental information about the potential economic benefits of major legislation, a practice in which there is a strong case for expanding as appropriate. But CBO does not incorporate such macrodynamic economic effects into official cost estimates because they are subject to much greater uncertainty than estimates of direct impact and microdynamic economic effects of legislation. While budget estimators are able to make reasonable assumptions about microeconomic behavioral responses using past evidence, the same cannot be said about overall economic effects. Macroeconomic variables such as GDP and inflation are the result of numerous and often competing changes in fiscal policy, monetary policy, and unrelated domestic and international factors.

Uncertainty in future projections should prompt lawmakers to be prudent about the future: preparing for downside risks and reaping the benefits when things turn out better than expected, not outright dismissing long-term projections. Budget projections provide useful information about the potential impacts of a certain policy given the best and latest information available.

The Interstate Highway System

Karabell cites the creation of the modern-day highway system during Eisenhower's administration as an example of the types of investments that he thinks would be dead on arrival today due to long-term budget concerns. However, Karabell neglects to mention that the highway system was enacted into law only after lawmakers found ways to generate additional revenues to help cover the costs.

The original proposal put forward in 1954 relied on bonds to finance much of the new spending. But objections to that approach led lawmakers to raise the gasoline tax by 50 percent (from 2 cents to 3 cents a gallon), dedicate the full revenues from the gas tax to a new highway trust fund, and raise additional new transportation taxes sufficient to cover the full projected cost of building the interstate highway system over the 16-year period envisioned in the legislation. Moreover, the legislation included a provision known as the Byrd amendment that would reduce spending if the highway trust fund was projected to face a cash deficit, effectively requiring Congress to raise additional revenues to maintain funding if costs were greater or revenues were lower than projected.

In other words, Congress not only identified an investment that they deemed necessary to meet a national priority, but they recognized its costs, found ways to make it fiscally responsible, and decided it was important enough to raise taxes to pay for the costs of the policy. This is exactly the type of responsible budget debate that should occur when considering new proposals, regardless of how big or small or whether the costs were generated from spending increases or tax cuts. 

In addition, lawmakers were debating the highway system in a very different context than the one we face today. Medicare had not been created, Medicaid had not been created, Social Security was still a relatively small program, and the country did not face the coming retirement of millions and millions of workers. The need to acknowledge and budget for the costs of new initiatives is much greater now given the magnitude of existing obligations for entitlement programs and projected debt levels we face today.

Fiscal Reform Can Open the Door to Higher Levels of Investment

Karabell laments what he believes is an inability to consider new investment projects today. He states:

Today, with the CBO as a gatekeeper and rigid numbers as its tools, we have reached a point where we can maintain spending on entitlements and defense but have no creative or dynamic means to invest in the long-term future of the country at a national level at precisely a time when we need it dearly and when societies around the world are doing so heavily and actively.

If Karabell believes that new investments are what the country needs, then wouldn't addressing the size of the defense budget and rising entitlement spending help free up federal resources? The growing share of the budget consumed by entitlements and the declining portion devoted to investments is not a result of CBO scoring. Rather, it is a function of political decisions made to prioritize spending on entitlement programs and a failure to take actions to control the growth of these programs. This is exactly what CRFB, CBO, and others mean when we refer to future budget flexibility and the risks of being locked into prior commitments with little ability to invest in new ideas or respond to crises. Ironically, comprehensive fiscal reform, which is grounded in long-term projections and adherence to budget scores, could help free up resources for new investments -- exactly what Karabell says the country needs. 

* * * * *

Our deficit problems will not go away on their own, and abandoning a reliance on budget estimates and long-term projections will not change the reality that our commitments are rising faster than our ability to pay for them. Even before the time of CBO, Congresses and administrations often considered how to pay for new, big initiatives -- a practice that is more important than ever given the fiscal challenges facing our nation.

While projections of the costs and benefits of legislation are inherently uncertain, CBO estimates provide lawmakers with important information about potential impacts of legislation based on the best information, techniques, and analysis available. Given debt levels that are projected to grow faster than our economy based on existing commitments, lawmakers should be prudent about new proposals: preparing for downside risks and reaping the benefits when things turn out better than expected, not outright dismissing projections about costs.