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COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

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Thursday, March 21, 2002

 
--- Surplus and Deficit: The Big Question Not Asked, Not Answered ---

With or without partisan posturing, we're entering an era of budgetary bereavement. A $5T projected 10-year surplus ("Politicians overcharge the taxpayer!") became a series of projected deficits ("Politicians can't balance the books!"). Fingers will be pointed, blame will be cast, questions will be raised.

"Huh? Where'd it go?" is one such question. Popular answers include:
  1. War (bad answer ... $1B/month over sanding defense budgets)
  2. Tax Cuts (good as far as it goes, subject to counterpressures of Laffer-ish dynamic scoring ... though most of either effect lies several years out)
  3. Runaway Spending (bad answer ... outlays maintain a 10-year declining glidepath as % of GDP, though Runaway Spinning via selective comparison can make it look worse).
But everybody's favorite excuse is Recession ... and here CP has a provocation to provocate.

In any legitimate methodology, a forecast made in good times always embraces a conservative assumption: good times don't last. If I recall correctly, CBO (and OMB under the previous administration) always posited a "typical" recession ahead, with onset and recovery weighted in over e.g. the next 3 years.

Clinton administration OMB outperformed fiscal balance projections every year, largely because the lead edge of this hypothesized dip moved a year farther out with every year elapsed, and the recession never came.

CBO estimates are prepared under a doctrine of asymmetric risk -- they'd rather underestimate income than overestimate it. In practice, CBO lowballs GDP growth by about 0.2% annually (with respect to its best unbiased estimate), and compounds that underestimate for five years forward. Again, the methodology is built to favor favorable surprises (actual vs estimate) in more periods than not.

Now that we have logged an actual dip ("Step right up, folks, see the World's Smallest Recession"), why should we find any impact on 10-yr projections?

As fate would have it, our dip materialized in Year 1 -- rather than Year 2, or 3, or not at all -- and this should very marginally raise the odds of 3 dips rather than 2 in the 10-year estimating cycle. But that effect should be barely detectable in the 10-year aggregates. Can it take a $5T mountain down to a rapidly-eroding $1T molehill? Ludicrous.

In the context of heavyweight deficit foodfights, the "slowdown" delta is the biggest moving piece ... but to the best of my understanding [and having queried more than one budget-process maven] this effect shouldn't exist, and I don't see anybody in the arena scratching for an explanation.

CBO year-to-year revisions also include a category called "technical changes". Some of these are exceedingly technical changes in methodology, measurement and definition. Also in this category are changes to the big baseline S.W.A.G.'s ... productivity growth rate is the biggie. This is susceptible to almost limitless reasonable disagreement, especially given the emerging reality or unreality of "New Economy" dynamics.

Maybe we should be talking about this. Maybe we should be talking about trillions in capital destroyed in the burst of conjoined bubbles named "dotcom" and "broadband". But we shouldn't just blame the recession for five trillion fallen souffles, and go back to our usual arguments.