Are CBO Estimates Really The Gold Standard Of Accuracy?

The pessimistic CBO estimates of growth, deficits, and unemployment for 2012 and 2013 are big news. The Democrats use them to argue for more stimulus. The Republicans cite them as a cautionary tale against government spending. Both sides express reverence for the “non-partisan” CBO, whose calculations are the “gold standard” of accuracy and integrity.

This elevated view of the CBO is wrong, not because the CBO is partisan or not immune to fudging. The CBO studies that I have examined use Keynesian models as the basis for all their calculations. If they are ordered to estimate the effect of the stimulus on GDP and jobs, they attach Keynesian multipliers to different spending categories. The model they use guarantees the finding that the stimulus saved jobs and growth. Similarly, when the CBO looks ahead to 2012 and 2013 and applies similar Keynesian models to projected tax increases and slower government spending, they will automatically conclude that growth will be slow and unemployment high.

The new CBO estimates cover 172 pages of charts, explanations, and footnotes. The draft spends most of its time on the details of government spending and revenues, which they must estimate using the flawed assumptions Congress gives them. The CBO publication does not take the reader into the “kitchen” where they prepare their estimates of GDP, but the source of their pessimism is clear from a short quotation (page 36):

Federal fiscal support for economic growth will weaken this year before turning to significant restraint in 2012 and 2013. Without the 2010 tax act, federal fiscal policy would have been restrictive this year because of the previously scheduled tax increases and the waning of the effects of ARRA (the stimulus).

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Thomas Sargent, Rational Expectations and The Keynesian Consensus

The Nobel Committee has again awarded the Nobel Prize in Economics to an economist who helped shatter the Keynesian consensus. We can now add Thomas Sargent’s name to a growing list of  Nobel laureate Keynesian skeptics. According to my count, we now have eight Nobel Prizes  to economists who cast doubt on the Keynesian model, and zero to economists for advancing the Keynesian agenda.
Whereas Robert Lucas (Nobel Prize 1995) provided the theoretical foundations of rational expectations theory, Thomas Sargent tested rational expectations against real-world data. Lucas’s and Sargent’s seminal research was carried out in the 1970s during the era of stagflation that was ended by Ronald Reagan and Paul Volcker.
Newspaper explanations of the contributions of Nobel laureates in economics leave readers more confused than enlightened. Readers either wonder why a Nobel Prize was awarded for such an obvious idea or their heads spin from the reported complexity of the idea.  The accounts of the Sargent award in both the Wall Street Journal and New York Times are less than clear. This is a shame because Sargent’s work speaks directly to policy issues as relevant today as they were in the 1970s. It is noteworthy that the New York Times account does not mention its anti-Keynesian implications.
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