You may have seen that the CBO updated their ten year budget projections yesterday. Here are a few observations about its economic assumptions:
- The current expansion will break the record for longest expansion ever. In fact, the CBO’s long-term projections show that it will never end. And it makes this prediction every year. CBO rule #1: There’s no such thing as the business cycle.
- The economy will accelerate to “above trend” growth in 2014 and remain at a heightened growth rate until 2021, when it settles back to the trend growth assumption of just over 2% per year. The growth peak will occur in 2016 (at 4.4%). This is one year later than it assumed in projections made in 2011 and 2012, three years later than in the projections from 2010, four years later than in the projections from 2009, six years later than in the projections from 2008, and so on. CBO rule #2: Always assume the economy will accelerate towards a full employment level of output, peaking at an unusually rapid growth rate in a few years time.
- The 2023 projections suggest no change in the CBO’s approach of aligning productivity growth with historical averages, ignoring better judgment by those (for example, Tyler Cowan, Jeremy Grantham, Robert Gordon, Carmen Reinhart and Kenneth Rogoff) who’ve recognized that productivity growth shouldn’t be as high in today’s service-oriented and high debt economy. And also ignoring the CBO’s warnings that its productivity figures are inconsistent with its own models (The 2012 Long-term Budget Outlook). CBO rule #3: Ignore ample evidence and even CBO research showing that its assumptions are overly optimistic. Embed warnings of the problems with this approach in long reports that never enter the broader debate.
And here’s a chart showing the last six years’ of CBO economic growth forecasts:
Nothing new here, just reminders of a few of the reasons why the CBO’s debt projections are consistently wrong. I discuss other problems with its work in the second installment of “Seven Deadly Sins of the Government Debt Debate,” which I’ll repost next week.