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The Congressional Budget Office came out with its Update to the Budget and Economic Outlook 2012 – 2022 yesterday (Link). The press jumped on the report’s conclusion that the consequences of not dealing with the fiscal cliff will cause a recession in 2013. The CBO thought it might result in 0.5% YoY drop in GDP.
Ho Hum to that. If the country does not come up with some compromises, and we do fall of the fiscal cliff, the recession will be much large than a half percent decline.
For the hell of it, I looked up the CBO report for 2002. This report contains the forecast for calendar year 2012. In a number of critical areas, the CBO missed by a mile:
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CBO- Ten Years After
(amounts in Trillions)
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I don’t blame the CBO for these big misses. It is not its job to predict wars and the biggest recession in 80 years. But a look at what was thought to be reasonable a decade ago shows that the expectations were not reasonable at all. Bad “stuff” happens. Bubbles, wars and recessions can’t be predicted with any degree of accuracy, but it is predictable that they will occur.
The August 2012 CBO report look into the future with same bleary eyes that contemplated the outlook in 2002. If there are no unanticipated hiccups over the next decade (there will be) the fiscal and economic imbalances that are with us today will be eliminated. The CBO expects that nominal growth will average 4.5% (real GDP growth = 2.4% – (no recession!). Inflation will be tame (Core PCE =2%) and today’s Debt to Public will fall from 73% to 58%. All is well.
Two final pics. The first from 2002, is a look at how quickly the US would go into surplus, the second from 2012 shows the reality.
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I don’t think it’s possible for the CBO to miss the 2012 ten-year projection of Debt to GDP by 400% as it a decade ago. If that were to occur, debt/GDP would push towards 300%. That can’t happen. The country would simply blow up before we got to that level. But there are significant forecasting errors in the latest CBO outlook, we will just have to wait to see what they missed.
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good info
Great stuff, Bruce. CBO is hamstrung in its predictions because they cannot make assumptions about what changes Congress might make, but still. . .
I guess the best way to look at CBO’s projections is that they represent the conventional wisdom at a given point in time. Useful as a foil, I suppose.
Great review. How can us commoners get it so right and the ‘experts’ with all the data get is so wrong. Simple answer. Instead of “it is what it is” we have transitioned to “it is what I want it to be” egonomics. Sorta like the kid in school telling everyone what their grades will be…..and the parents drink the kool aid until the report card comes out with the real news. They talk about it but nothing is done about it. The kid gets used to doing it…the parents get used to accepting it. Everyone doing just enough to get by…to get along. At the end of the day, no one on either side is accountable. If so, they are an outcast…not part of the mainstream….and shunned publically.
been following you since seeking alpha 2 years ago.Was curious why you left SA? I thought you were early in prediction of euro breakup and did well with apple but sold in march 2012 and missed 150 points but made nice profit thinking I had pushed my luck enough,then Draghi says will save at any cost,oh well.What do you think of euro now?I think they will start there own QE eventually to save all there own skins!What do you think would happen to US equities if they start printing? BTW Was in the haight in 67 also,for 2 weeks,before being drafted in CT.Avalon ballroom and all that.Bored me pretty quick though.Thanks for all the hard work again.
I left SA as it was a dead end. They wanted only exclusives. I don’t do that.
The summer of 67 was a hell of time to be in SF. Changed my life. Sounds like it was a tipping point for you too.
I’m lost on the Euro as of now. I think it should be 1.10, market disagrees with me, and the market is always right.
Great post Bruce. Well, this reminds me very much of your article on Social Security and how reivestment risk for SS rolling over into new debt will greatly influence their projections….to the downside.
At least they called FICA deductions (aka Social Security) a “tax”. Which is all that it is.
The CBO is required by law to forecast based upon the policies that are in place at the time. The Bush tax cuts of 2003 were not in place in 2002, and the 2001 tax cuts were scheduled to expire in 2011. I don’t see the validity of criticizing them for being off on the 2012 deficit.
If you look at the September 2004 report, the 2011 projection was for 40% public held debt to GDP. They were also predicting 600B of defense spending. They DID project the military costs accurately, once the policies were embarked on. So it’s fair to say that before the policies happened, that they weren’t projected. And it’s also fair to say that CBO forecasts are built around a steady state model of the economy, but the real world is lumpy.
But overall, I think you are being unduly harsh. Especially the last chart. The 2004 forecast was for deficits of 2% of GDP prior to expiration of the 2001/2003 tax cuts, which swing to a narrow -.4% deficit after expiration. The point is this: the CBO said at the time these cuts would produce deficits, and that’s what happened.
Export-Import Bank of the United States investment in a $10 billion Australian coal-mining deal to help China…
http://www.marketwatch.com/story/how-big-mining-deal-will-sabotage-america-2012-08-24?link=MW_home_latest_news
OT
BBC article about pensions in Greece with some great quotes: Greece’s pensioners face looming poverty
“I feel like they just stole my money,” he says.
They did.
If I had saved all those payments in a bank account I would be rich by now; where has it all gone?”
Maybe not rich, but you’d be a lot better off than you are now.
People who imagine Social Security is any different are delusional.
Sad.