Tags: Auerbach | Manski | CBO | projections

Brookings Institution Takes Close Look at Uncertainty

By    |   Tuesday, 16 Dec 2014 07:50 AM

The Brookings Institution held a half-day program Dec. 15 titled "The Long Run Outlook for the Federal Budget: Do We Know Enough to Worry?' This article covers the first panel, which featured a paper by Alan Auerbach, a professor of economics and law at the University of California, Berkeley, with comments by Charles Manski, an economist at Northwestern, and questions from some high-powered audience members. While this was a certifiably liberal group, some of the ideas debated were fairly hardheaded from a conservative point of view.

The main theme of Auerbach's paper is that he finds the quality of long-term projections on which policymakers are asked to make decisions to be deficient, and he asks how they should respond to this fact. He observed that they might decide to ignore the uncertainty embodied in the projections and to defer action. This might seem natural and sensible, but Auerbach argues to the contrary that the policy response should be bolder in the name of precaution against the prospect of outcomes that prove to be worse than expected.

He attributed much of the uncertainty in projections to uncertainty over the short- and medium- run to the business cycle, and over the long run to uncertainty regarding productivity growth, the interest rate on federal debt and the rate of excess growth in healthcare costs. (A recent panel at Cato put considerable stress on demographic factors, especially the withdrawal of the baby boom generation from the labor force, as a limiting factor on economic growth that is quite predictable and unchangeable.)

Auerbach called on the non-partisan Congressional Budget Office (CBO) to incorporate uncertainty into its estimates. In other words, CBO should attach probabilities to a range of possible outcomes rather than settle for traditional point estimates. He also advocates automatic budget adjustments as a means of leveling out funding changes (usually increases) over time.

Manski went even beyond Auerbach in criticizing the quality of the projections that inform policy, criticisms that would ring true for conservatives. He finds that official statistics make very little mention of error, and therefore he attaches "not much credibility" to them.

For example, GDP numbers come out in three phases and are constantly in the process of revision. Population numbers are based on census data that are 40 percent missing and the constructed based on assumptions. He was also critical of the routine use of seasonal adjustments that can distort underlying data. Finally, he ridiculed the CBO budget scoring process that yields point estimates while estimates of experts can diverge greatly.

Here's a "gee whiz" example. In 2010, the current director of CBO, Douglas Elmendorf, a Democrat, estimated savings from healthcare legislation at $138 billion, while his Republican predecessor, Douglas Holtz-Eakin, estimated that it would cost $562 billion, a swing of exactly, so to speak, $700 billion. This for an agency that is widely praised for its objectivity.

(Archived video and presentations can be found here.)

© 2017 Newsmax Finance. All rights reserved.

 
1Like our page
2Share
Robert-Feinberg
The Brookings Institution held a half-day program Dec. 15 titled "The Long Run Outlook for the Federal Budget: Do We Know Enough to Worry?' This article covers the first panel, which featured a paper by Alan Auerbach, a professor of economics and law at the University of California, Berkeley.
Auerbach, Manski, CBO, projections
488
2014-50-16
Tuesday, 16 Dec 2014 07:50 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved