The CBO is a Useful Idiot

The Federal Reserve Bank of St. Louis recently asked an interesting question. "Congress relies on projections supplied by the Congressional Budget Office to make decisions. How good are those projections?" It turns out the answer is, "Pretty poor". In fact the CBO's projections are consistently worse than those generated by a simple Random Walk model! So why would anyone keep citing anything the CBO said? It turns out that the CBO errors have a consistent bias toward underestimating deficits and overestimating surpluses. In other words, the CBO is a "useful idiot" if your objective is to justify government spending or tax increases.

Actual and CBO-Projected 5-Year Cumulative Budget Surplus/Deficit as a Percent of GDP

 

Projected

Figure 7

Cumulative 5-Year Random Walk and Actual Deficit as a Percent of GDP