CBO Crows

The CBO published a report (pdf) that gives itself a pat on the back. The analysis looks at the success rate of CBO economist's forecasting of key economic metrics over a long period of time. If you can wade through this beast you will see that the CBO thinks pretty highly of itself. One example:

I am going to take issue with the CBO. My first concern is that their measurement stick is a comparison of their forecasts to those of the “Blue Chip” economists. Who cares? Yes they came up with numbers that were highly correlated to others. That proves nothing.The others were off the mark.

My second concern is that the study covered a period up to 2008. That cut off date is convenient. They missed the forecast by a mile in that year and ever since.

Here is a slide of the January 24, 2007 CBO forecast for the budget deficits.

Note that their expectation for the 2008-2011 cumulative deficit was $1.25T. The real number will be $4 Trillion. About a 300% error rate.

I’m razzing on the CBO because they gave me the window with their glowing report. I wonder what it cost to produce. Econometric forecasting is tough stuff. The future is much more unpredictable than what we were used to. It’s not just the VIX, everything is moving faster, including global economic cycles.

In the first slide there is a third column: Administration projections. I think this is a dig at the OMB. Basically they are saying, “We did about the same as the blue chips, but we did better than OMB”. That result makes sense. OMB is the Executive branch and therefore political. Politics always comes in the way of forecasting. This slide is from 2008. It is OMB’s projected deficits. They had us going into surplus. They were off by a tidy $5T.

One lesson might be that the future is not predictable and therefore a range of forecasts must be developed. One of them must be the proverbial “Worst Case”. The view of the dark side is of course produced by the CBO. They just don’t release that set of numbers. They should.

Another lesson would be to get this process apolitical. That of course is impossible.