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Sunday
Feb102013

US Politics Analysis: "Lies, Damned Lies, and Statistics" --- The Battle over "Stimulus" v. "Cuts"

On Tuesday the Congressional Budget Office published "The Budget and Economic Outlook: Fiscal Years 2013 to 2023", detailing how current legislation will affect the growth of America’s economy.

The CBO's aim is to provide politicians from both parties with a baseline to consider the impact of any alteration to current law. The Office has the advantage that, while it has critics, it is about as nonpartisan and independent an organisation to be found in the nation’s capital. The CBO makes no policy recommendations. It only provides the economic statistics that undergird discussion of the issues and what should be done.

The problem with the CBO report, through no fault of its own, is that its abundance of statistics and estimates is fodder for mainipulation. There may be some debate as to where the phrase ‘"lies, damned lies, and statistics" originated, but little over its primary association with politicians and political activists.

Selection of certain statistics from the CBO report allows those in the political arena to make two wildly opposing arguments. There is a case to be made for the urgent need for another round of spending designed for growth and job creation. There is just as strong a case for drastic reductions in government expenditure, slowing America’s descent into unsustainable debt.

The CBO Outlook estimates that the jobless rate will remain above 7.5% through the end of 2014. It is projected to fall to 5.5% by 2017, but only through a forecast of economic growth of 3.6% per year at that point.

Moreover, this rosier medium-term unemployment projection rests on the assumption that the US will finally have closed the output gap --- the difference between "real" GDP and "potential" GDP --- caused by the financial crisis of 2008.

This output gap has “cost” America $1 trillion a year, roughly the size of the deficits compiled in the same period, with the forecast of $8 trillion in under-performance between 2007 and 2017.

The case for pro-growth policies rests on closing that gap, reducing the deficit and debts as a share of GDP. It makes sense --- the total number of how much America owes doesn’t matter; it is the ability to repay that bothers creditors. As long as the debt is falling relative to America’s GDP, then the country is on the right path. Borrowing a dollar to make two, with a negligible interest rate, is good economics.

Without that stimulus, the CBO estimates it will take four years for underlying economic factors to close the output gap. That wait is intolerable for liberals, such as Senator Patty Murray, a Democrat from Washington:

Today’s CBO outlook confirms that the economic recovery remains fragile and we can’t afford to lose focus on job creation and economic growth. I hope this nonpartisan economic analysis will push my Republican colleagues to finally end the political brinkmanship that has hurt the economy and to work with us on a fair and pro-growth budget plan.

Murray, as chair of the Senate Budget Committee, is in a position to make a difference. She has already scheduled an appearance on Tuesday by Dr. Douglas Elmendorf, Director of the CBO. The next day, a hearing will be held on the "Impact of Budget Decisions on Families and Communities", with testimony will be provided by members of the public “to make sure the values and priorities of families across the country are heard loud and clear in a budget process that too often denies them a seat at the table".

At the same time, the CBO report has stern warnings about America’s debt problems that conservatives can seize to counter the pro-growth arguments of SMurray and her allies.The CBO predicts that the deficit will drop over the short-term, but it maintains that “by 2023, if current laws remain in place, debt will equal 77 percent of GDP and be on an upward path". This could be devastating:

When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

Conservatives insist that increased revenue should not be the means to reduce the debt and deficits. Instead, government spending must be cut to halt this alarming scenario. The CBO’s Outlook gives them plenty of ammunition for this campaign:

Revenues are projected to grow from 15.8 percent of GDP in 2012 to 19.1 percent of GDP in 2015—compared with an average of 17.9 percent of GDP over the past 40 years. Under current law, revenues will remain at roughly 19 percent of GDP from 2015 through 2023.

Meanwhile on the expenditure side, “Although outlays are projected to decline from 22.8 percent of GDP in 2012 to 21.5 percent by 2017, they will still exceed their 40-year average of 21.0 percent.”

So the CBO is estimating that under current law revenues and spending will both be above their 40-year average. Thus, conservatives can point to the math to argue that an increase in revenues is not needed for a return to "normalcy", but a cut in spending is required if the US is to return to the responsible budget processes of the past.

The deadline of 1 March for "sequestration" --- the mandatory sweeping cut in Government budgets if there is no agreement on a way forward --- approaches, and both Republicans and Democrats have begun manoeuvring in the media. Both will use this 2013 CBO Budget Outlook for their side of the case of stimulus v. cuts.

And the battle will go on. For while each side will accuse the other of lying, each can actually claim a portion of the "truth".

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