How trustworthy should I consider the Congressional Budget Office re: the economy?

[Leaper]

I just read someone use this link and this link in opposing the stimulus. Both pull info/predictions from the Congressional Budget Office. Both say (at least as presented by the previously mentioned “someone”) that the stimulus is worse than doing nothing, and that “doing nothing” is PRECISELY what should be done.

Now, the “doing nothing” part has been advanced by many a conservative pundit, and there are plenty of economists I’ve read who wholeheartedly disagree, AND I don’t know much about the CBO. But that’s the reason for this post. How much should I trust their opinion on this matter? How should I judge them as a source?

(Obviously, I know that this will be affected by overall POV and beliefs about the economy; that, to answer Jon Stewart, is why so many people put faith in how “the markets” react to various political moves on the economy: because many of those people already think that the market knows best, and that it was actually the GOVERNMENT who caused the recession, so OF COURSE they’ll emphasize that. But I just wanted some perspectives here.)

[hawthorne]

The CBO is highly reputable. You should read its report [.pdf], not just those of various pundits. Just taking a real quick squiz , you can see on p5 that they say

The Outlook from 2011 to 2019
CBO does not attempt to predict cyclical movements
beyond the near term—that is, in the current projections,
beyond 2010—but instead aims to describe an average
path on which the economy’s actual output gradually
converges with its potential output.2 In these projections,
the anticipated GDP gap—the difference between actual
and potential output—will not close until early 2015 (see
Figure 1 on page 2). After that point, CBO projects,
GDP will average close to its potential and therefore will
grow at the same rate: 2.3 percent.

In other words, they *assume *that after 2010 the economy will converge to potential output. This is a perfectly sensible thing to assume, but it does not mean they are saying the stimulus is unnecessary or counterproductive.

[Nametag]

We’re talking about three different things, here.

The CBO, in January, prepared the report Hawthorne linked to; it specifically says:

In preparing its economic forecast, CBO assumes that current laws and policies governing federal spending and taxes do not change. This forecast, therefore, does not include the effects of a possible fiscal stimulus package.

In this report, CBO projects that the recession will end in 2009 – they base this on historical data, which they admit is only partly valid. The end of the recession is only the beginning of the recovery, however; it only means that the economy will stop contracting at that point. Recovery will require the economy to expand to its former strength, which won’t be until 2015.

The Washington Times article is quoting this letter to Judd Gregg, which projects that in the short run, the stimulus package will accelerate the recovery by a couple of years, producing 2012-level employment by next year. It also estimates that after 2015, the extra accumulated debt MIGHT knock 0.2% off the projected GDP – it might have no effect in the long run.

The CBO, in short, expects that doing nothing will result in a long, slow recovery starting in mid-2009. The recovery act is expected to produce a rapid recovery for the next two years, and then plateau, converging with the long slow recovery later on. We will pay for this rapid recovery with a vastly increased national debt, which will hopefully be reduced by future budget surpluses. Such surpluses cannot be predicted by CBO, because they will require additional legislation. Budget surpluses will require spending reductions and tax increases, both of which will be less painful when the economy has improved a bit. Either way, I expect the U.S. economy and the U.S. government will not be healthy and solvent again for a good 20 years (unless we see another bubble – which will produce problems of its own).

[Lantern]

We discussed this on the other thread and I think the CBO numbers support the stimulus. Roughly speaking the CBO is saying that the stimulus will boost GDP by around 6% in the next three years followed by a 6.2% reduction over the seven years after that. So yes there is a small net reduction in GDP but note that for all practical purposes 0.2% is zero particularly when you consider the fairly large margins of error for such forecasts.

So basically the CBO is predicting a moderate boost for the economy in the next three years and an equal decline of GDP over the seven years after. Is this worth it? I would say clearly yes. The boost comes when the economy really needs it whereas the reduction will probably come when the economy has recovered and is growing smoothly. The boost will come when the economy is way below full employment which means it will help create millions of jobs and also provide assistance to the poor through various stimulus projects. The decline will come when the economy is close to full employment. It won’t cost jobs but will mean a slightly smaller GDP growth spread across the whole population.

[Elendil_s_Heir]

I briefly worked on Capitol Hill twice, and CBO is generally very respected and trustworthy. It strives to be nonpartisan and really tries to “call 'em as it sees 'em.”