A Hidden Economic Ideology: Six Flaws in the CBO's New Report

The new CBO report [1]is out, and it's a huge disappointment. Their report misrepresents both our nation's economic situation and the range of policy solutions available to the Federal government.

We'll review the report in greater detail in the days to come, but here are six glaring flaws that illustrate a hidden economic ideology - the same sort of anti-Keynesian, anti-spending, and anti-growth ideology that led so many economists to be so wrong in the last couple of decades.

Some flaws are analytical, some are errors of omission or bias, and some are merely misleadingly emphasized or presented facts. But, taken together, they illustrate the fact that our CBO - like so many economic institutions - has failed to absorb some real-life lessons of recent years.

The six most glaring flaws we found in the CBO report are:

1. It ignores job creation.

The words "employment" or "jobs" appear nowhere in the summary of its report, and the report itself says little about job creation. It accurately describes the role of unemployment in reducing government revenue. So why isn't the job creation part of the revenue equation included in this report?

Instead the CBO uses sleight-of-hand like this to ignore the stimulative effect of short-term job creation altogether:

"Policies that increased federal budget deficits would generally boost demand, thereby increasing output and employment relative to what would occur with smaller deficits or a balanced budget. However, the effects of that greater demand would be temporary because stabilizing forces in the economy ... tend to return output to its long-run potential level—that is, toward the amount of goods and services that the economy could produce if its capital and labor resources were fully employed. Because the analysis presented in this chapter focuses on the long-run effects of tax and spending policies on the economy, the estimates do not take those short-run effects on demand into account.

"In other words: Keynes be damned! In the long run, "I'm OK, you're OK." That's not how the world works. We learned that after the Great Depression, and have re-learned it many times since. But the CBO's determined to forget that short-term job creation leads to stronger long-term growth.

Near-term government revenues are being hurt by our continued high unemployment numbers, which is particularly acute among minorities, young people, and older workers, and especially by the record-high rates of long-term unemployment.

Long-term revenues are affected by today's youth unemployment figures, too. According to studies, young people who are underemployed or jobless in early employment will earn less money throughout their working lives. That means they'll pay less in taxes, too.

2. It amplifies misleading and fear-inducing statements about an "aging America."

The report says scary and misleading things like "The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security and Medicare, as well as long-term care services financed by Medicaid." But we've known about this "age wave" for a long time and had planned for it. This wouldn't be a problem, if not for other factors the report chooses to ignore.

Those factors include politically inconvenient issues like wealth inequality, unemployment, and tax favoritism toward the wealthy.

Although it doesn't say so explicitly, the report repeatedly gives the impression that Social Security contributes to the Federal budget deficit, which it is forbidden by law from doing. (That's why benefits may have to be reduced in twenty years or so, if no further changes are made to the program.)

And it ignores the root cause of that long-term shortfall, which is not an aging population. (That was fixed by the Greenspan Commission in the 1980s, which reduced benefits and increased contributions for baby boomers - who have paid those increased contributions throughout their working lives.)

3. It misleads on Social Security.

As economist L. Josh Bivens and others have demonstrated, that long-term shortfall is primarily caused by the fact that income inequality has become so much worse since the 1980s. As the wealthy capture more and more of the national income, more of that income has been above the payroll tax cap limit.

Instead of taxing 90 percent of our national income ,as originally planned, a significantly smaller percentage is contributing to Social Security. That problem's compounded by the wage stagnation being experienced by the middle class. If their wages don't rise, their payroll tax contributions don't go up either.

And unemployment hurts here, too.

4. It presents a radically distorted picture of health spending - and ignores its real cost drivers.

The report's analysis of public health spending states that "health care spending per person has grown faster than the nation’s economic output per person by an average of 1.6 percentage points per year during the past 25 years (based on a calculation that gives more weight to more- recent years)."

But it makes an extraordinary omission by failing to compare our spending baseline with that of other industrialized nations, which spend far less of health care than we do (and which have lower inflation rates).

Why leave this out? One can only speculate, but that would bring up the issue of our unique - and uniquely expensive - dependence on private, for-profit health providers and insurers.

The increasing prevalence of for-profit corporations and chains in key health care areas like hospitals and diagnostic services is completely ignored. Instead the report says things like "Key factors contributing to that faster growth have been the emergence and increasing use of new medical technologies, rising personal income, and the expanding scope of health insurance coverage."

("Expanded scope of health insurance coverage"? In reality the trend's gone the other way, as employers shift more and more health costs back onto their insured workforce - hence the large number of health-related bankruptcies among Americans with employer-sponsored health insurance.)

The report says this:

"Such rates of growth (in health spending) cannot continue indefinitely, because if they did, total spending on health care would eventually account for all of the country’s economic output—an impossible outcome. Instead, over time, people will try to limit their spending for health care in order to maintain their consumption of other goods and services. Private insurers and employers will adjust the insurance coverage they offer, the benefits they provide, and the amounts and nature of their payments to health care providers."

This is a remarkable paragraph, if only for its matter-of-fact assumption that people can sacrifice medical services without negative health consequences. (This may be partially due to a now-controversial, decades-old RAND Corporation study that concluded such a thing was possible.) Or that if they did suffer health consequences (note the use of the word "may") that was not an issue the CBO needed to flag for policymakers.

The report continues: "In addition, state governments—which pay a large share of Medicaid’s costs and have considerable influence on those costs—will need to reduce spending growth in order to balance their budgets. Those reactions to cost pressures will increase the incentives for health care providers to invest in cost-reducing technologies and to increase efficiency. "

None of these steps will address our health care cost problem. They'll simply cause financial hardship and adverse health consequences for large portions of the population instead. The real solutions - limits on health care profit-making, or an "all payer" fee system like those used in some other industrialized countries, go unmentioned. And single-payer? Forget about it.

5. It doesn't clearly identify the drivers of our current deficit - wars, the financial collapse, and tax breaks for the wealthy.

The report ignores the need to prevent further bank-caused financial crises, despite the 2008 crisis' impact on the Federal budget. It does discuss tax revenues at length, as a matter of necessity, but elides over the most critical area of lost revenue: top tax rates for the wealthiest Americans, which are at historically low levels.

And it plays games with the military budget, where it says that "Over the past four decades, defense discretionary spending has declined significantly, on balance, as a share of the economy."

Then there's no problem there, right? Read on

:"After the end of the Cold War, defense spending fell again relative to GDP, to a low of 3.0 percent at the turn of the century. In 2002, however, such spending began to climb again; it reached 4.7 percent of GDP from 2009 through 2011, mainly as a result of operations in Iraq and Afghanistan. In 2012, the funding provided for defense activities declined both as a share of GDP and in dollar terms

."Read that sentence a couple of times, if necessary. It says that military spending has gone up over the last decade and has peaked in the three years - and while it says that funding will decline this year, it doesn't say by how much.

Intermission

We interrupt our list of flaws to sum up where we are so far: Our short-term budget problems can only be fixed by increasing taxes on the wealthy, a short-term plan to significantly reduce unemployment, beefed-up education programs, infrastructure investment, and cuts in military spending.

And our long-term budget problems can only be fixed if we attack the root cause of runaway health spending in the United States: for-profit healthcare.

Jobs? Education? Infrastructure? Won't it hurt our government financially to borrow all that money? That gets us to flaw #6:

6. It doesn't emphasize the benefits of borrowing.

Actually, the opposite is true: There's so much investor confidence in the US government right now that markets are actually paying the government to borrow. That's right: Markets are offering negative interest rates on US government debt.

The CBO report says frightening things about long-term debt - but doesn't mention the fact that the government can make money tomorrow by borrowing today.

That means it's fiscally irresponsible not to borrow money in the short term and use it to 1) create jobs, 2) rebuild our bridges, schools, railroad, and highways (we'll have to do it eventually, and now's the best time to do it economically), 3) invest in our future through increased education and youth employment programs, and 4) promote other growth strategies to encourage wage increases for the middle class.

The "non-partisan" CBO doesn't have to support these initiatives. But a truly non-partisan group wouldn't ignore them altogether. The CBO does - and the human implications of that omission are tragic.