5 reasons you shouldn’t believe the government’s debt projections

U.S. Capitol
WASHINGTON, DC - JUNE 10: The U.S. Capitol building is seen on the evening of June 10, 2014 in Washington, DC. (Photo by Alex Wong/Getty Images)
Photograph by Alex Wong — Getty Images

There’s an old joke that asks, “Why did God create economists?” The answer: “To make weather forecasters look good.”

This wisecrack is particularly apt on Tuesday, a day when many on the East Coast woke up to find that the storm billed as the blizzard of the century turned out to be a run-of-the-mill snow fall.

Tuesday was also the day after economists at the Congressional Budget Office released their tri-annual 10-year budget projections for the federal government.

The report provides endless fodder for political pundits on the right and the left. For instance, the right is emphasizing the fact that the report warns of rising deficits starting in 2018 and increasingly unsustainable debt. While the left champions the report’s findings that Obamacare spending will be 20% cheaper over the next 10 years than originally imagined.

Politicians and their mouthpieces will use this report as gospel when it suits their purposes. But for the rest of us, it is useful to consider just how hard economic forecasting can be and how often economic forecasters get it wrong. Just like predicting the weather, predicting the economic future requires making many assumptions about the future, some of which are bound to be wrong. Here are five assumptions the CBO has made in its most recent report, and a few reasons you should take it with a grain of salt.

1. Interest Rates: Perhaps the single most important variable in any economic forecast is interest rates. In the case of the CBO, it must project where interests rates will be to forecast how much in interest the feds will have to pay on its debt. But, as the FT’s Matthew Klein shows, the government is likely being too pessimistic on this front.

The CBO’s prediction of an increasing deficit rests on its belief that interest rates will rise so much that the government will be paying nearly four times as much in interest in 2025 than it is today. While there’s some reason to believe that a recovering economy and greater government debt loads will cause rates to rise, the example of Japan should give anyone betting money on that pause.

2. Wars and natural disasters: The CBO might be a bit too pessimistic when it comes to interest rates, but the reverse is likely the case on the topic of wars and natural disasters. It predicts that defense and nondefense discretionary spending will continue to fall relative to GDP, an assumption that is hard to defend given the increasing likelihood of natural disasters in a warming world and an increasingly contentious atmosphere in Eastern Europe.

3. Congress remaining fiscally responsible: Depending on your opinion of our elected officials, perhaps the most laughable assumption the CBO makes is that Congress won’t enact any new spending without first paying for it. While this might seem likely as long as Republicans remain in control of Congress, it is the contention of mainstream Democratic economists like Larry Summers that more deficit spending is needed for the economy to reach full strength.

4. That today’s economic expansion will be the third-longest in history: The CBO projects that the economic recovery will last for at least three more years, which would make this expansion the third-longest in history. Economic expansions tend to last longer following financial crises, so this assumption has some basis behind it. But if it turns out wrong, that will change the budget outlook significantly.

5. We know how much debt is too much: One of the most questionable assumptions the economists at the CBO make is that the level of debt we have now, or the debt it projects we will have in 10 years, is somehow unsustainable or “will restrict policymakers’ ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises,” as the report reads.

A 2010 paper by economists Carmen Reinhart and Kenneth Rogoff tried to prove that high government debt loads slow economic growth. In 2013, their analysis was proven wrong. While common sense would tell us that less debt is better than more, there’s no empirical proof that if debt does rise to roughly 80% of GDP in 10 years, the economy or country will be worse off than if debt were 30% of GDP, as it has roughly averaged since World War II.

This is not to say that reducing the national debt is a bad idea. But it reminds us that there is sometimes a major difference between what we know empirically and what we might believe.

If you hope to make any sort of political argument based on CBO projections, remember that they are just estimates by well-meaning economists who aren’t going to be much more successful than your local weatherman at predicting the future.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

CryptocurrencyInvestingBanksReal Estate