A few times a year, government economists, like oracles, issue forecasts of the federal debt. The projections, such as the one that will be embedded in the White House budget, are the culmination of hundreds of hours of work by the nation’s top economists. They can nudge markets, spook lawmakers and shift policy agendas. They can also be very wrong.
“It is possible that if we’re in particularly bad times we’ll be pessimistic for too long, just like when we’re in particularly good times we’ll be optimistic for too long,” said Tara Sinclair, an economics professor at George Washington University and codirector of the GWU Research Program on Forecasting. Current debt forecasts may be too pessimistic, she said, "mostly because we could have stronger economic growth going forward."
The degree to which projections can miss the mark varies. The Congressional Budget Office’s forecasts must be bound by current law, so the projections can’t take into account likely new policies. White House budget forecasts aren’t limited by the same rule, but suffer from their own bias: They reflect the hopes of the president at the time. Both have been wildly amiss.
In 2000, CBO and the Office of Management and Budget projected a decade of annual surpluses, which would have eliminated most of the then-$3.5 trillion in federal debt held by the public. By the end of 2010, however, the debt had actually ballooned to roughly $9 trillion. Of course, in the intervening years, the nation suffered its greatest economic disaster in decades. But the debt had reached $5 trillion even before the Great Recession.
Had those surplus projections been right, it would have represented a departure from the historical trend. So the forecast spurred two researchers at the Federal Reserve Bank of St. Louis to investigate in a 2001 paper. Their conclusion? In its five-year projections, CBO has tended to under-project the size of deficits to a large degree, and there was no statistically significant relationship between its projections and actual experience.
The duo updated their paper last year, confirming their findings. CBO’s one-year projections were more accurate than its five-year projections, but both failed a simple accuracy test. Replacing CBO’s forecasts with projections based on the previous one or five years produced estimates were just as good.
“CBO could have done as well by simply assuming that next year’s budget surplus/deficit would be the same as last year’s,” the duo, St. Louis Fed economist Kevin L. Kliesen and St. Louis Fed Vice President and Economic Adviser Daniel L. Thornton, wrote in their paper.
Other research has yielded similar results. In a 2011 paper, Andrew B. Martinez, then a graduate student in the economics department at GWU, found that OMB’s one-year forecasts of gross debt had fared better than CBO’s from the early 1980s through 2008, but deteriorated sharply after that “due to structural breaks and policy shifts.” Both were “relatively successful” at debt forecasting, but neither got its projections totally right.
“When only one of the agency’s forecasts is used, there is an incomplete and potentially distorted picture of the future levels and changes in government debt,” he wrote.
Of course, laws can't be made in a vacuum, so CBO and OMB debt projections play an important role in informing the fiscal debate. But, as the research suggests, such forecasts can be error-prone, sometimes drastically so.