Saturday, 25 August 2012

Costing Incomplete Fiscal Plans: Ryan and the CBO

Some of the regular blogs I read are currently preoccupied (understandably) with the US Presidential election. This is not my territory, but the role of fiscal councils – in this case the CBO – in costing budget proposals is, and the two connect with the analysis of the Ryan budget plan. The Ryan ‘plan’ involves cutting the US budget deficit, but contains hardly any specifics about how that will be done.

There is nothing unique to the US here. In the 2010 UK elections, both main parties acknowledged the need for substantial reductions in the budget deficit over time, but neither party fully specified how these would be achieved. Now as the appropriate speed of deficit reduction was a key election issue, this might seem surprising. In particular, why did one party not fully specify its deficit reduction programme, and then gain votes by suggesting the other was not serious about the issue?

The answer has to be that any gains in making the plans credible would be outweighed by the political costs of upsetting all those who would lose out on specific measures. People can sign up to lower deficits, as long as achieving them does not involve increasing their taxes or reducing their benefits. However, I think it’s more than this. If people were fully aware of the implications of what deficit reduction plans might entail, you would guess that lack of information might be even more damaging than full information. As people tend to be risk averse, the (more widespread) fear that their benefits might be cut could be more costly in electoral terms than a smaller number knowing the truth.

The fact that this logic does not operate suggests to me that (at least among swing voters) there is a bigger disconnect in people’s minds between aggregate deficit plans and specific measures. Saying you will be tough on the deficit does not panic swing voters, but adds to your credibility in being serious about the deficit ‘problem’. Indeed, from my memory of the UK election, claims by one side about secret plans of the other were effectively neutralised as scaremongering.

This can be seen as the reverse side of a familiar cause of deficit bias. A political party can gain votes by promising things to specific sections of the electorate, but does not lose as many votes because of worries about how this will be paid for. The media can correct this bias by insisting on asking where the money will come from (or in the reverse case, where the cuts will come from), but they may have limited ability to check or interrogate the answer. This is where a fiscal council, which has authority as a result of being set by government but also independent of government, can be useful.

For some time the Netherlands Bureau for Economic Policy Analysis (often called the CPB) has offered to cost political parties fiscal proposals before elections. The interesting result is that all the major parties take up this offer. Not having your fiscal plans independently assessed appears to be a net political cost.

What the fiscal council is doing in this case is conferring an element of legitimacy on aggregate fiscal plans, a legitimacy that is more valuable than uncosted fiscal sweeteners. Which brings me to the question of what a fiscal council should do if these plans are clearly incomplete? In particular, suppose plans include some specific proposals that are deficit increasing or neutral, but unspecified plans to raise taxes or cut spending which lead to the deficit being reduced. By ‘should do’ here I do not mean what it is legally obliged to do, but what would be the right thing to do.

It seems to me clear that the right thing to do is not to cost the overall budget. What, after all, is being achieved by doing so? Many people or organisations can put a set of numbers for aggregate spending and taxes into a spreadsheet and calculate implied deficits, and the adding up can easily be checked. By getting the fiscal council to do this fairly trivial task serves no other purpose than to give the plan a legitimacy that it does not have.

In this situation, a fiscal council that does calculate deficit numbers for a plan that leaves out all the specifics is actually doing some harm. Instead of asking the difficult questions, it is giving others cover to avoid answering them. It is no excuse to say that what was done is clear in the text of the report. The fiscal council is there partly so people do not have to read the report. So I wonder if the CBO had any discretion in this respect. If Ryan was playing the system, perhaps the system needs changing to give the CBO a little more independence. 


  1. Both Paul Krugman and Martin Wolf have written about the implausibility of Ryan's budget proposals,they make shocking reading!
    As for lack of details,well that's a typical politician's trick,a speech full of rhetoric,soundbites and buzzwords aimed to pander to a disgruntled electorate with little or no thought of how to achieve it. Could be Osborne making the speech or as you say Balls for Labour. They're all the same when it comes to providing details.
    The one thing that is evident in his plans is,as over here the rich will suffer the least and the poor will bear the brunt of the cuts. Plus ca change!

  2. I've come to the belief that the US federal "budget", an innovation of the Harding administration, was a mistake.

    Previously, the federal government just had self-funded continuing programs, unfunded continuing programs, and taxes, all of which were tweaked at various times.

    I think the "budget" nonsense has actually made policy worse by reducing the number of automatic stablizers in the system. Under the old system, quite a lot of programs had automatic stabilizer effects. Under the new system, a lot of those get hacked to bits in the name of "balancing the budget".

  3. Yes, the government budget is a very odd construct.

    Firms would make a distinction between the purchase of assets and operating expenses such as payroll. They would also take depreciation into account.

    If a government spends a billion to fix a sewer system, then this goes into the budget as a spending item and is viewed as increasing the deficit. But letting the sewer system rot is an example of prudence, because the depreciation is not counted as an expenditure and does not change the government's fiscal balance.

    I hope the proposed fiscal councils properly value all of these things instead of being focused on cash flow deficits and surpluses.

  4. The media has the ability to do fact-checking, but U.S. media is oligopolistic and corporate-controlled; I doubt such profit-maximising entities care to cover "deficit reduction policies," particularly when those policies involve reduced corporate and upper-level income taxes that benefit media corporations' board of directors. Their conjuring trick is to shift public opinion away from such particulars.

    This is why it is important that the UK has the BBC, which can be at least partially independent on these matters (though I suppose it didn't help much in the last national election).

  5. From a GOP voter's perspective, given their scepticism towards facts, I'd argue that the CBO is largely an irrelevance. Rather its imprimatur let's more moderate people both in the US and here in the BBC, given its profoundly sanitised reporting of the US right, pretend the GOP aren't nasty crackpots.