Questions Raised by the Congressional Budget Office Report

February 12, 2013

As expected, the Congressional Budget Office (CBO) Budget and Economic Outlook released recently continued the pattern of predicting a strong recovery just two years away. Although CBO's economic approach is typical among forecasters and historically unbiased, the economy's persistent failure to launch as predicted raises questions. Are current conditions of persistent slow growth and high unemployment principally the result of bad luck, uncertain global economic conditions or bad policy, asks Salim Furth, a senior policy analyst at the Heritage Foundation.

  • In the 2013 forecast, CBO predicts that the next two years will continue the mediocre, below-potential growth of the past three years.
  • After that, its framework dictates that actual gross domestic product (GDP) must spring back toward potential GDP -- an estimate of how much the economy could produce if labor and capital were used at typical intensity and efficiency.
  • Since we are far below potential, that means three years (2015-2017) of rapid growth.

This sounds strikingly similar the CBO's Outlook in January 2012 -- and the ones in 2011, 2010 and 2009. Each year the Outlook embodies the spring-back theory of recessions, with a robust recovery beginning two years away.

Another interesting question raised by the Outlook is how much potential GDP has changed as a result of the Great Recession and subsequent policies. Since 2009, CBO's expectation of real GDP in 2019 has slid by 4 percent.

The release of the Budget and Economic Outlook gives economists, policymakers and observers a framework to raise questions about the health and future of the American economy. Beyond the truism that the economy is in a nasty slump, data and theory indicate that the economy is worse than one would expect based on economic factors alone.

The policies of the past five years have systematically harmed the economy in both the short run and the long run. As discouraging as the new CBO Outlook is, reality will probably be worse unless federal policies improve.

Source: Salim Furth, "Questions Raised by the CBO Report," Heritage Foundation, February 5, 2013.

 

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