The $12 Trillion Misunderstanding
Call it the $12 trillion misunderstanding.
It ranks among the biggest forecasting errors ever. Back in 2001, the Congressional Budget Office projected federal budget surpluses of $5.6 trillion for 2002-2011. Instead we got $6.1 trillion of deficits — a swing of $11.7 trillion. Naturally, political recriminations followed. Who or what caused the change? President Bush’s tax cuts for “the rich”? The Iraq and Afghanistan wars? The Medicare drug benefit? The financial crisis? President Obama’s “stimulus”?
Doubtlessly, the question will emerge as a campaign issue. But any intellectually honest answer — perhaps futile in today’s politically charged climate — will admit that no single cause explains the change. We now have evaluations from the CBO and two nonpartisan groups: the Committee for a Responsible Federal Budget (CRFB) and the Pew Fiscal Analysis Initiative. They all point in the same direction.
For starters, a weak economy was the largest cause. The CBO attributes $3.2 trillion of the $11.7 trillion shift (about 27 percent) to “economic and technical changes.” “We overestimated how good the economy would be, even before the Great Recession,” says Marc Goldwein of the CRFB.
Consider. In 2001, the CBO projected that the economy would grow about 3 percent a year over the 2002-2011 period. Actual growth from 2002 to 2007 averaged only 2.6 percent. From 2008 through 2011 — the Great Recession started in late 2007 — growth averaged only about 0.2 percent annually. Slow economic growth reduces tax revenues and increases spending for jobless benefits and other assistance.