Biden Budgets Challenge Agency That Kept Predicting Deficit Doom
(Bloomberg) -- President Joe Biden’s administration appears relaxed about running large budget deficits, but for one government agency that’s usually been a cue to start sounding alarms.
The nonpartisan Congressional Budget Office –- whose job is to evaluate how new legislation will affect the public finances -- finds itself in a tough spot as Biden prepares to announce an economic package worth as much as $3 trillion, on top of his $1.9 trillion pandemic relief bill earlier this month.
Since its creation in the 1970s, the CBO has often been on the hawkish side of budget arguments, flagging the risk that the U.S. could slide into a fiscal crisis by spending too much. It repeated the warning this month. But the agency has persistently overestimated the government’s borrowing costs -- leading to exaggerated debt projections that helped deter public spending.
And its forecasts have relied on assumptions about how the economy works that are increasingly coming under fire, including from members of Biden’s administration.
After decades of falling borrowing costs, the government’s interest bills have shrunk even as its debt has surged. Officials like Treasury Secretary Janet Yellen now say that these servicing costs -- rather than more traditional metrics like budget deficits or the national debt as a share of GDP -- are the best guide to how much spending room there is.
The CBO says it’s adjusting to the times.
“We know that interest rates have remained lower than previously expected, even as deficits have remained wide and the debt level has picked up -- and that’s important news,” said Phillip Swagel, its director since 2019. “You see signs of inflationary pressures. But it’s not like the world falls apart.”
In 2010, when the government was still running a sizeable deficit after the financial crisis, the agency said interest payments were “poised to skyrocket” and predicted the yield on 10-year Treasuries would average around 5.5% in the second half of the subsequent decade. Financial markets took a similar view. But the actual rate turned out to be less than half that, as the economy recovered slowly.
Now, the CBO looks more likely to miss on the downside. In February, before the Biden stimulus passed, it projected that 10-year borrowing costs will rise at a gradual basis of 20 basis points a year after the pandemic slump -– to average 1.1% this year and then 1.5% in 2023. Treasury yields are already above that latter level, after surging 70 basis points since the new year.
‘Don’t Make Sense’
Some fiscally conservative Republicans would like to see the CBO take a firmer stand against deficits and debt. Last week, GOP Senator Mike Lee reintroduced a bill that would require the agency to publish all its models and data, though the CBO already reveals most of its workings.
More often it’s been advocates of expansionary policy who object to the CBO’s methods.
The agency warns that budget deficits may drive government borrowing costs higher, because investors will insist on bigger rewards for holding U.S. debt, and that government spending will “crowd out” private investment.
A growing number of economists, including those from the rising school of Modern Monetary Theory, are challenging these arguments and pointing out that there’s little recent evidence to back them up.
“These stories about debt don’t make sense any more, and now people actually recognize that and have become skeptical,” says J.W. Mason, associate professor of economics at the City University of New York.
Swagel says portraying the CBO as a deficit scold misses the point about the agency’s role.
“Should there be more spending or less spending? What’s the proper role for the government in society? Those are not issues for the CBO to decide,” he says. The CBO is merely outlining the risks associated with certain policies, says Swagel. “That is not saying, ‘Don’t do them’.”
Douglas Elmendorf, a former CBO director who’s now dean of the Harvard Kennedy School, acknowledges that “the weight of the evidence has shifted a fair bit.” He says there are still plenty of economists and policy makers who are “fighting the last war about fiscal policy, where they are focused almost entirely on the risks of too much federal borrowing.”
The CBO was created as part of a push by Congress to rein in the White House and make budgets more data-driven.
The agency has already fallen foul of the Biden administration over its now-shelved plan to more than double the minimum wage.
The CBO forecast it would result in 1.4 million lost jobs. That was immediately picked up as a talking point by Republicans, while Democrats suggested the analysis was flawed. Jared Bernstein, a top Biden adviser on economic policy, said other research has found “much smaller effects” on employment.
In the recent past, there have been plenty of Democrats ready to warn about excessive spending, and rising deficits and debt, on the same lines that the CBO has often done. The Obama administration quickly pivoted to tighter budgets after the Great Recession of a decade ago.
But the mood is different now, according to Democratic Representative Don Beyer of Virginia, head of Congress’s Joint Economic Committee. He says lawmakers have concluded they were too quick to hit the brakes in the past, and should take advantage of cheap borrowing costs to “ let the economy get really healthy again this time.”
Low interest rates have “wrecked everything we learned about macroeconomics in college,” Beyer says.
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