Future economic projections are wrong
In the current fiscal debate, a lot of numbers are being used to describe or defend the various plans being put forth. This one will cut spending by $1.4 trillion, that one will reduce the debt by $4.3 trillion, and so on. The fact is that every one of these projections is wrong.
I don’t know if they are wrong on the high side or the low side, close to or far from what will actually happen, but I do know that they are wrong. They are based on estimates of a wide range of variables, including the growth rate of the national economy, the level of tax revenue that will be generated and the amount of federal spending that will occur over the next ten years. It’s hard for anyone to know any of those things with precision over one year, let alone ten. Compare the projections confidently made ten years ago with where we are today and you will see what I mean.
Nevertheless, every year, the Congressional Budget Office (CBO) examines a number of economic factors, feeds its assumptions into its computers and comes up projections “scoring” the ten year financial impact of every bill introduced in the Congress. If CBO computers say a proposal will cost X dollars over that period of time, X dollars is what the cost will be. CBO’s word is final.
The divergence between projection and reality can have long lasting consequences. Take health care. The initial score for Medicare was too low by a huge margin; the real cost has been more than 20 times higher than anticipated, even adjusting for inflation. Joseph Califano, the White House aide responsible for drafting the first Medicare proposal, has written that the potential size of the scoring error became known within 18 months of passage, but “by then it was too late.”
On the other hand, the score for the cost of the latest addition to Medicare – the drug benefit, Part D – has turned out to be have been too high. To the surprise of everyone, this program is currently costing substantially less than forecast while enjoying an approval rating in excess of 80% among those who use it.
Where are we now, with respect to Medicare? Overall costs have not been going up as fast as they were, so CBO has done a new projection. A few weeks ago, it announced that Medicare costs in 2020 would be $200 billion less than previously estimated. That’s good news (although the number is surely too high or too low) and Part D has helped.
Before it was passed, Medicare would pay for an expensive hospital stay but not for the much cheaper drug treatments that would prevent one. CBO scored Part D without taking that possible impact into consideration. Now we know that that really happens, and since increased use of drug therapies has lowered costs, further changes in Medicare should be made to accellerate that trend, regardless of how they score.
There is much more to be done before we can relax with respect to the rising cost of health care. Even as we applaud the trend, we don’t know every reason for its existence or exactly where it is going. As Yogi Berra has been quoted as saying, “Predictions are always uncertain, especially about the future.”
So, in our political dialog, we should be less dogmatic in citing projections that support past prejudices and more willing to embrace course corrections as new data become available. That’s the best way to make sound decisions about our fiscal problems in today’s fast moving world.