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‘Truth is our only refuge’: why the CBO must remain independent

Hot off the presses: the CBO plays a pivotal role determining the price tag of measures in the budget and other legislation. Reuters

‘Truth is our only refuge’: why the CBO must remain independent

Congress created the nonpartisan Congressional Budget Office (CBO) 40 years ago to provide lawmakers with information independent of the influence of the executive branch. The CBO’s most important job is to put a price tag on proposed legislation, which Congress uses in its deliberations.

That makes the CBO’s cost estimates the currency of the legislative process. Those numbers have real consequences and can make or break a bill. Policies that garner a higher price are less likely to be enacted. Those deemed to save money get an added boost.

In recent years, the CBO and how it scores bills (or assigns estimated costs to legislation) have come under increased political scrutiny. With full control of Congress, Republicans have gained the power to choose the CBO’s director. They plan to do so in the coming weeks after deciding to block the reappointment of the current director, Douglas Elmendorf. That move comes despite Elmendorf’s widespread reputation for fairness and professionalism.

Last month they passed along party lines a rule change that requires the CBO to use “dynamic scoring” when assessing the cost of legislation, a policy long sought by the GOP that factors economic effects into the final price tag.

Both moves are disturbing signs that the CBO is at risk of losing its independence and with that its credibility. Whatever the merits of dynamic scoring, forcing the CBO to use an estimation approach that in the director’s professional opinion is flawed sets a dangerous precedent. It opens the door for future meddling and further threatens the integrity of what has become a very disorderly budget process.

Republicans chose to block the renomination of CBO Director Douglas Elmendorf. Reuters

CBO scoring, 101

A mixture of rules and discretion affects how the CBO prepares its cost estimates. The rules require the cost of new legislation to be measured relative to the CBO’s “budgetary baseline.” The baseline is a projection of what future spending would look like were current law to remain unchanged. That exercise also requires a macroeconomic forecast that the CBO constructs using a fairly standard model.

Where greater discretion comes in is in modeling complicated programs and their broader economic effects. Like government economists everywhere, the CBO’s analysts must make assumptions about various quantities and about the macroeconomic consequences of government policies.

At the periodic request of the budget and other committees, the CBO also prepares more in-depth reports that advise policymakers and the public about the implications of policy options and about the long-term fiscal outlook.

The CBO’s director is appointed to a four-year renewable term, alternately by the majority party of the House and Senate Budget Committees. No one else on the staff is a political appointee.

Why the controversy

For most legislation, the CBO’s cost estimates are straightforward. If a bill directs an agency to spend US$100 million on a program, the budgetary cost of that bill is $100 million.

Where things get trickier is for entitlements – laws that authorize the Treasury to spend whatever it takes to provide the specified services to qualifying recipients. Coming up with a score involves constructing a model of how program costs will change over time. Those modeling choices are where allegations of partisanship can arise.

For Obamacare, for example, that required forecasting variables including the number of enrollees, demand for various insured services, future health care costs and employer and consumer behavior. The choices about those variables, which unavoidably involve judgment, lead to the possibility of manipulation.

‘Truth is our only refuge’

Allegations that CBO directors influence how programs are scored to favor particular outcomes are generally unfounded. Having worked in various capacities for the CBO under its last five directors, I can attest that non-partisanship is in the DNA of the agency. A popular mantra among CBO analysts is that “the truth is our only refuge.”

That’s because analysts know that whatever price tag the CBO assigns, a bill’s proponents will attack the cost for being too high and opponents will claim the opposite. Of course, economic truths can be elusive. It is natural that every CBO director will come to somewhat different conclusions about the macroeconomic consequences of taxes, spending and deficits.

Whether the CBO should adopt the practice of dynamic scoring is a long-standing controversy. The issue is that the CBO does not include the macroeconomic consequences of proposed policy changes into its cost estimates. Some Republicans contend that practice unfairly overstates the cost of tax cuts because it neglects their benefits for economic growth and tax revenues.

CBO directors of all stripes have resisted dynamic scoring on logical and logistical grounds. In my view the issue is a red herring because standard models would show the effects of dynamic scoring to be minimal. Unfortunately, some observers have misinterpreted the criticism to mean that the CBO’s models are not dynamic and hence not credible, whereas in most instances they are both.

Why the CBO should be protected and emulated

Congress oversees trillions of dollars of spending each year. To efficiently and transparently allocate those resources, policy makers and the public need credible information about the costs and broader economic consequences of fiscal policies. As an independent agency, the CBO is uniquely positioned to provide that information. To do that job well, it is critical that the CBO be protected from short-term political influence.

Some view the CBO as undemocratic because it is a highly influential agency that is not directly accountable to elected officials. However, the case for an independent budget authority has strong parallels with that for an independent central bank.

In a 2010 speech, then Federal Reserve chairman Ben Bernanke made the case for his agency’s independence:

A broad consensus has emerged among policymakers, academics and other informed observers around the world that the goals of monetary policy should be established by the political authorities, but that the conduct of monetary policy in pursuit of those goals should be free from political control.

He goes on to say:

Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives and transparent in its policies.

Certainly Bernanke’s arguments hold for fiscal policy and for the role of the CBO as well.

Although a few other countries have instituted semi-independent budget offices, the CBO is seen by many in the international fiscal policy community as the leading example of how a well functioning budget office should operate.

In the face of mounting fiscal pressures everywhere, the case has never been more compelling for the establishment and protection of independent budget offices. Hopefully recognition of that need will create the necessary political consensus for similar institutions to be created and maintained around the world.