Tuesday, March 30, 2010

ObamaCare Highlights Weaknesses Of CBO Cost Estimating Process

To prevent unrealistic Congressional Budget Office projections of the effects of proposed legislation on the US deficit and budget, CBO must make changes to its process for evaluating the cost of new legislation.

In passing health care reform, Congress was mindful of the Congressional Budget Office's tally over the next decade of the net cost of the final legislation. In particular, Congress manipulated the structure and timing of the law's taxing and spending provisions to meet Obama's $900 billion cost target.

CBO does an honest, best guess analysis of the expected costs of proposed legislation, but CBO works within the cost estimating guidelines established by Congress. For example, CBO projects expected revenues and costs from new legislation under the assumption of a static economy, and it ignores the effect of other likely legislation.

Unrealistically, CBO estimates that new taxes or new mandated employer costs do not change consumption or tax revenue estimates. When economists model tax or price changes, they use more realistic dynamic stochastic general equilibrium (DSGE) models and not static models. DSGE models attempt to accurately reflect behavioral changes caused by tax, cost and price changes. DSGE models of the new health care reform law would show that the new law slows economic growth, slows employment growth, and that tax revenue will be lower than expected.

Furthermore, CBO follows rules that require it to evaluate only the legislation under review and not to consider other likely Congressional laws. For example, in recent years, Congress passed a one-year law delaying legally mandated Medicare cuts. When CBO evaluated ObamaCare, it included the new Medicare cuts in ObamaCare as potential cost savings because they are legally mandated. It ignored the high likelihood that Congress would pass another law delaying or reducing the proposed Medicare cuts. It also ignored that Medicare cost increases were unsustainable and that Congress would pass cuts out of necessity without the passage of ObamaCare.

As a result of CBO's process, the new health reform law contains tax and cost saving provisions that reduce CBO's cost estimate and increase CBO's revenue estimates but that do not reflect realistic, real world, estimates of those numbers.

A President and a Congress who truly cared about the long-term US deficit, the looming high taxes, and the continued affordability of government social programs would modify CBO's process for assessing the costs and revenues of new programs, taxes, and legislation to reflect real world effects.

To accurately reflect the growth, employment, tax and cost effects of new legislation, the CBO must modify its legislative cost and revenue estimating process. CBO needs to switch to a dynamic, as opposed to static, modeling of the economic effects of new legislation. It also needs to take into account likely subsequent legislation that would undo part of the revenue or cost benefits of the legislation under review.

It would make a lot more sense for CBO to give separate numbers and a range as part of its analysis instead of one net number. CBO should give a range, under dynamic modeling, for likely costs and likely revenue of the new legislation and a likely high and low net cost. Additionally, CBO should forecast the effects of the passage of other likely legislation that would significantly affect the costs or revenue impacts of the legislation under review.

The proper changes to CBO's cost estimating process would eliminate a lot of the unrealistic political budget deficit gamesmanship that occurred during the debate for health care reform. The suggested changes would improve the accuracy and usefulness of CBO's forecasts. A better CBO forecasting process will also help the US reduce its long-term budget deficit.

No comments:

Post a Comment