Domitrovic: History Shows CBO Is Partisan

Posted March 22, 2010 at 11:06am

Supporters of the health care bill were ecstatic over the finding of the Congressional Budget Office, released last week, that the federal budget deficit will come in lower over the next 10 years should the bill become law. When news of the CBO forecast came in over the airwaves, invariably the reports noted that the CBO is a “nonpartisan” institution.

[IMGCAP(1)]It’s funny that public radio and the mainstream newspapers have a reflex making them call CBO nonpartisan, because a little knowledge of the CBO’s founding and history would dispel this myth right away. The CBO began life in 1974, the year Watergate forced Richard Nixon to resign — in other words, in one of the most partisan years in American political history. The CBO owes its existence to the baldly partisan environment of that year.

The Democrats had a big majority in Congress at the time but found that Nixon had proven adept at nixing their pet spending initiatives. Nixon would “impound” funds that Congress had authorized to spend on this and that pet project, and the money would go unspent. Infuriated, the Democrats revised the entire budget process just to make it impossible for the president to proceed in this manner. With the 1974 budget “reform,” the piecemeal appropriations process of the past was scrapped. Now only two budget resolutions would be passed every year, each one accounting for large portions of the aggregate federal budget. If the president wanted to impound funds, he would have to put the whole resolution in escrow. That was unthinkable, so the Democrats were assured of every drop of their pork.

The CBO was invented during all this to “score” the mammoth budget resolutions that were to emerge from this process. One of the reasons was as follows. If the CBO projected deficits from a resolution, the new budget regimen would make it impossible to nix spending on a case-by-case basis — which, after all, is the easiest way to cut spending. Therefore, it would become all the more imperative to raise taxes, as well as to resist the calls for tax cuts that were beginning to be heard from up-and-coming Representatives such as Jack Kemp (R-N.Y.).

All this is to say that the CBO was devised by a historically partisan Democratic majority in the service of forestalling an up-and-coming idea from the downtrodden opposition: tax cuts. And sure enough, in its first years, the CBO proved a loyal fighter in the service of the Democratic status quo. When Republicans proposed a 5 percent cut in income tax rates in late 1976, the CBO found that the tax cut would result in a 4 percent increase in economic growth along with a 14 percent drop in federal revenues. Members of the budget committee were left scratching their heads as to how a 5 percent tax cut that caused good growth led to a decrease in federal revenues nearly three times the magnitude of the tax cut.

The reason for these absurdities was that the private forecasting companies contracted by the CBO epitomized the partisan nature of the whole endeavor. They made sure to tweak their econometric models such that they told the CBO what it wanted to hear. The budget resolution of February 1977 proved to be a turning point, however. The outcry against the preposterous CBO forecast of the 5 percent tax cut proposal was so great that the modelers, in particular Otto Eckstein of Data Resources Inc., set to figuring out how the theory of supply-side economics might be fit into his model, just in case the Republicans won control of the CBO some day. Surely one of the reasons Eckstein successfully sold the DRI model in 1979 for a cool $100 million is that it had shown itself “flexible” in being able to appease whatever majority happened to be in control of the CBO.

The biggest laugher in the old DRI model that the CBO swore by in the mid-1970s was that a decline in the corporate tax rate would result in a decrease in economic growth. The idea was that corporations would reach their “target” profit more quickly without high taxes, and then shut down operations, to the detriment of growth and jobs. Nonsense like this is what got the CBO off the ground back in the 1970s. The case that the CBO has shaken such stuff out of its DNA by now, as it pronounces on a megatrillion-dollar health bill, has yet to be made.

Brian Domitrovic teaches at Sam Houston State University in Huntsville, Texas, and is author of “Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.” (ISI Books, 2009)