[Congressional Record Volume 144, Number 73 (Tuesday, June 9, 1998)]
[Extensions of Remarks]
[Pages E1068-E1069]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      CBO'S FRACTURED CRYSTAL BALL

                                 ______
                                 

                           HON. NEWT GINGRICH

                               of georgia

                    in the house of representatives

                         Tuesday, June 9, 1998

  Mr. GINGRICH. Mr. Speaker, The attached editorial from The Washington 
Times puts the problems with the Congressional Budget Office in the 
proper perspective. Stephen Moore's suggested remedies merit serious 
consideration. I submit the editorial to the Congressional Record.

                      CBO's Fractured Crystal Ball

                           (By Stephen Moore)

       Speaker Newt Gingrich announced last week that Congress 
     should begin to ``review the accuracy [sic]'' of the economic 
     and budget forecasting of its internal think tank: the 
     Congressional Budget Office. It's about time.
       Mr. Gingrich and his GOP colleagues are finally catching on 
     to a problem that many supply side economists have recognized 
     for years. Since at least 1995 the CBO has been dramatically 
     low-balling its economic estimates, and thus overstating the 
     budget deficit. On average CBO has understated GDP growth by 
     1 percentage point per year--which is a large forecasting 
     error.
       One implication of this underestimate of GDP growth has 
     been that the government's official budgeting agency has 
     missed the biggest fiscal story of the last quarter century: 
     a balanced budget with very rapidly rising budget surpluses.
       Consider the legacy of error detailed in the attached 
     table. Two years ago, in May 1996 the CBO forecast a 1998 
     deficit of $174 billion. Instead, now we are told that we 
     will have a surplus of $35 billion. This means the CBO's 1996 
     deficit forecast for 1998 was off by more than $200 billion. 
     The five year (1998-02) estimated deficit was $1,167 billion. 
     The latest CBO forecast now sees a surplus over that period 
     of at least $200 billion. In two years, CBO has revised 
     upward its budget estimate by almost $1.4 trillion. 
     Incredible
       But the CBO's crystal ball may still be cracked. The latest 
     CBO report that came out in early May 1998 continues to 
     underestimate surpluses. Larry Kudlow of American Skandia and 
     I have estimated that the surplus for this year will be 
     closer to $70 billion and that future surpluses will be at 
     least twice as high as CBO says.
       The CBO has long been bearish on the American economy even 
     as employment, stock values, and business profits soar, 
     inflation approaches zero, and interest rates dip to 20-year 
     lows. The long-term CBO estimate for real GDP growth is a 
     turtle-paced 2.1 percent growth rate for as far as the eye 
     can see. Yet the average GDP growth over the past 16 years 
     has been 3.0 percent. In fairness to CBO, the Clinton 
     Treasury Department is predicting an equally anemic rate of 
     future growth.
       Economic forecasting is at best an inexact science. Some 
     might even call it voo doo. The best--and perhaps the only--
     semi-reliable forecast of the future is the past. CBO 
     continues to assume that the economy will grow at 
     substantially below its historical trend.
       The logical question is: Who cares if CBO is wrong? The 
     answer is that bad forecasts make for bad policies. 
     Republicans in Congress continue to budget as if we are in a 
     deficit environment. In fact, revenues are going to be at 
     least $500 billion higher from 1998-2002 than they thought 
     last year. This explains why Congress is now pondering a 
     niggardly tax cut of less than $100 billion when in fact a 
     better economic forecast would demand tax cuts 3-5 times 
     higher than that. Yes, bad numbers lead to bad policies.
       Faulty number crunching is also a big problem at CBO's 
     sister agency, the Joint Tax Committee. Last year when the 
     Republican Congress cut the capital gains tax rate from 28 
     percent to 20 percent the JTC scored this as a five and ten 
     year revenue loser for the government. This ignored all 
     historical evidence to the contrary. For nearly 40 years 
     every capital gains tax cut has yielded more revenues. Every 
     capital gains tax increase, including most notably the 1986 
     increase, has lowered federal tax receipts. Preliminary tax 
     return data indicate that in the first 10 months since last 
     year's cap gains cut, capital gains receipts are surging. Has 
     JTC learned its lesson? Hardly. The JTC is now scoring a 
     proposal to cut the cap gains tax to a uniform rate of 15 
     percent. Rather than admitting its error, JTC chooses to 
     stick with it's discredited story.
       The GOP has no one to blame but itself for these faulty 
     forecasts. The GOP runs Congress nowadays and hence it hires 
     and fires the number-crunchers. But JTC and CBO appear to be 
     using the same Keyensian models the Democrats invented 40 
     years ago.
       It is time for the GOP to launch an assault against the CBO 
     and the JTC. The assault should be based on the fact that 
     CBO's models are broken. The goal is not ideology, but simple 
     accuracy. Newt Gingrich and the Budget Committees should ask 
     these agencies to:
       (1) Raise GDP forecasts through 2008 from 2.1 percent to a 
     more realistic 3.0 percent.
       (2) Raise revenue growth estimates. CBO (and Treasury) 
     predict 4 percent revenue growth. We've been averaging 7 
     percent revenue growth since 1982. This year revenues are up 
     an enormous 11 percent. A reasonable revenue growth estimate 
     is 10 percent for 1998 and 7 percent thereafter.
       (3) Revise the surplus estimates. Because revenues will be 
     much higher, so will surpluses. With 7 percent revenue 
     growth, the surplus by the year 2002 reaches roughly $300 
     billion.
       (4) Make dynamic economic estimates of capital gains tax 
     changes. A 15 percent capital gains rate will be extremely 
     bullish for the economy and increase wealth and tax 
     collections.
       Most important of all, once armed with these new forecasts, 
     the GOP must abandon its austerity budget strategy and enact 
     a very, very large tax cut. It is time to harness the 
     surpluses in a way that creates more prosperity, not bigger 
     government. American workers and businesses, not politicians, 
     created this prosperity and the expected tide of budget 
     surpluses. Now we deserve a substantial tax cut dividend.


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