Bush Economic Chief Defends GDP Forecasts

In the Times Board of Economists column, “Council of Economic Advisers Report Reveals Fallacies of Optimistic Forecasting” (March 15), George Perry criticized the council’s projections of the effect of the President’s policy proposals: The “2.2% . . . increase (by 1997) in the trend of GDP projected to result from the policy changes . . . appears outside all reasonable grounds.”

While I respect Perry’s right to an honest difference of opinion, I must respond when his misunderstanding of the conceptual basis of the Council of Economic Advisers’ (CEA) forecasts and the several technical mistakes in his analysis lead him to question the professionalism of the council.

In the 1992 Economic Report of the President, the CEA projected the path of the economy under two scenarios: one that assumed that Congress passed the President’s pro-growth policies and one titled “Business as Usual.”

The latter scenario assumed greater private sector uncertainty, prospects of political paralysis and attempts to increase federal spending and the budget deficit, all of which would raise long-term interest rates, slowing investment and economic growth. (Indeed, long-term interest rates have already increased 35 basis points in the past six week.)

Perry does not give sufficient weight to the importance of financial market expectations and business and consumer confidence.

Perry also makes several technical mistakes. His claim that projected additional growth would require between a $1.3-trillion and $1.7-trillion increase in capital is simply wrong, high by a factor of at least two.

As usual, our projections are of non-farm business productivity growth resulting from, among other things, increases in the quantity of machinery and other business capital. Perry includes residential and agricultural capital, which, while important in their own right, do not contribute to non-farm business productivity.

In addition, he also missed the difference of 0.3% in labor force and hours that exists between the two forecasts, so that the 1997 gap to be accounted for by increased productivity growth is about 1.9%, not 2.2% as he claims.

Perry considers only some of the President’s pro-growth proposals--tax incentives for home ownership and business investment, lower capital gains tax rates and liberalization of individual retirement accounts--while he ignores others that would also increase investment, accelerate innovation and improve the labor force.

Those proposals include permanent extension of the R&D; tax credit, reduction of unnecessary regulation, creation of enterprise zones and investment in federal R&D;, public infrastructure, Head Start and education.

Taken together, these policies form the basis for the quite reasonable CEA projection of the additional GDP that passage of the President’s proposals would generate by 1997.

The Bush Administration’s forecasts have generally been more accurate than most of the 52 private blue chip forecasts as well as the forecasts of the Congressional Budget Office (CBO). This year the Administration forecasts real growth of 2.2%, slightly below the blue chip “consensus” of 2.4% and the CBO’s 2.8%. So much for overly optimistic forecasts.

MICHAEL J. BOSKIN

Washington

The writer is chairman of the President’s Council of Economic Advisors. Perry responds:

I agree with Michael Boskin’s defense of the CEA’s forecasting record. But it has nothing to do with my article, which was about CEA’s projections of how much worse things would be if the President’s tax proposals were not adopted.

I am not guilty of the errors Mr. Boskin alleges. If I had assumed, as he recommends, that all the added investment went to non-farm business and none to housing or farming, it would not have changed my conclusions.

On a much more important point, my calculations were deliberately generous to the CEA in that they assumed all the added investment would come from added domestic saving. In fact, because the proposals almost surely would add to the budget deficit, any added investment would come largely from foreign funds. In this case, the investment would add much less to the GDP than even my calculations allowed for.

George Perry is a member of The Times Board of Economists and a senior fellow at the Brookings Institution, a research organization in Washington.