Beware the Tax Cut Siren. . . and Dreams of Surplus
President Clinton has announced a projected $39-billion surplus for this year and a $1.48-trillion surplus over 10 years. He told Americans that they “could turn off the deficit clock and plug in the surplus clock.” But before we rush to spend the bounty, there’s a small problem: The wondrous numbers are almost certain to be wrong.
This type of long-term budget forecast should be labeled “handle with extreme care” or even outlawed. The projection of a $1.48-trillion surplus could lead to dangerous policies such as the big tax cut that so many in Congress are hungry to make. Budget projections are guesstimates, a look into the future. The surplus projection might be likened to that of a high-powered stock market specialist forecasting that the Dow Jones will quadruple in 10 years.
Even though the budget projections are the economists’ best forecast, they, like the rest of us, have only a highly fallible crystal ball. Former Congressional Budget Office director Robert D. Reischauer has warned that even in the most careful budget projections, the one thing economic forecasters can be sure of is that “what you predict won’t come to pass.”
Here we can cite chapter and verse from recent experience. The actual budget deficit in 1996 came to $107 billion. This is a solid number determined after the budget year ended. In 1993, both the Congressional Budget Office and Clinton administration economists projected a budget deficit of around $285 billion for 1996. Thus, their 1993 guesstimate for 1996 missed by roughly $180 billion.
There is more to the story. Six months before the end of the 1996 budget year, the two offices’ projections on the average came close to $150 billion, or $40 billion too high. How could these projections be so far off even a few months before the year ended? We can rule out incompetent or politically motivated explanations; the staffs that made the projections were honest and highly skilled professionals.
The answer is much less dramatic, almost a “no-brainer” with hindsight. Those doing the projections simply did not see the powerful economic boom that was gaining such strength. In 1993, just about everyone saw large deficits into the distant future. That is hardly surprising, with the United States having experienced a record deficit in 1992 of more than $290 billion.
In the gloom of early 1993, when the 1996 projections were made, anyone claiming an end to the federal red ink would have been laughed out of court. But now, 1998 euphoria has replaced 1993 gloom and the forecast is for budget surpluses as far as the eye can see in the allegedly recession-proof American economy.
The problem is that most of the public and likely some members of Congress do not realize how shaky the multiyear budget surplus projections are. The 10-year projected surplus could easily take on a life of its own, giving the wrong signal that America will definitely be awash in budget surpluses as far as the eye can see.
The implications are clear and simple: Don’t put much stock in the guesstimate being right and use the projected surpluses for big tax cuts or major new spending. In sounding the alarm, I do not claim a crystal ball that foresees a deep recession and a plummeting stock market to warn: Listen to history. Don’t base policy on almost-certain-to-be-wrong 10-year estimates.