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PAUL SOLMAN: Gentlemen, thanks for coming in. Mr. Reischauer, the latest CBO forecast, it’s tens of billions of dollars rosier than the last CBO forecast. Why?
ROBERT REISCHAUER, Former CBO Director: Well, for a lot of reasons. It’s a little bit rosier from the standpoint of the deficit because inflation has remained moderate and the belief of CBO is that with the changes that the Bureau of Labor Statistics has announced that it will make it methodology. The cost of indexing Social Security programs will be a bit lower in the future.
PAUL SOLMAN: Can you explain that, because I don’t think we all followed that necessarily.
ROBERT REISCHAUER: Well, when one asks what the deficit is going to be, one asks how high are we going to spend on Social Security and other index programs, and that depends on–
PAUL SOLMAN: Indexed to the rate of–
ROBERT REISCHAUER: Rate of inflation.
PAUL SOLMAN: –inflation.
ROBERT REISCHAUER: And that depends on how fast inflation will be in the future, and the Bureau of Labor Statistics is going to make several small adjustments in methodology that will lead to a measured Consumer Price Index that’s a little bit lower than the CBO thought earlier this year.
PAUL SOLMAN: So, therefore, inflation won’t be going up as fast?
ROBERT REISCHAUER: As fast, right.
PAUL SOLMAN: And we won’t have to pay off, pay out–the government won’t pay out on the basis of those numbers?
ROBERT REISCHAUER: Quite as much.
PAUL SOLMAN: Is that the only factor?
ROBERT REISCHAUER: No, it’s not the only. The Congressional Budget Office has moderated its expectations about growth for Medicare and Medicaid programs. It’s also increased the kick that it expects will be delivered by balancing the budget on the economy. There will be slightly more oomph out of the economy, which will lead to slightly higher revenues.
PAUL SOLMAN: What does that mean, Mr. Beach, slightly more oomph?
WILLIAM BEACH, Economist: Well, the whole point of balancing the budget is to release economic energy in the economy, and that’s seeming–apparently that’s what’s going to happen. These numbers do reveal, at least they indicate, that there is more oomph out there.
PAUL SOLMAN: The CBO–the Congressional Budget Office thinks there’s more.
WILLIAM BEACH: Right. And so that particular premise of the budget-balancing program is justifiable. What it means in a sense is that we will have more revenues to help balance that budget, and that’s extremely important in this whole process. We spend a lot of time looking at the spending side. That’s where the big policy debate, this great debate really is. But from a bookkeeping standpoint, from an accounting standpoint, somebody has to look after the revenue side, and the revenues apparently are going to be there to help balance that budget.
PAUL SOLMAN: So more money coming in, less money going out is the new projection?
WILLIAM BEACH: Well, not really quite, because the Congressional Budget Office has also made an assumption that nominal Gross Domestic Product will be slightly lower than it thought before. In fact, there will be slightly less revenues overall than was projected earlier on.
PAUL SOLMAN: But so there are these various factors, a little more of this, a little more less of that. Mr. Beach, CBO estimates, why are they considered better than the administration’s estimates?
WILLIAM BEACH: Well, they’re a single target. The process of debating the budget is hard enough. It makes it more difficult if you have several different revenue targets, economic targets floating around.
PAUL SOLMAN: But the administration had its own set of numbers.
WILLIAM BEACH: And, indeed, the administration does, and so do all of the private accounting houses, all of the private forecasting houses. In fact, Heritage has some numbers that we’d be happy to share with you.
PAUL SOLMAN: But are CBO’s better than yours? And why are they so good?
WILLIAM BEACH: Not necessarily better, but it’s a single target. It’s an independent process. One of the things that CBO does, and they do very well, is they go out, and they canvas experts outside of government in industry, in the public sector too, and they get the consensus forecast. They get a consensus view, then they make their own judgments. That’s a very good process.
PAUL SOLMAN: You mean, the consensus of all the other forecasters?
WILLIAM BEACH: Yeah. At least that they pay attention to all of those other forecasts that are going out there. I think the process is very important of putting together the numbers. We have a single target. We disagree with that particular target or that particular set of numbers. Then we have a place where we can go and make that debate.
PAUL SOLMAN: Okay. So now how does the CBO actually come up with these numbers, Mr. Reischauer? I mean, we’re not going to get exactly how it does it, but what is the process they go through, besides looking at other people’s forecasts?
ROBERT REISCHAUER: Well, they consult macroeconomic forecasting models, these complicated, statistical devices that economists use to predict the future course of the economy.
PAUL SOLMAN: And what do those models do? What are they predicated on?
ROBERT REISCHAUER: Those models are estimations of relationships among economic variables based on past behavior of the economy. The expectation is the past relationships will hold in the future.
PAUL SOLMAN: Well, can you give me an example? Mr. Beach, perhaps you can give me an example.
WILLIAM BEACH: Well, right now, almost all of the models are saying that if you balance the budget in seven years with some tax cuts that you’ll have a stronger economy. Now, these relationships that Mr. Reischauer has talked about are all very sensitive to government spending and to government tax policy.
PAUL SOLMAN: So they figure if there’s more government spending on one thing, then that’ll have implications for other aspects of the economy?
WILLIAM BEACH: On defense spending, for example, or on transfers to individuals in Medicare. When you cut the capital gains tax rate, for example, that has in these models has a big impact on what businesses spend, on factories, and on new equipment. When you cut the personal income tax rate through a credit or a deduction, that means households have more income to spend on automobiles and other things. And that all comes up, it all tears up, it all sums up to Gross Domestic Product, which was referred to earlier.
PAUL SOLMAN: But these are forecasts, right? I mean, ultimately it’s just a guess. How reliable have CBO–how reliable were your forecasts, so I can put you on the spot?
ROBERT REISCHAUER: Well, CBO has a pretty good track record here, if you compare the Congressional Budget Office with the Office of Management & Budget forecasts, or the private sector forecast, it’s been at least as good over the past few years, and during the 1980’s, the Congressional Budget Office as considerably better than the Office of Management & Budget with respect to forecasting.
PAUL SOLMAN: Would you have bet on those forecasts of yours when you went home at night? I mean, do you really feel confident in them, or just they’re better than the other guy’s?
ROBERT REISCHAUER: Well, you can bet but not a lot of money on the forecasts for a year or two out, but what’s important here, of course, is we’re trying to forecast where the economy will be seven years from now, and that is really a crap shoot.
PAUL SOLMAN: Wait a second. You mean, all the numbers that we’re talking about and the differences between the two forecasts, administration’s and CBO’s, you are referring to as a crap shoot? Would you agree with that? I want to jump in here.
WILLIAM BEACH: I would agree to it, yes.
PAUL SOLMAN: A crap shoot?
WILLIAM BEACH: Well, it is a crap shoot, but let me just back off this point. There are people who do, in fact, bet the house on CBO forecasts. Now when I was in other jobs, okay, one state government, and one in the private sector, we had our models, we had our own views, but we would always go and take a look at CBO, even in the private sector. We would say, well, what does CBO say? That’s the importance of this agency, and that’s the importance of the process that they undertake is that not only do governments go and refer to the CBO forecasts, almost all of the businesses that I know of, and certainly the state governments do as well.
PAUL SOLMAN: You build in the possibility of a recession in these numbers, I mean, an economic downturn, is that in there?
ROBERT REISCHAUER: Well, if we’re looking at–
PAUL SOLMAN: Seven years, after all, is a long time.
ROBERT REISCHAUER: –the short-term, the next two years, CBO might see a recession based on what the circumstances are now. Looking at that over a seven-year period, CBO builds in enough slack in the economy to compensate for a mild recession sometime during that period.
PAUL SOLMAN: Mr. Beach.
WILLIAM BEACH: The numbers that I saw today didn’t indicate to me that this particular set of CBO forecasts has much of a business cycle in it, and–
PAUL SOLMAN: Business cycle meaning going up in the realm, recession going down?
WILLIAM BEACH: Right. Exactly. And most of the private forecasting models do have a very slow 1997, and we built that into our own analysis.
PAUL SOLMAN: So this might be a little rosy in that sense?
WILLIAM BEACH: It very well might be.
MS. HUNTER-GAULT: Finally and just briefly, do you believe that these estimates should bring the two sides a lot closer together, Mr. Reischauer?
ROBERT REISCHAUER: Closer together, not a lot closer together. CBO’s new numbers shave about a sixth off the size of the problem that Congress is trying to address.
PAUL SOLMAN: Briefly, last word to you, Mr. Beach.
WILLIAM BEACH: Well, I think that they will bring the two sides together so that they can have that good policy debate that they ought to be having right now, not on the numbers but on the, on the policies.
PAUL SOLMAN: Thank you very much, gentlemen, both.