Why Government Finances Are Such a Mess

Paying for stuff in Washington is more complicated than it seems.

Jul 15, 2014 at 6:31PM

The world needs more long-term thinking. But there's actually quite a bit of it these days in a place that might surprise you: Congress. 

Washington thinks in 10-year blocks when making government budgets. Want to balance the budget? Come up with a 10-year plan that does it. Want to cut taxes without blowing up long-term deficits? Let your tax cuts expire in 10 years. Want to make small spending cuts look big? Add them up over 10 years.

This rare bit of long-term thinking might seem noble. But it almost never is. 

Josh Barrow of The New York Times showed this weekend how dangerous this 10-year budgeting can be. The Federal Highway Trust Fund is about to run out of money. One proposal on how to replenish it involves changing pension accounting rules so that companies have to set aside less money to fund future pension obligations. That would raise short-term profits, which would raise short-term taxes, which can pay for highway funding. But Barrow explains: 

Unfortunately, this gimmick will also result in corporations paying less in taxes in later years, when they have to make up for the pension payments they're missing now. But if it happens more than 10 years in the future, it doesn't count in Congress's method for calculating budget balance. "Fiscal responsibility," as popularly defined in Washington, ignores anything that happens after 2024.

That's bad. But there's even more danger in 10-year forecasting: When budget forecasters look 10 years into the future, they are as blind as bats. 

The Congressional Budget Office's history of forecasting government finances even five years into the future is dismal. Over the last decade and a half there has been no correlation between what the CBO thinks will happen and what has actually happened:  

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Part of this is because there is no such thing as a 10-year budget. There are only annual budgets. Congress can vote to cut spending for the next decade, and overturn it all a year later. A lot also has to do with the economy. Spending that goes out and taxes that come in to the government are heavily dictated by recessions and the unemployment rate. And since no one can predict a recession 10 years in advance -- we sometimes don't know we're in a recession until it's almost over -- budget forecasts end up hopelessly inaccurate. 

Trying to predict something that can't be predicted leads to all kinds of crazy behavior. Early last decade we cut taxes largely on forecasts that showed surpluses were going to pay off the entire national debt by 2009. Over the last five years we've cut things like education and infrastructure spending based on forecasts that showed trillion-dollar deficits as far as the eye could see. But both the surpluses and the trillion-dollar deficits ended up being short-term blips of a booming and busting economy.  

When you're dealing with something that can't be predicted, you are best off advocating the opposite of a forecast: humility. Budgets should be made with huge margins for error. But they rarely are. They're made with precision, admired with precision, and criticized with precision. Ten-year forecasts probably do more harm than good. That's part of why government finances are always a mess. 

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