The Hidden Cost of the Falling Deficit Forecast

Once again, administration officials are corrupting a branch of economic science, and the American economy will pay a much bigger price than they realize. This week, the Treasury announced that based on spending and revenue data through May, the 2006 budget deficit will be some $100 billion less than the Treasury estimated just last February. The White House used the new estimate to trumpet the success of its tax cuts – which makes no economic sense, because Congress hasn’t passed tax cuts since February that could affect current economic activity in any way.

That leaves two possibilities. Either the revenue estimators at Treasury and spending estimators at OMB are wildly incompetent, and only recently became so – which frankly is not very likely. Or, the Treasury and White House manipulated the February estimate upward -- for example, using the most pessimistic economic assumptions available and massaging pay-out formulas for entitlements – so they could claim progress for their controversial policies in July. For an administration that has pursued political gain at almost any price, time and again, that seems entirely likely.

When the senior economic agencies and officials of the United States Government produce deficit estimates which wouldn’t pass muster in economic forecasting 101, they mislead the capital markets. Tens of billions of dollars in investments are made assuming that these estimates are as accurate as humanly possible – and no private forecaster can do an equally authoritative independent estimate, because nobody outside government has the Treasury’s revenue datasets and OMB’s spending datasets.

When these estimates are manipulated for cheap political purposes, it corrupts vital information flowing into U.S. capital markets, impairing their basic efficiency and distorting the distribution and cost of investment capital. And if it becomes a pattern – and when has this administration given up any of its bad habits? – the markets could simply stop trusting government data, and then the American economy could really suffer.


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