'Stylized Facts' Help Budget Negotiators
IN their calculations, economists sometimes employ a ''stylized fact'' - a number they make up when they don't know what they are talking about.Skip to next paragraph
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Budget negotiators in Washington are using stylized facts these days when they quibble over the growth in the economy in the next seven years, says economist H. Erich Heinemann, of Heinemann Economic Research in Great Neck, N.Y.
''There is no relation to reality,'' Mr. Heinemann says.
In calculating what steps are needed to end the deficit, the Republican Congress uses a forecast of the Congressional Budget Office (CBO) that assumes national output will grow 2.3 percent a year. The Clinton administration's Office of Management and Budget (OMB) says output will rise 2.5 percent a year.
''Who can tell who is right?'' asks Charles Schultze, who was head of the budget office under President Johnson. ''There is no economically right answer.''
Economists have trouble predicting the economy a year ahead, let alone seven years. Moreover, within that time frame there is likely to be a recession. Heinemann expects a slump before the presidential election next year - one that would bloat the federal deficit in a hurry as revenues fall and unemployment costs rise.
Yet both sides are counting on the CBO to become somewhat more optimistic in its economic projections next Tuesday to facilitate a budget compromise. Under its present economic assumptions, the CBO projects a budget deficit of $340 billion in 2002 if no changes are made in federal government programs and taxes. The White House's OMB says the deficit would be $216 billion, or $124 billion less. If the CBO becomes more optimistic, the gap could shrink $50 billion or more. That's important because it would mean fewer spending cuts and a smaller reduction in tax cuts would be needed to reach a theoretical budget balance by 2002. The Republicans could boast of ending the deficit; the Democrats could trumpet lower spending cuts in federal programs, especially Medicare.
The CBO projects a slightly higher interest rate on the federal debt than the OMB. It also sees a bit faster growth in spending on Medicare and Medicaid (9.7 percent a year, versus 9.1 percent). That tiny percentage difference in growth, compounded over seven years, makes about a $25 billion gap by 2002 when spending on the two medical programs will exceed $500 billion.
The new Clinton plan finds more money by recalculating the consumer price index to limit the growth in Social Security pensions, welfare checks, and other benefits. Many economists suspect the price index exaggerates inflation. Economist Leonard Nakamura, writing in the Federal Reserve Bank of Philadelphia's latest Business Review, says the CPI may overstate inflation 1 percentage point a year. Heinemann and Mr. Schultze hold 0.5 percent is probably more accurate. The Republican budget plan reduces the CPI by a politically cautious 0.2 percent a year.
To Heinemann, the budget disagreement is ''noisy political theater.'' Both the Republicans and the Democrats realize that somehow the rapid growth in entitlement programs such as Medicare, Medicaid, and Social Security has to be slowed, he says. ''All the budget professionals know that they are arguing over who gets the political blame and not over reality.''
So neither side will accept any compromise until the deal shares the blame for that adjustment.
Mr. Schultze, now at the Brookings Institution, a Washington think tank, would normally prefer conservative rather than generous economic assumptions behind a budget deal. But this time he wants the happier version because Republican budget cuts, in his view, are excessive. By 2002, federal nondefense discretionary spending would be down 30 percent. If outlays on such programs as the FBI and federal prisons are untouched, it would mean even greater cuts in other programs such as those aimed at alleviating poverty and maintaining national parks and highways.
He suspects Republican cuts might last two or three years, but not seven years. Political opposition will build. ''I don't believe the American people want to be in a third-world country,'' he jabs.
This week the White House moved one step toward compromise by offering a seven-year balanced-budget plan. It calls for spending $70 billion less on domestic appropriations than the nine-year balanced-budget plan outlined this summer. A deal may be cooking nicely - with the help of stylized facts.