In the fog of fake news and partisan debate, most tangentially informed individuals are bewildered as to the effects from the tax legislation being fast-tracked through Congress. Larger corporations, with their phalanxes of lawyers, are not so in the dark. Chase Bank CEO, Jamie Dimon, chairman of the Business Roundtable and former head of the now passé “Fix the Debt” committee, broadcasted the corporate view without equivocation or qualification. “Passing tax reform is the single most important thing that Congress can do to make American companies more competitive, boost the economy, create jobs and spur wage growth.” Continued caution on the part of lesser luminaries is understandable.

As mentioned in other posts, the future anticipated by current forecasts must be measured against the facts of the past. That past would indicate that regardless of who might be opining, even the most constrained of forecasts will prove to be wildly—and quite likely destabilizingly—optimistic.

The Congressional Budget Office

The forecasts of the Congressional Budget Office (CBO)—respected as objective, impartial, and nonpartisan—put numbers to the narrative of proposed legislation, attempting to estimate the actual financial and social cost over 10 years. The scope of the watchdog’s analytics is extensive.

One of its primary mandates is assessing effects on future deficits and debt. This emphasis is particularly important because 800 years of global data suggests that when the ratio of public debt/GDP in major developed nations exceeds 90% for five years running, as is the case in the U.S., real GDP growth declines by one third.[1] With increasing ratios, scholars believe the effect on growth will be nonlinear.

CBO forecasts, however, are prone to err. I believe such imprecision neither systematic nor partisan in intent. Rather, as Friedrich Hayek warned in The Pretense of Knowledge, his 1974 acceptance speech for the Nobel Prize in economics, it is foolish to believe we can shape the economic world around us by applying laws like those in the physical sciences to the essentially complex system of economics. Our forecasts will fail because economic laws are not universal, but dependent on the arrangement, or organization, of individual elements of an economy. We have no quantitative capacity to access that situation. This critique echoed the “fatal conceit” of which he accused the central planners of socialist economies.

He delivered his address the very year the CBO was founded. He lamented that the inflationary nemesis, against which all the best economic minds of the free world were arrayed, was brought about by the very policies that that vanguard had recommended. He concluded thusly, “We have indeed at the moment little cause for pride: As a profession we have made a mess of things.” (Perhaps that partially explains why the first Nobel Prize in economics was presented in 1969, a full 68 years after prizes were awarded in physics and chemistry.)

You may determine for yourself the magnitude of error in economic forecasts. Here’s what I found in the CBO archives. Federal debt held by the public at year-end 2006 was $4.8 trillion. The CBO’s 10-year projections made in early 2007 for 2017 forecasted a slight decline to $4.3 trillion. Then came the Great Recession’s blindside. By January 2010 the CBO radically upped its forecast: Debt would exceed $10 trillion by 2012! Debt projections continue to ratchet upward. In June of this year the CBO again raised its estimate for year-end 2017 to $14.2 trillion and, before factoring in costs of the Tax Cuts and Jobs Act, total cumulative deficits over the next 10 years are expected to exceed $10 trillion and the debt will surge to a corresponding $25.5 trillion. The rate of interest on the debt is forecasted to be 2.1% in 2017, rising to 3.5% by 2027.

If such irresponsible behavior goes unchecked, even the mightiest of nations can be humbled. If it becomes difficult or impossible to fund national defense or public education, to name a few, the viability of debtor nations is called into question. In the United States the current debt/GDP ratio is 103%.[2] Whoever wins or loses from the proposed tax legislation means nothing if the net effect is a notable increase in deficits and debt, because growth rates will decline. Like a thief in the night, weakness in our national character and political resolve may ultimately rob us of our civil order, national security and, ultimately, our sovereignty.

If the past gives us pause, where might this iteration of CBO projections err? First, and seemingly unfailingly, the record of revenue neutral tax cuts has been abysmal, Jamie Dimon’s optimism notwithstanding. Second, it’s a near certainty that the U.S. economy will not avoid a recession in the next 10 years. Given the complications and complexities of the debt overhang alone, it could be severe. Third, the risk that the rate of interest on the public debt will rise faster than forecasted should not be taken lightly. Under that scenario, a growing proportion of Federal revenues would be diverted away from essential services and toward debt service. This does not even begin to consider off-balance sheet liabilities.

How Did We Get Into This Mess?

First, we can’t blame the CBO’s forecasters. They are doing what they were commissioned to do. Alan Greenspan articulated the intractability of forecasting while acknowledging the extreme limits of its predictive power. The incongruency borders on the incredulous.

But forecasting, irrespective of its failures, will never be abandoned. It is an inbred necessity of human nature. The more we can anticipate the course of events in the world in which we live, the better prepared we are to react to those events in a manner that can improve our lives. Introspectively, we know that we have a limited capability to see much beyond our immediate horizon. That realization has prompted us, no doubt from before recorded history, to look for ways to compensate for this vexing human “shortcoming.” In ancient Greece, kings and generals sought out the advice of the oracle of Delphi before embarking on political or military ventures. Two millennia later, Europe was enthralled by the cryptic prognostications of Nostradamus. Today, both fortune-tellers and stock pickers continue to make a passable living. Even repeated forecasting failure will not deter the unachievable pursuit of prescience, because our nature demands it.[3]

How Do We Get out?

If prescience is not achievable, we must find another way forward. The proverbial definition of insanity is to repeatedly do the same expecting different results. Nassim Taleb[4] advocates for something that is within the human reach, although far less available to the subset of politics: Nonpredictive decision-making. For systems that are inherently fragile and where unknowns—such as “randomness, unpredictability, opacity, and the incomplete understanding of things”—preponderate, only the fatally conceited would attempt to manage on the pretense that they have the requisite knowledge. It is far easier to determine a system is vulnerable, to any number of shocks, than it is to predict an event that might harm it. Taleb dubs the so-called Black Swan dilemma as the “impossibility of calculating the risks of consequential rare events and predicting their occurrence.” To broaden his sentiment, there seems an impossibility of calculating the outcomes of something as germane to social order as federal taxes. Rather than prediction, Taleb proposes preparedness. We value investors call that the margin of safety. The huge dark cloud of government debt continues to cast shadows over prospective economic growth, with every member of Congress hoping that debt will not reach crisis levels until someone else is on watch. Inaction is not a strategy, it’s a prescription for a preventable disaster. Relying on historically inaccurate projections of slow deficit growth ranks in that category. The current tax bill is the equivalent of scrounging for the best deck chairs… on the Titanic.



[1] This dynamic described in detail by Ken Rogoff and Carmen Reinhart in This Time Is Different: Eight Centuries of Financial Folly.

[2] This ratio differs from that of the CBO and the Office of Management and Budget (OMB). Those government agencies, the first independent and the second an arm of the White House, have an incentive to keep the ratios low and so do not account for gross national debt in their ratios. That is, they do not include debt that the government owes to itself, primarily through the Social Security trust fund, a not insignificant $5.9 trillion. Scholars, including Ken Rogoff, use the more inclusive gross numbers in their assessments.

[3] Greenspan, Alan. The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (Kindle Locations 70-77). Penguin Group US. Kindle Edition.

[4] Taleb, Nassim Nicholas. Antifragile: Things That Gain from Disorder. Random House Publishing Group.

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