CBO, We Have A Problem

Sometime back, I wrote, not with admiration, about the Congressional Budget Office (CBO) and the 'scoring' rules that our Congress has burdened it with. Essentially, they don't adjust for inflation and they don't do dynamic scoring. Or, said differently, they are required to treat each bill as its own micro-economy, forecast for only 10 years, and  generally not reflect inflation. This approach allows the Congress to manipulate bills so as to score them as cost-neutral, or even as cost-savers, when in reality, everyone, including both Congress and the CBO, know that they are going to cost us a lot of money.

How much money? Does the number 15 trillion mean anything to you? The federal debt, according to the debt clock is now just above that number. It's a big number. It has 12 zeroes in it. It also has two other digits to the left of those zeroes.

I would posit that these rules and Congress' manipulation of these rules are responsible for a significant portion of that 15 trillion. In fact, and I'm just guessing (no calculator or spreadsheet in action here, not even any mental math), if I had to choose an over/under amount, more than half of that 15 trillion in debt has accumulated from flawed scoring.

I'm not saying that the CBO does poor math, in fact, they are very good at it. What I am saying is that the constraints that they are required to follow have caused the United States to underprice the costs of various bills by a really big number and I am guessing (that means that I don't know, but my brain now fully caffeinated for the day has estimated) that this number in the aggregate is more than half of 15 trillion dollars!

When I try to hide my political biases, I usually work in alphabetical order and I'm going to do that here. In this case, the Democrats are incredibly guilty of having gamed this system ... and they know it. In this case, the Republicans are incredibly guilty of having gamed this system ... and they know it. Most of the public doesn't know it. There has never been a public outcry. There should be.

So, what does this have to do with employee benefits? The good folks at the Employee Benefits Research Institute (EBRI) have a nice little chart (actually it's not so little) that they call Employee Benefit Tax Expenditures -- White House Fiscal Year 2011 Budget Estimates. It shows that the tax expenditure (that's a fancy name for the amount of deductions that people and corporations get on their taxes, either through deductions or through tax exemptions) for employer contributions for health care benefits in FY 2011 is in the neighborhood of $175 billion and  similarly, for employment based retirement plans, it's about $110 billion. That's $285 billion in total. The mortgage interest deduction for the same year is about $105 billion. So, employee benefits are a really big culprit.

I bet my readers know that those numbers go up every year. Of course, they do, inflation makes them go up, doesn't it? Suppose we adjust for inflation. Then, what happens? Well, EBRI can help us out with that as well. Here is the url for a spreadsheet (http://www.ebri.org/pdf/publications/books/databook/Table 5.2 Inflation Adjust.xls), and you'll have to copy and paste this one, that shows what happens when we adjust for inflation. Look at the spreadsheet. Find me a major element that decreases on an inflation-adjusted basis. You can't do it, can you? And, therein lies a problem of just enormous proportions.

The 10-year cost of many of these bills is understated because the CBO isn't allowed to use assumptions that faithfully project the cost. And, because cost increases tend to (read that as virtually always) significantly outstrip inflation, using virtually any 10-year cost projections for a bill that is expected to last for a long time (think Social Security or Medicare, for example) represents among the most significant frauds ever perpetuated on the American taxpayers.

Yes, I said it. It's a fraud.

It's time for the taxpayers to stand up to Congress.

I haven't used song lyrics in this blog for a while, but I'm going to go back to the Vietnam War era for this one. With thanks to Jefferson Airplane,

got a revolution got to revolution 
Who will take it from you 
We will and who are we 
We are volunteers of america

Change volunteers to taxpayers and ...

Public Enemy #1

Suppose I told you that I had a business idea for you that had profits (written as +) and costs (written as -) that went like this:

• 2010: + 100 billion
• 2011: + 200 billion
• 2012 : + 250 billion
• 2013: + 250 billion
• 2014: + 250 billion
• 2015: + 250 billion
• 2016: + 150 billion
• 2017: + 50 billion
• 2018: - 50 billion
• 2019: - 200 billion
• 2020 --> : - 200 billion or more every year

How would you "score" this business? Personally, I would say that if we went in to that business, it would be time to get out by 2017. The Congressional Budget Office (CBO), not because they are stupid (they are, in fact, a bunch of very smart people), but because they have a set of rules given to them by Congress that they must follow, would tell you that this business (or law) actually saves the country lots of money.

How can that be? Look at their rules. Time value of money is not part of the rules. So, one dollar in 2010 is the same as one dollar in 2012 is the same as one dollar in 2019. And, the scoring for a bill ends after 10 years. So (and my intent here is not to be political, but instead to make a point) construction of bills and therefore laws becomes a jury-rigged process. Every major bill that goes to the House Ways and Means Committee seems to save money early on and not start to cost money until close to Year 10. Hmmm? Does that make such a bill a budget-neutral, or even budget-positive bill? I don't think so. But the author of the bill will tell you how it will save the country money while neglecting to tell you that the same bill will saddle future generations with mountains of debt.

Where did the numbers above come from? I made them up. Where could they have come from? They could have come from the Affordable Care Act (PPACA), or Health Care Reform, if you prefer. There is a law where the savings are front-loaded, but once the program starts to cost the country money, it never is projected to stop costing money. Yet, the authors of the law say it saves the country money. And, they use the non-partisan CBO as ammunition to prove it. 

The CBO says PPACA will save us money. And, by their estimates, which I believe to be as valid as any others, it is expected to save us money ... over a 10-year time horizon. But, what happens after 10 years? Hmmm! It costs money every year after Year 10. So, if instead of scoring over 10 years, CBO rules asked them to score over 20 years, then proponents of the law could not say that PPACA saves the country money.

Does the public know this? Generally not. Does Congress know this? I think that some in Congress do, and some probably do not. Now you do.

To my mind, these rules are lunacy. We are in the computer age. If the CBO can do a 10-year projection, it can also do a projection for 25 years, 50 years, 100 years. It's not the CBO's fault, though. They have rules. But, to my mind, those CBO rules, foist upon them by Congress are Public Enemy #1.

What do you think?