$1 Trillion Extra Really Is Possible
Washington Post Staff Writer
Tuesday, June 29, 1999; Page A4
As late as Sunday, federal government budget forecasts didn't show quite enough money to pay for everything Democrats and Republicans would like to do over the next decade and a half. Then yesterday -- surprise! -- the White House unveiled a new forecast that added $1 trillion to projected surpluses over the next 15 years.
Administration officials cited a stronger-than-expected economy that generated more revenue than the White House had expected as recently as February. It was like Christmastime for the budget: Suddenly, and seemingly by magic, there was more money for Social Security, more for Medicare, more for defense and more for education, and maybe even more for the big tax cuts Republicans would like to enact.
A cynic might well wonder whether any of this is real.
But economists say -- cautiously, and with their usual caveats -- that yes, it is.
"You can't really pick any fights with what they're saying," especially the short-term budget and economic forecasts, said Jim Glassman, chief economist for Chase Securities. Glassman said the White House's Office of Management and Budget (OMB) does not appear to be cooking the books. Its economic growth forecasts are a conservative 2.3 percent or so over the next five years, at a time when the economy has been booming at about 4 percent a year.
Okay, but does a legitimate forecast add $1 trillion in surpluses in just five months? "This may sound like a lot of money, but when you realize how sensitive these forecasts are to economic assumptions, it's not surprising at all," Glassman said.
Like a lot of other forecasters, OMB apparently was expecting the economy to slow down this year, explained Cynthia Latta, principal U.S. economist for Standard and Poor's DRI, an economic data and consulting firm. That hasn't happened. The latest figures show that consumers are still spending like crazy, new cars are flying off the lots, the stock market is making a lot of people feel rich and, as a result, the government's tax take is up.
At the same time, Latta noted, spending is down in some important places. Medicare, which analysts once assumed would grow at least 10 percent a year forever, is actually down about 2 percent below last year's level.
All things considered, Latta said, OMB might be a little too conservative, at least in the short run. DRI's fiscal 1999 surplus forecast is $117 billion, a hefty chunk bigger than OMB's $99 billion.
The difference between those two numbers conveys a sense of just how difficult it is to predict the surplus. With just three months left in the current fiscal year, which ends Sept. 30, forecasters still disagree by about $20 billion over the size of this year's surplus -- an uncertainty range of about 20 percent.
Economists note that the job is all but impossible to do with complete accuracy. Forecasters are trying to measure the difference between two monstrously large and constantly changing numbers: the roughly $1.8 trillion the government takes in and the roughly $1.7 trillion it spends. The key word here is "roughly" -- any of a dozen factors can change either number from day to day or week to week.
"In order to get those two sides right, you've got to get a whole bunch of things right -- the economy, inflation, interest rates and also a host of decisions about policy," such as taxes and spending, said L. Douglas Lee, chief economist with HSBC Washington Analysis, an independent investment analysis firm.
The fact that forecasters are having a tough time agreeing on what the surplus will be three months from now also raises ominous questions about how they can predict with any accuracy at all what it will be five, 10 or 15 years from now. "I don't believe anyone's forecast 10 or 15 years down the road, including my own," said Lee.
On the other hand, Lee said, lawmakers' efforts over the last decade to wipe out the deficit have produced structural changes in the budget -- more taxes and less spending -- that make surpluses fairly durable. "If we do not undo those policy changes, then we will continue to run a budget surplus as long as the economy remains healthy," he said.
Economists say that even a recession might not drastically alter the forecasts, at least over the long run. OMB Director Jacob "Jack" Lew said yesterday that the administration builds a recession into its long-term outlook to take account of the possibility that the economy will eventually quit booming. While they don't predict it in any given year, forecasters factor in a downturn by dialing back their growth estimates throughout the 15-year projection.
Some analysts warn that the greatest danger to these rosy estimates comes not from any economic peril but from the natural tendency of a big surplus to burn a hole in lawmakers' pockets.
While DRI's Latta has a larger surplus estimate than the administration for this year, her estimates for the next 10 to 15 years are much smaller than the numbers the White House rolled out yesterday.
"Our forecast has tax cuts and additional spending," both of which shave billions off the projections, she said. "Our baseline says Congress isn't going to let the surplus sit there."
© 1999 The Washington Post Company