Not All Economic Data are Created Equal

The Congressional Budget Office (CBO) recently released an issue brief that outlined some of the data it used to estimate the effect of the 2008 tax rebates.  Given the debate over the true effect of these rebates, the CBO clearly felt that it needed to provide some detail about its methodology.

The CBO's analysis breaks down the different type of studies available in assessing the tax rebates:

  1. Those based on detailed data about spending by individual households;
  2. Those based on qualitative answers to surveys in which people were asked about what they intended to do or had already done with their rebate check;
  3. Those based on national data on income and consumer spending.

The CBO excludes type #3 because they determined that it doesn’t provide an accurate estimate.  The problem is that this type of data is commonly mentioned in policy debates and media coverage.  Instead, the CBO relied more heavily on studies that used #1 and the result is that the CBO estimated that 40% of the 2008 tax rebates were spent within the first six months while other reports peg the figure at 10-20%. 

Consumption and Income With and Without Rebates Provided Under the Economic Stimulus Act of 2008 (Trillions of dollars)

CBO's estimation of the effect of the 2008 rebates.

The tax rebate debate is just one example of how difficult it can be to figure out when policy works as intended.  This week, in addition to blogging about the tax rebate, the CBO also commented how it must also make certain behavioral assumptions when determining the cost-benefit analysis of health-related debates.  The CBO includes an interesting paragraph:

Although CBO’s estimates reflect how certain individuals and firms would respond to enactment of a legislative proposal, those estimates generally do not reflect how gross domestic product (GDP) might change. That long-standing convention of not incorporating macroeconomic effects in cost estimates is consistent with the practice of  the House and Senate Budget Committees to adopt an annual budget resolution with a specific underlying set of baseline economic assumptions, so that all legislation throughout a Congressional session can be evaluated against those assumptions.

As consumers of the CBO content, this is an important distinction to consider when listening to legislators quote CBO figures.  With a proposed health-care bill that currently encompasses an extraordinary number of moving parts, it’s important not to assume that CBO figures automatically account for all the other factors that may affect the economy.

CBO: Did the 2008 Tax Rebates Stimulate Short-Term Growth?

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