The Government's Rearview Driver
Brad Plumer has a very nice post on why the Congressional Budget Office has, historically, predicted that pollution regulations would cost much more than they actually did. When Congress went to create a cap-and-trade plan for sulfur dioxide in the early '90s, the CBO figured that permits would sell for $750 a ton. By 1997, they were $100. And that's not an isolated example.
The basic story, as Plumer explains, is that "markets almost always tend to be smarter than forecasters, and adjust in ways that no one expected (and, as such, are hard to build into the models)." Technological innovation tends to emerge much more rapidly than CBO's predictions admit. And there's a reason for this. The CBO plays by "all-else-being-equal" rules. Asked to evaluate cap-and-trade, they essentially ask, all else being equal, what will this do to the economy?
But the point of a policy like cap-and-trade is that it all else won't be equal. The idea is that making carbon more expensive will spur the market to develop carbon alternatives. People will thus use less carbon, demand for the permits will drop, and the policy will be less onerous than it initially was. CBO can't build that into their model because, well, it hasn't happened yet, and CBO can't score something we hope will happen. But the fact that they can't score it doesn't mean it won't happen. Predicting the outcome of a new idea based on evidence gathered from old ideas is a tricky business.
As a senator once said to me, CBO is like a navigator who tells you where you're going by staring into the rear-view mirror. There's a role for that. If you're asking, for instance, how much it will cost to expand Medicaid eligibility to 150 percent of poverty, then data from what happened when we've expanded Medicaid eligibility in the past will probably be pretty helpful. But if you're asking how much it will cost to do something we haven't done before, then looking in the rearview mirror is less useful. The CBO estimate, in that scenario, plays an important role as it's still the number we use for budgeting purposes. But as an analytical contribution, it's highly uncertain.
Photo credit: AP Photo/Pat Roque.
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