More reasons to support the PBO

Today's National Post has an op-ed written by a couple of Fraser Institute types entitled "Scrap the Parliamentary Budget Office". It's a remarkable piece of rhetoric. Although its stated purpose is to make the case for eliminating the PBO, it ends up demonstrating once again why an effective PBO is so desperately needed.

Let's start with this bit:

[A]t the same time as the PBO released its updated fiscal and economic forecasts, Kevin Page, head of the PBO, warned that his office may have to shut down if it does not receive the $2.8-million it needs for operations this year, a substantial increase from last year’s budget of $1.8-million.

With the current federal deficit estimated at $56-billion in 2009/10, and further deficits amounting to $109-billion expected over the next five years, the Conservative government has got its work cut out. In this context, the PBO’s funding request provides an interesting case study about how the government should examine its programs and activities going forward.

The use of the word "context" here is clearly ironic; the authors are comparing an extra $1m for the PBO with an accumulated deficit of $109b - a number that is five orders of magnitude greater than what the PBO is asking for. Even if we dial it back and compare that $1m to the $10b estimate for the annual structural deficit, we're still talking about numbers that are different by four orders of magnitude. One of the reasons so many academic economists support the PBO is to raise debate on economic policy issues beyond this level of innumerate nonsense.

But do we really need another government agency to do much of the same as several private sector organizations? Indeed, what functions does the PBO perform that the private sector cannot or does not provide?

Private sector organizations such as TD Economics, Global Insight, Dale Orr Economic Insight, and others regularly produce fiscal projections of government budgets, many of which are available online for free. In other words, there is healthy competition in the private sector for the production of economic and fiscal forecasts. This competition ensures that no one organization’s forecasts dominate, also serving the dual purpose of disciplining wildly inaccurate figures.

Dear reader, I must confess to snickering a bit at this point. I don't suppose that it ever occurred to MM Veldhuis and Lammam to question this assertion: investigating market failures isn't exactly part of the Fraser Institute's mission statement. But as I note over here, there is an academic literature on the performance of private sector forecasts that largely contradicts this claim.

In addition to the multitude of private organizations supplying economic forecasts and fiscal projections, others still go to great lengths to scrutinize the accuracy of government budget numbers and assess its fiscal policies and programs. These include think tank institutions (including our own), lobbyist groups, and professional and academic economists. In a sense, the government already has multiple “watchdogs” keeping it honest and disciplined.

Yeah, not so much. One can predict with a remarkable degree of precision the conclusions of such think-tanks as the Fraser Institute ('markets always work') or the Canadian Centre for Policy Alternatives ('markets never work'). With the notable - and laudable - exception of the work of the CD Howe Institute (disclaimer: I have nothing to do with the CD Howe Institute), there simply isn't much in the way of timely, accessible and high-quality policy analysis that can advance public debate.

[T]he private sector seems to be doing a fine job.

And at this point, snickering became laughter; regular readers may recall these gems that the private sector recently offered on an important policy issue.

When it comes to economic policy analysis, the story is one of market failure. The benefits of high-quality analysis accrue to everyone who cares to read the report, not just those who pay for it. This is a classic example of a positive externality, and the standard conclusion from public economics is that the market will produce less than the social optimum. Worse, the people who are best able to produce those analyses - that is, academic economists - have little incentive to do so. Unless we can come up with a way to fix these problems, the best way to deal with this market failure is government intervention. And the PBO is the best option available to us just now.

Update: Kevin Milligan at Support the OPBO adds his comments.

Comments

[Guillaume]

These well-funded hacks are a real threat because they have managed to find a way to present their "findings" in such a way that the media simply republishes whatever they're being sent without seeking an alternate point of view. The situation here is arguably worst than in the US, where the think thank ecosystem is much more developed and balanced ideologically.

Fraser is not an economic think thank as much as a polished PR machine for the tax-cutting/government program-slashing crowd. And they should be treated as such by the media.

[Matthew]

Other problems with the article: that the PBO reports to Parliament, whereas other organizations like TD Economics don't. Also, the PBO is supposed to provide parliament with costing estimates for government spending proposals. I don't think the private sector would be into this.

But my favourite Fraser moment was at the beginning of the recession when Mark Mullins or Vehlhuis or whoever argued that the government's stimulus wouldn't revive the economy and would lead to inflation. Richard Lipsey laid the smack down, pointing out the obvious contidiction here (i.e. how can it both fail to stimulate demand and cause inflation?).

[Frances Woolley]

A tiny quibble - the Institute for Research on Public Policy www.irpp.org is another quality think tank,

[Stephen Gordon]

Ah - quite right.

[westslope]

I would be curious to learn of Veldhuis' and Lammam's thoughts on the Congressional Budget Office.

Speaking of market failure, the old Economic Council of Canada had a very different mandate but did once upon a time produce a large amount of Canadian policy-relevant, empirical economic research. I seem to recall its independence being challenged by partisan players who didn't like specific bits of information or conclusions.

[Justin Donelle]

Guillaume, your comment about the Fraser Institute is completely ideological and arrogant. The Fraser Institue does advocate market-friendly policies, let me point out that they are no where as free-market oriented as the Mises Institute or Cato Institute. The Fraser Institute believes in minimal government. The view of minimal or even no government is a valid one in academia, which should be respected as an area of multiple ideas. If the press wants to be open they can continue on showing both sides, or even more than both sides of a situation.

Matthew, yes the PBO reports to parliament, but do you think they care? The NDP gets their information straight from the Canadian Centre for Policy Alternatives. The Liberals get it from the CD Howe Institute and the CCPA sometimes. And so far the Conservatives have been getting it from, well, some policies from the CD Howe Institue, they haven't cut spending or fought inflation. The PBO tries to give cost analysis, but, if we look through history every private think tank does the same thing, so technically we could use private numbers as they have been more accurate. And last I checked, the CPI was going up, so technically the Fraser economist was right, unemployment hasn't budged much either.

Stephen, I think from my previous remarks you can already see that I don't believe market failures exist, only government meddling exists. The issue of comparing the amount required is still more spending which someone has to pay, we should be arguing against more money to the PBO and any other government program, its a philosophical case. I strongly disagree with your argument for public sector economists, an economist would lose his job because his forecasts are bad which would be great. There would be no incentive for an economist to just follow the others because the economist with the best reputation would be hired and not the one who is just predicting the same as the good economist. A government economist has no incentive to produce accurate results, he has an incentive to create worst results or better, depending on the economic situation. A government economist has a better incentive to save his job by making the government look bad or making the government look even better so he can probably get a pay increase. Yet alone, there are the issue of bribes for government economists which arises, most government-dependent associations or labour unions have no problems getting economists to forecast better pictures to let spending increase.

In my honest opinion about incentives for academic economists, I think we should simply follow the tradition of having someone teach and someone who produces, teachers and employees, academic economists should train economists and then the economists should predict.

[Stephen Gordon]

Two points:

1) I'm far from convinced that any private sector economist would lose her job for making a bad forecast; see that link to my post on the academic literature on private sector forecasting. Their main incentive is to avoid being too far from the consensus forecast.

2) In any case, as Kevin Milligan points out, forecasting is only a small part of what the PBO would do if it had the resources. Policy analysis - evaluating the effect of policy proposals - is not something the private sector does on a regular or thorough basis. Nor is it equipped to do so.

[David]

I didn't realize the PBO would do policy analysis if it had the resources. How would that differ from the policy analysis that the Auditor General's office currently does?

[Stephen Gordon]

The A-G doesn't do economic policy analysis. It asks if the proper rules were applied in the implementation of a policy. It doesn't try to work out counterfactuals ("what would have happened if that policy hadn't been in place?"), nor does it try to evaluate the effects of a new policy proposal.

[David]

OK fair enough. But government already has policy analysts within departments that create policy to do that kind of stuff. So having another quasi-government organization in place to do the same work seems a little redundant.

[Stephen Gordon]

But those economists report to the government, not Parliament. And governments generally don't release studies that don't endorse their policies.

[Tom D]

From the website of the PBO: "The mandate of the Parliamentary Budget Officer is to provide independent analysis to Parliament on the state of the nation's finances, the government's estimates and trends in the Canadian economy; and upon request from a committee or parliamentarian, to estimate the financial cost of any proposal for matters over which Parliament has jurisdiction."

It was set up by the Conservatives, in their early years in government, to provide economic analysis to Parliament independent from the government as provided by the Department of Finance. This was because the Chretien government, with Paul Martin as finance minister, always significantly underestimated revenues resulting in large surpluses, a significant portion of which were then spent on what the Conservatives considered to be partisan projects. This was an improvement on the Department of Finance's projections during the Mulroney years when Finance consistently underestimated projected deficits. "The Gang that couldn't shoot straight."

Its ironic that the Fraser Institute is advocating the elimination of a body providing independent economic analysis for our Parliamentarians and replacing it with analysis provided by the private sector, as the Fraser Institute has a reputation of its own for providing analysis heavily biased in favor of its own small-c conservative values.

Note that while the Office of the A-G provides auditing functions these are often selective and occur long after the horse has left the barn, while the PBO can provide to Parliament quite up to date economic projections which can be used in evaluating policy.

[Andrew F]

I continue to be astounded by people who think the PBO is a bad thing. It's dirt cheap, and will probably save us billions by avoiding foolish policies that won't work.

[Justin Donelle]

Tom, the AG in general doesn't even understand the legal principle associated with equalization and the separation of powers, she doesn't do a good job and she's a waste of money.The Fraser Institute has not implemented bias information for the Tories, they have constantly criticized them for engaging in Keynesian policies.

Andrew, the PBO does reports and sips coffee. They aren't politicians and cannot stop policies. How often have people listened to economists? They only listen to pragmatic approaches, otherwise, if people saw how government acted, do you think they would give up their sovereignty and engage in Keynesian policies? :)

Stephen, then all you have to do is modify the law to release all figures and let private economists do their work. Whether or not the PBO verifies the numbers, they can still underestimate surpluses or deficits.

[Matthew]

"The PBO tries to give cost analysis, but, if we look through history every private think tank does the same thing, so technically we could use private numbers as they have been more accurate."

Are you sure about that Justin? Individual parliamentarians and parliamentary committees can request (in other words, compel) the PBO do a cost estimate on a particular government spending proposal and the PBO. It would be a bit awkward for a parliamentarian to get the Fraser Institute to do this for a number of reasons, namely because it wouldn't have the same credibility in the perceptions of other parliamentarians and the public. Also, do you really think private sector think tanks consistently do a full analysis of each department's estimates when they are tabled? I doubt it.

[westslope]

I'm always a little surprised by the depth and breadth of popular support for weakening Parliament or opposing measures that would strengthen Parliament and improve its ability to do its job.

One alternative to the PBO would be reduce the total number of parliamentarians and increase their budgets so they can hire educated, competent assistants to do policy analysis instead of relying on the usual deep-seated ideological crowd pleasers.

I reckon an institution like the PBO has to be cost effective.

To follow up on SG's comment, it is too bad that graduate-trained civil servant economists are so tightly constrained in what they can study and publish. Many of them never exploit a fraction of the analytical tools they learned in graduate school.

[Kevin Milligan]

"But government already has policy analysts within departments that create policy to do that kind of stuff."

I invite you to speculate what would happen when Sally Economist presents her unit chief with a report saying that the government's proposed policy will cost twice as much as the minister has announced.

I know what the answer is. Do you? This isn't dark conspiracy talk--this is how life actually works in a government line department. Among the worst things you can do is produce any number that will lead to a question put to the minister in the House or a negative newspaper story.

[Kevin Milligan]

"it is too bad that graduate-trained civil servant economists are so tightly constrained in what they can study and publish."

I am always happy to recommend a student take a job at Statcan or the Bank of Canada. For a research-trained PhD, though, a line department job is, in my view, not nearly as good as one where you are actually able to do some independent research like at Statcan or the Bank.

[Kevin Milligan]

"and let private economists do their work"

Justin, since you seem taken with the idea that everyone is motivated by narrow economic incentives, could you explain why any private sector economist would have the incentive to do a good job with this? I don't see it. Why would a bank pay someone to price an NDP or a Bloc tax policy initiative? How could that be justified to bank shareholders as a good use of the capital provided to the company?

[Kevin Milligan]

" then all you have to do is modify the law to release all figures "

An effective PBO would use micro simulation models based on confidential tax data to price policy initiatives. (They do this at Finance, and I know the PBO was trying to set this up. Don't know how far they got.)

Are you saying that the government should ignore privacy and confidentiality concerns and just post the T1 data? You strike me as a libertarian--libertarians normally care about things like privacy. Perhaps it's time to set down the Ayn Rand and join us at the big kids table.

[Kelsey]

Would there be a funding issue if PBO acquiesced to the party in power?

Mr Harper was interviewed in the first week of September by his fan Dave Rutherford of QR77 in the Conservative heartland. Rutherford brought up the question of PBO chief Kevin Page and referred to him as an ACTIVIST. Prime Minister avoided answering that one. Well that is the crux of the issue. The problem is not the budget or the office it is the mandate of the PBO and the Officer who insists on abiding by that.

The deficit raison d'etre for scrapping PBO is akin to contrived ignorance.

The Fraser types are not expected to leave Roses by the Stairs for Kevin Page, an act like this would mean commiserating for contributing $75 to the $56 billion federal deficit.

The link below pertains to Think Tanks in US:

http://www.sourcewatch.org/index.php?title=Think_tanks

"Think tanks may have a decided political leaning. There are twice as many conservative think tanks as liberal ones, and the conservative ones generally have more money. One of the important functions of think tanks is to provide a way for business interests to promote their ideas or to support economic and sociological research not taking place elsewhere that they feel may turn out in their favor. Conservative think tanks also offer donors an opportunity to support conservative policies outside academia, which during the 1960s and 1970s was accused of having a strong "collectivist" bias.

"Modern think tanks are nonprofit, tax-exempt, political idea factories where donations can be as big as the donor's checkbook and are seldom publicized," notes Tom Brazaitis, writing for the Cleveland Plain Dealer. "Technology companies give to think tanks that promote open access to the internet. Wall Street firms donate to think tanks that espouse private investment of retirement funds." So much money now flows in, that the top 20 conservative think tanks now spend more money than all of the "soft money" contributions to the Republican party....

Democratic strategist Rob Stein, who organized the effort, thinks "there is a big imbalance in the amount of cash that goes into left and rightwing thinktanks. Over the past two years, he said, think tanks pushing the conservative agenda had received $295 million, while leftwing institutions were given just $75 million."

A think tank's resident experts carry titles such as "senior fellow" or "adjunct scholar," but this does not necessarily mean that they possess an academic degree in their area of claimed expertise. Outside funding can corrupt the integrity of academic institutions. The same corrupting influences affect think tanks, only more so."

[Justin Donelle]

Matthew, If the numbers would be released immediately they can still look at policy, and with many think tanks around the country as mentioned above,then there are plenty of private economists plus those in business who could identify all policies. Even if policy is analyzed, how many people will listen? Political parties will get things cost-analyzed or else, the opposition will get it analyzed to attack the government.

Kevin, a bank or another business would pay private economists in order to price initiatives, so they can see how it would end up effecting them or others within a society. It creates an incentive for others to invest in a company that provides accurate information on different levels. Maybe we should ask why TD bank or other banks already look at government figures? Tax measures is one, deficits, and other policies.

Kevin once again, I am a Libertarian. I believe in privacy. What I don't believe in is government privacy when it comes to its administration. I have no problem with releasing all tax information and spending contracts. Government had a fiduciary duty to the people which pay and are suppose to control it. The true tax-generating individuals are from the private sector which will come to fund government programs, even if they get taxed again you cannot talk of a legal obligation for their privacy.

Kelsey, as previously stated, the Fraser Institute opposes deficits, they called for a balanced budget, spending cuts, and tax cuts. With regards to think tanks, all market-oriented oriented or mixed think tanks have PHD scholars or those with a masters and significant experience in policy. Its people's personal will to invest in a think tank that creates policy that they enjoy. Even if there was no government funding, you would still have private-non paid funding that would occur through the internet joining of many economists, an Open Source economist analysis. Also, your stats for the number of "left" and "right" think tanks sound more like a marxist inequality, as if your angry that there are more market-oriented think tanks than there are socialist. And for the political leanings, there are people who believe in the market and support that the market is the ultimate way in which society can solve its problems, and the Fraser Institute doesn't fix policy to please others because there are actually former Conservatives (Ralph Klein, Mike Harris,Tom Flannigan) and Liberals(Brian Tobin, and the others aren't coming to mind) who support and work at the Fraser Institute.

An overall policy that arrives, whether or not predictions are drawn up, there will still be ideological differences from those who believe in a mixed economy, those of believe in the unfettered market and those who believe that markets are the devils. So the PBO could be filled up with Keynesians or Monetarists, and even with their figures they can be drastically wrong as the future is generally unknown. You can't forget Human Action as the basic principle for policy. You also can't forget that government employees can change the basic figures or exaggerate to support a government or ruin one. The salary and social effect is one that can change people, look at Judge Gomery for example, he's writing books and going around thinking he's 'The Man'. The PBO could even cut deals with political parties in order to get more funding and higher salaries, in return they would support a government or opposition.

[Kevin Milligan]

"I believe in privacy. What I don't believe in is government privacy when it comes to its administration. I have no problem with releasing all tax information and spending contracts."

Ok. I don't mean to be rude, but I don't think you're aware of the kind of data I mean. I am talking about administrative tax microdata. This is a) necessary to properly tax policy initiatives and b) very confidential, unless you like your tax form posted on the web for all to see.

" so they can see how it would end up effecting them or others within a society."

Right. And each bank would put a value on the value. We can sum up those willingnesses to pay and then proceed to see how much of the public good should be produced. Samuelson condition.

[Kevin Milligan]

Sorry. That would be 'value on the information'

[Justin Donelle]

Kevin, I have no problem with tax forms being posted on the web. They do it with financial contributions in the US, all scanned and posted :) Government is by and for the people. I rather we abolish government, but the issue is that it should be accountable and demonstrated. Makes you think, look at how many people can vote and advocate spending policies, but don't even pay taxes.

Why can't people just use the term "self-interest" instead of Samuelson condition? :P A bank would be self-interested with regards to what it can produce, that's a possibility but in the long-term, the bank would become known as an ideological institution which would not dominate people's mind. Look at how things are now, we have economists who have many beliefs and argue many different policies, not enough Austrians:P, and they can currently use different figures to apply anything. There is the issue of competition which always comes into mind. Competition in information will ultimately lead to a better social outcome, with people being forced to choose what they really value. Thinking that the PBO would be so much better is exactly saying that all economists should be Keynesians, Monetarist or Austrian. For the PBO to be so effective as a public good, then it would have to cater to different opinions, which it will not. It's an economically political idea on what should dominate figures and interpretations. Its just like saying that we should fill our courts up with activist judges because it's better to have them and get a proper response instead of conservative judges, who would simply follow and apply the law as it is written.

[Andrew F]

Justin, I doubt you'll have many people sign on to a scheme that involves releasing private tax information, all to save the government a few million dollars. Norway might be willing to release the tax filings of all its citizens, but I don't see it flying here.

[Justin Donelle]

Andrew, agreed. It's easier to abolish taxes :)

[Patrick]

Justin: Enough with the John Galt stream of conscience shtick. Stay on target. You're a Carleton poli sci student, so we know you can do it.

Given that Canada is going to continue to be a federal parliamentary democracy for the foreseeable future, and that the Gov't is going to continue to formulate and legislate a variety of economic policies, and that those policies must be debated in parliament, and that the debate in parliament should be informed, there is thus a case for creating an independent agency whose mandate is to help provide said information to parliament, without fear of reprisal from the Gov't and without interference from private interests attempting to control the flow of information for their own narrow interests.

[Justin Donelle]

Patrick, you seem to believe that an independent agency would be neutral, it wouldn't. If you look at my arguments about how even independent agencies are run with their own personal interest, there is no truth in this world except the truth you believe in. The only thing that will arise, is any organization whether "independent" from government, which private institutions are, will serve their own interest and ideology. The people in the PBO have their own political and economic views. I suggest you read a little on government agencies from Mises or Rothbard, both of them do an excellent critique of government with regards to the lack of productivity from public institutions and the problem of human action, in which people are personally motivated.

And with regards to being a Political Science student, yes it is wonderful, it helps me see how government truly works with regards to special interest. It also shows how to analyze many issues such as education and how unbalanced it is. As you've noticed, I'm not the student who's going around saying things are between A and B, there are more things that will effect a situation than just A and B.

Truth be told, I never read Atlas Shrugged. I rather deal with articles and theoretical books than stories. When I have kids, maybe I'll read Atlas Shrugged to them :P

[Nick Rowe]

Justin: suppose we replace Patrick's "independent" with "dependent on MP's"? Is there a (good) reason MPs might need their own research office, dependent on them?

(BTW, let's meet for lunch? email me).

[Justin Donelle]

That sentence sounds a little mixed up, I'll try to answer. MPs can access the parliamentary library which does all the work for them, or their staff, their staff gets their results from somewhere, normally think tanks.

I'll stop by your office hours on Monday.

[Stephen Gordon]

Why would a think tank answer the Parliamentary Library's question for free? For that price, you'd get the usual cookie-cutter answer: "markets always/never work!" or some such inanity.

I don't think you understand just what it takes to do economic policy analysis.

[Justin Donelle]

I thought Nick was talking about research for MPs and how the PBO would serve MPs.

The Parliamentary Library does research and find any and all information available, so any published articles from think tanks will show up.

If all figures were released straight from the finance department with regards to revenues and all other statistics required, then the private sector could take over and produce that data. Yes, there is an incentive for people to follow their ideology and base their findings on that. The issue I have with the PBO is that those people can have ideologies, and its natural, but what seems to be constantly mentioned here is that they are somehow suppose to be wonderful and honest people who will follow a balanced picture. What I have strongly argued, is that: 1.The PBO can be controlled by different economic schools of thought and tailor things differently or manipulate data to show it, which is already done at most think tanks. 2. The PBO would simply be showing another or the same point of view from other think tanks. Think tanks currently do a lot of research on different topics from different regions in the country. 3. It boils down that politicians will follow what they believe and pick and choose what they value the most worthwhile proposition. Each think tank pops up with different ideas and even if the PBO was fully funded, it would still have people who hold basic political and economic views on how it should be shaped. 4. The PBO can be manipulated with money from special interest just like anything else.

If the law is changed and the finance department becomes more open, then all your information will pop up with regards to spending and anything else you might dream of. But, policies such as possible new regulations or such would end up being evaluated by the private sector. The private sector would do it because any industries that would perhaps be effected, would do an analysis and see what impact it would have on the said industry. Just like how many oil companies are funding research on climate change and backing the idea of man-made climate change, and the pigouvian tax on it. The private sector can look at every single policy and offer a comparison. Think tanks have always analyzed policy and brought out their own numbers. The only difference I see is that the private sector would show competition and let different ideas come out instead of just letting one organization look at it. Imagine if Marxists took over the PBO, you can't tell me that there would still be "moderate" policies calling for tax cuts and spending cuts, or saying that policies which create competition through privatization and the reduction of regulations, would still be supported or properly analyzed.

[Stephen Gordon]

Okay, so why isn't that already happening?

And please don't say that it *is* happening, because it is most painfully clear to professional economists that it isn't.

[Justin Donelle]

It isn't happening because of many legal issues around privacy and the governments own agenda. Canada seems to have a misconception about tolerance and privacy. Assuming that you were asking about he change in laws.

[Stephen Gordon]

Publishing data is *not* analysis.

[JKH]

Your “orders of magnitude” reference is supremely appropriate. I don’t know what the institutional configuration should be, but to suggest that some sort of body along these lines isn’t necessary as a balance with private sector input is absurd. I’m not familiar with the set up. What’s the right way to think about this sort of body versus work by the Department of Finance, for example?

[Justin Donelle]

The PBO's mission is to review the budget, make sure the estimates are correct, and aid any parliamentarian or committee that wants its opinion on estimates.

To my knowledge, it has done what was asked. It doesn't go further for good reasons. If it went further in analyzing all sorts of policies without the government or oppositions request, it would turn into a Stats Canada of sorts with regards to all bills and their economic impact, which can always be fooled or manipulated for the personal reasons in my previous posts. Analysis is subjective and can be taken in different ways. So, I'm assuming from your point then, you want the PBO to get more funding and turn into as mentioned above, a sort of "independent" government estimate for all projects and their impact on the finances and social aspect of Canadians?

Maybe I'm not getting the way your asking the question. Tell Nick, and I'll ask him on Monday.

[westslope]

"I am always happy to recommend a student take a job at Statcan or the Bank of Canada. For a research-trained PhD, though, a line department job is, in my view, not nearly as good as one where you are actually able to do some independent research like at Statcan or the Bank." -Kevin Milligan

Good advice. The central agencies usually offer more scope. Some people have been relatively happy working at Finance too.

[Charles Lammam]

As the authors of last week’s National Post article on the Parliamentary Budget Office, allow us to address what we consider to be your three main comments responding to the article.

First, you have not demonstrated that a “market failure” exists in the production of fiscal projections of government budgets. As the article mentioned, several private sector organizations regularly produce such forecasts, meaning they are not being under-provided and therefore government intervention is not warranted. In fact, projections by the federal finance department, as well as the PBO, rely heavily on private sector forecasts. Even your colleague Kevin Milligan concedes that “[he is] not convinced that the PBO guys are going to be better macro forecasters than anyone else.”

Moreover, a recent study published by the IMF found that “fiscal forecasting in Canada is governed by one of the strongest institutional frameworks relative to benchmark countries….One particular strength is the explicit use of macroeconomic projections from a wide range of private forecasters for the preparation of the budget.”

Second, you have also not demonstrated that a “market failure” exists in terms of policy analysis. Good policy analysis is not in short supply. Private sector organizations and academics consistently provide policy analysis to interested parties (admittedly some better than others). As Nobel Laureate Gary Becker concluded, competition among interest groups for legislative success is a mitigating factor in governments choosing bad policies because politicians have to make decisions on which groups to placate. Since political actors can’t satisfy all of the vested special interest groups, they have to calculate which to support. Policy analysis by the PBO would unlikely add value to the policy landscape given that self-interested political actors tend to support policies based on political payoffs (i.e. votes), rather than on high-quality analysis.

Even assuming the PBO is a more reliable source of policy analysis than other organizations, its efforts are of little practical value in the Canadian political context given the institutional environment. Unlike the US where the Congressional Budget Office (CBO) is more influential, Canada’s government operates in a parliamentary system. As in many parliamentary systems, the Canadian legislature has limited powers to change the submitted budget (see IMF study). Generally, parliamentarians can only approve or reject the incumbent government’s spending proposal, while the legislatures in the US government are free to change every aspect of the budget proposal. Policy analysis performed by the CBO is more likely to be used effectively by individual members of congress to adjust proposals accordingly.

Finally, the third issue is that of the magnitude of the PBO’s budget. Yes, everyone can do a simple calculation but you are embarking on a slippery slope by using this as a rationale to support the PBO’s continued existence. A more appropriate test is whether the PBO provides value for money to taxpayers. And as we’ve shown, it is far from certain that it does.

Link to IMF study: http://www.imf.org/external/pubs/ft/wp/2005/wp0566.pdf

Charles Lammam and Niels Veldhuis

[Matthew]

Charles and Niels:

1) Private sector organizations are not accountable to Parliament.

2) An office of Parliament must be seen to be free of political bias. As you know, a lot of private sector think-tanks have been formed to
promote a particular point of view. You can argue that the Fraser Insitute for example is not ideologically biased, but there is a
perception that it is, and that is important.

3) So lets say that Parliament contracts with a private sector organization to provide consistent, on-demand fiscal forecasts and budgetary
analysis at the program level. This would still cost money.

I ain't no big city economist, but it seems to me that the PBO is worth a measly $2.8 million. I'm a bit surprised the Fraser Insitute is arguing for its abolition as a fiscal restraint measure. The PBO's most widely read reports have (i.e. the costs of Afghanistan and recent federal budgets) shown the spotlight on govenrment spending. To the extent that it has an impact, it is probably as a foce for fiscal prudence.

[Stephen Gordon]

I'll just quote from Kevin Milligan's response:

Where are these watchdogs? Have you seen them? Where are the detailed, credible, timely, and transparent costings of government and opposition tax policy initiatives? I don't see them. Not at the Fraser Institute, not elsewhere. I don't mean opinion pieces. I mean solid, objective, transparent policy work.

[Patrick]

Charles Lammam and Niels Veldhuis:

Oh, I can't wait for Stephen's reply. I wan't going to say anything, but I couldn't let this one go:

"Policy analysis by the PBO would unlikely add value to the policy landscape given that self-interested political actors tend to support policies based on political payoffs (i.e. votes), rather than on high-quality analysis."

Huh? The whole point is that the PBO would provide credible contrast to the self interested political actors in exactly the same way the Auditor General does. The Gov't ignores the AG at it's own peril, despite the AG having little real power other than the disinfectant of sunlight and the perception of holding the moral high ground. Furthermore, given the success of the AG as an independent body reporting to Parliament, the onus is clearly on YOU to demonstrate how a well funded PBO accountable to Parliament (i.e. the people of Canada) would not be beneficial. Good luck.

I have to wonder to what extent your attempted hatchet job is simply a preemptive strike. Are you having visions of a diminished share of the market for your economic analysis (if we can call it that)? A well funded PBO with the credibility of the AG would put an awful crimp in the Fraser Institutes style. That alone is reason enough for me to support it.

[Patrick]

Having a couple of Fraser Institute hacks tell us that the PBO has to go is like Exxon demanding the abolition of the EPA. Prima facie, it stinks of self serving drivel.

[Matthew]

"Policy analysis by the PBO would unlikely add value to the policy landscape given that self-interested political actors tend to support policies based on political payoffs (i.e. votes), rather than on high-quality analysis."

I guess we are supposed to believe that PBO officials are self-interested political actors, whereas economists from the charter banks and the Fraser Institute are not.

[KevinMilligan]

Hi Charles and Neils,

Thanks for engaging in a positive way in the comments here.

I'm glad you saw my comment that I don't think the PBO is likely to be much better at macro forecasting. (I might have a different opinion on that than Stephen, but I'll let him speak for himself.)

I hope you also read the rest of the paragraph. Here is the whole paragraph:

"I am not convinced that the PBO guys are going to be better macro forecasters than anyone else. On that point, I have some sympathy for the Fraser Institute argument. But that's not what we're paying the PBO to do. We're paying them to a) translate those macro forecasts into fiscal projections and b) price policy initiatives coming out of Parliament."

We might make some more progress here if you could address my argument, rather than just repeating the part where I agreed with you.

[KevinMilligan]

It's not that I think PBO economists are purer of morals or higher of intellect than private sector economists. It's that I think that the institutional incentives are much more likely to produce good policy analysis housed as an Office of Parliament than in the private sector.

[KevinMilligan]

whoops: Sorry Niels. Spelling counts. I failed!

[Frances Woolley]

Gary Becker can be cited as an authority on many things - crime, rotten kids, taste discrimination, human capital theory, polygamy, addiction - but he's not usually regarded as an expert on interest group politics. I feel like a Sarah Palin detractor, trying to undermine her credibility by pointless fact-checking...