The whole campaign to impose permanent new taxes on Nevadans rests on a fantasy.
In this fantasy—which we are all invited to share—the setting is an ever-so-serious research laboratory. Perhaps it’s at a university. Or perhaps some private institute.
Wherever the lab is, inside are all these really smart economic experts. Some are at huge computers, which they’re programming with hard-to-understand but ever-so-scientific economic forecasting techniques.
Next, several of the experts are clustered together. They’re peering intently at long computer printouts. Everyone is frowning and looking worried.
In the final scene, the experts are being consulted by our political leaders. Everyone, of course, radiates scrupulous honesty—while frowning and looking worried. What we are given to understand is that genuine science has announced that long-term financial trends pose a real danger to the people of Nevada.
For two years, this little flight of the imagination has been peddled relentlessly to the taxpayers of the Silver State. It is intended to say that objective and impartial science requires us to increase Nevadans’ tax burdens. Otherwise, goes the story, state government will face huge and unmanageable deficits 10 years down the road.
For the moment, let’s leave aside the simple fact that Nevada can never run a deficit, even for one year, since that would be illegal under our state constitution. Instead let’s inspect the idea of economic forecasting itself—the lynchpin of this drive for major new taxes.
We Nevadans are being asked to rewrite our basic social compact, based on a highly dubious proposition. That proposition is that long-term economic forecasting is something solid and reliable. But what real economic professionals know is that when it comes to reliability, long-term economic forecasting is a joke.
Modern economic forecasting, or “econometrics,” attempts to produce sound economic predictions by the use of past statistical data and mathematical modeling. But after almost 70 years as an academic field, econometrics still fails to deliver the goods. Indeed, its abysmal record is a big part of the public record.
Consider the fact that virtually every state in the union currently faces a budget shortfall. To quote the June 10 Barron’s, “The states collectively have registered a shortfall of about $40 billion out of about $1.1 trillion in spending for the current fiscal year. Thus 2002 is turning out to be a year of fiscal crisis from coast to coast.”
This “year of fiscal crisis” was developing long before the 9-11 attacks. But economic forecasters at both the state and federal levels utterly failed to spot it. Indeed, they’ve been wrong every year of the last seven. So—realistically—can their projections have any genuine credibility?
For 65 years the Tax Foundation in Washington D.C. has closely monitored state and federal budgets, including all the obligatory economic projections. After all this, the foundation has concluded that it is virtually impossible for economists to make accurate long-range forecasts.
Last January the foundation released a new report specifically focused on the question of forecasting’s reliability. Its conclusion was that, based on forecasting’s long history of unreliable estimates, long-term economic projections should never be the basis for tax legislation.
Noting the wild swings in forecasts coming out of the Congressional Budget Office and the federal Office of Management and Budget in recent years, the report concluded that:
While drastic, such swings in fiscal projections are par for the course. Fiscal forecasting is fraught with difficulties not the least of which is predicting the economic outlook of the country ten years into the future. Margins of error of 50 percent or greater and swings in deficit / surplus projections of hundreds of billions of dollars are typical. . . .
The Tax Foundation went on to note that fiscal “forecasts are hardly ever reliable and could never be the basis for sound policy.”
Marvin Leavitt, Nevada’s premier longtime state and local tax expert, made this point in February to the Governor’s Task Force on Tax Policy:
I’ve been around long enough that I’ve seen these projections, now, several times. And I’ve had cause to go back and look at them, at the end of the period of time when they were trying to make the projection, 10 years later. And they don’t bear any resemblance to reality.
Nevadans should listen to Marvin Leavitt and other genuine experts about the deep flaws in economic forecasting. Nevadans should also recognize that econometricians work for the politicians, and thus have motives to help cook up reasons for government to further empty our pockets.
Steven B. Miller is policy director for the Nevada Policy Research Institute.