The Tyranny of Budget Forecasts
The evolving federal budget process has placed increasing demands on, and given unique powers to, the economic forecasters at OMB, Treasury, CBO, and the Joint Tax Committee of Congress. On the whole, the forecasters have been highly professional in their work, but differences in estimating techniques and, especially, constraints imposed on their analysis by elected officials have limited their credibility. Both the Administration and Congress "game" the system and even ignore the budget rules when convenient. Thus, a sophisticated budget process can help, but cannot assure, sound fiscal policy in the absence of political will to make hard decisions.
A new measure of fiscal shocks based on budget forecasts and its implications
This paper develops a new measure of US fiscal policy shocks that intends to avoid the anticipation problem affecting conventional measures, being also arguably free from endogeneity. The shocks are intended to capture changes to the component of anticipated fiscal policy that is exogenous to economic developments. Key economic variables such as output and interest rates respond quickly and significantly to a realization of the estimated shock and, in the first part of the sample, 1969-1988, in a way consistent with the Keynesian prior. In contrast, over the period 1989-2008 the effects are at odds with that prior, with fiscal loosening producing contractionary impacts.
The failures of success.
I would like to begin by taking you back to the years preceding the Second World War, because the problem I wish to discuss must be seen as a historical process if it is to be understood. I am going to talk about a particular chapter in the history of disease, a chapter characterized by the surprising fact that the net effect of successful technical innovations used in disease control has been to raise the prevalence of certain diseases and disabilities by prolonging their average duration. The beginning of this historical period coincided with the introduction of the systematic clinical trial and of the sulfonamides in 1937 and 1938. 
 
The health situation regarding modern man's chronic diseases and disabilities immediately before that period was well described by Osler in 1904 in his famous textbook, The Principles and Practice of Medicine, and the same description was still present in the 1935 edition revised by McCrae (Osler, 1935): 
 
There is truth in the paradoxical statement that persons rarely die of the disease with which they suffer. Secondary terminal infections carry off many patients with incurable disease. 
 
Osler could not have anticipated the coming successes in curing the terminal infections associated with these incurable, or chronic, diseases that were to be introduced by a new era of medical research—the era of the clinical trial. What happened was that at the beginning of the era, in 1936, on a very small grant from the Rockefeller Foundation, a group of investigators searching for a cure for puerperal fever revealed to the world the antibacterial powers of sulfanilamide. The impact that sulfa drugs were to have on pneumonia, the most frequent of the terminal infectious diseases at that time, was as dramatic as it was serendipitous. Figure 1 shows the steep decline in death from pneumonia after 1936, following the introduction of sulfa drugs. 
 
 
 
Figure 1 
 
Curve of the Mortality Rate per 100,000 from Pneumonia between 1930 and 1950 as Prepared by the Metropolitan Life Insurance Company 
 
 
 
Coincidental to the discovery of the sulfonamides was the invention of the clinical trial, the seeds of which had been developing for many years. In 1937 Professor A. Bradford Hill gave researchers a means for comparing a new treatment with an old one on a carefully selected population, and getting a definitive answer, usually within a few months. Quite by accident, the first new treatment that was tested adequately by the clinical trial was sulfanilamide. The clinical trial was then used to examine the efficacy of treatments whose effects, while not so apparent as those of the sulfa drugs, represented major clinical successes. 
 
The rate at which new, effective remedies were discovered accelerated suddenly. The most important of these turned away impending death by simple techniques. The once fatal disease or injury might be in an otherwise healthy or vigorous person. As it turned out, these successful life-saving measures were disproportionately needed in people suffering from an incurable disease or disability. But these new techniques did not cure the chronic diseases, nor did they prevent them in the next patient. 
 
If we assume no change in the age-specific annual incidence of the diseases formerly terminated early by now curable infections, and that, in fact, the anti-infectious drugs have been postponing death, then the average duration of these conditions has presumably been increasing. Therefore at the same time that persons suffering from chronic diseases are getting an extension of life, they are also getting an extension of disease and disability. 
 
It is obvious that, with increasing duration, we would expect the proportion of the population in any given age group suffering from these conditions to rise. And, in fact, as the result of advances in medical care, we are seeing a rising prevalence of certain chronic conditions which previously led to early terminal infections, but whose victims now suffer from them for a longer period. The goal of medical research work is to “diminish disease and enrich life” (Gregg, 1941), but it produced tools which prolong diseased, diminished lives and so increase the proportion of people who have a disabling or chronic disease. 
 
That is a major but unintended effect of many technical improvements stemming from health research. These increasingly common chronic conditions represent the failures of success. Their growing prevalence and longer duration are a product of progress in health technology.