Explaining Bureaucratic Optimism: Theory and Evidence from U.S. Executive Agency Macroeconomic Forecasts

Abstract

W e offer a theory of intertemporal bureaucratic decision making which proposes that an agency's forecast optimism is related to the extent to which it discounts future reputation costs associated with bureaucratic incompetence. Agency forecasts of the distant future are more likely to be optimistic than short-term forecasts. We claim that unstable organizations will discount reputation costs at a steeper rate than stable organizations, and therefore will produce more optimistic forecasts. We test our theory using macroeconomic forecasts produced by the Office of Management and Budget (OMB) and the Social Security Administration (SSA) across six forecast horizons from 1979 to 2003. The statistical results are generally consistent with our theory: OMB generates more optimistic long-term forecasts than SSA. Further, differences in forecast optimism between these executive branch agencies widen as the forecast horizon increases. Our evidence suggests that more stable agencies place a premium on minimizing reputation costs. Conversely, less stable agencies are more likely to accommodate political pressures for forecast optimism. These findings underscore the importance of institutional design for understanding how executive agencies balance the conflicting goals of political responsiveness and bureaucratic competence within the administrative state.

Political distortions in state forecasts

“…At the federal level, the President is allowed to propose a budget that leads to a deficit and thus there is less of a need to propose budgets that balance only under overly optimistic forecasts. Thus it is not surprising that at the federal level the electoral cycle does not explain forecast errors of GDP growth (Krause and Corder 2007) or revenue growth (Campbell and Ghysels 1995). …”

“…The authors present evidence consistent with this hypothesis for long run economic forecasts but not for short run economic forecasts. Federal data Blackley and DeBoer (1993) 1963-1989 Economic Unbiased deficit Republicans optimistic Campbell and Ghysels (1995) 1967-1990 Revenues Unbiased a Frendreis and Tatalovich (2000) 1979-1997 Economic Pessimistic b Krause and Corder (2007) 1979-2003 Economic Republicans optimistic Unbiased…”

Reputation and Public Administration

“…Yet reputation‐based emulation also has been observed in both U.S. economic and fiscal forecasting behavior (Krause and Douglas 2005, 2006; cf. Krause and Corder 2007), as well as in the realm of administration of U.S. federal public lands (Kunioka and Rothenberg 1993), as a means of blame avoidance. The rationale for such behavior among agencies engaged in the same set of functional tasks is the desire for organizational maintenance (see also Wilson 1989; cf.…”

The Complications of Controlling Agency Time Discretion: FDA Review Deadlines and Postmarket Drug Safety

“…Given the certain publicity that accompanies tardiness in drug approval, relative to the uncertainty over whether rushed approvals will yield reputational damage, we suspect that incentives to meet the deadlines may outweigh reputational and other considerations that contribute to decision quality (see also Krause and Corder 2007).…”