Administration's economic forecasts

Brad DeLong sends us to Eschaton, who is one of many who have been driven to the depths of despair by the Administration's pessimistic economic forecasts in the proposed budget for 2011. I think we need to take a deep breath here:

If you were Christina Romer and you had to make public a forecast for growth and unemployment for the next three years, would you give your mean forecast, a forecast biased to the optimistic, or a forecast biased to the pessimistic?

I'd give a number more pessimistic than my true forecast. The reason is I don't want to be caught in the same situation the Administration found itself in this year when it predicted 8.5% unemployment and the unemployment rate went to 10%. My decision to do this is reinforced by the fact that the pessimistic forecast is consistent with the Fed's forecasts.

The Fed faces an incentive to report a more pessimistic forecast than its true beliefs as well. If it predicts strong growth ahead it makes financial markets think interest rates are going to rise, and so bond rates rise, choking off recovery. Better to announce a pessimistic forecast, keep rates low, and get the economy humming again. The Fed's incentives are reinforced by the fact that its pessimistic forecasts are only little more optimistic than private forecasters; if the Fed is wrong, it made the same mistake as everyone else, and gets no flak.

The private forecasters are idiots.

Meanwhile...