Risky Returns: Accounting for Risk in the Federal Budget

There has been a growing consensus among academics, analysts, and policymakers that the official federal budget estimates should reflect the “cost of risk”—the amount that the private market would demand to bear risk. The result would be to add tens, if not hundreds, of billions of dollars in annual costs to the federal budget and, in combination with the budget enforcement laws now in place, make it much more difficult for the federal government to create or expand programs that involve risk—ranging from student lending to home mortgage guarantees to, potentially, broad social insurance programs like unemployment insurance. This Article is the first academic analysis to reject this consensus and argue that including the cost of risk would improperly skew budget estimates. In addressing this issue, this Article explores the purpose of budgeting and concludes that official budget measures are best used as a gauge of the federal government’s fiscal position and not as a means of capturing broader social effects.

Including the cost of risk in the official budget estimates confuses cost-benefit analysis with budgeting and would generate incoherence in the official budget measures that would leave them doing little well at all.