Tuesday, January 6, 2015

Dynamic scoring is here to stay and it's huge

For the past year or so, I've been talking about how dynamic scoring was on track to fundamentally change the way the Congressional Budget Office evaluates legislative proposals. Today it was made official, as Ed Lazear notes in tomorrow's WSJ:

The House of Representatives on Tuesday adopted a rule that will change Washington and lawmaking for the better. When legislation is proposed, the Congressional Budget Office is tasked with estimating its fiscal consequences. In most cases, the CBO assumes there is no effect on economic growth, positive or negative. In the future, the House will instruct the CBO to take macroeconomic effects into account when estimating the cost of legislation.

With this, a long-time dream of supply-siders has been realized. It will surely mark a turning point in the economic history of the U.S. economy.

Predictably, some Democrats denounced the change. In my view, this issue should transcend politics because it is simply a question of basic economics. If you raise or lower taxes, you will change people's behavior. If these dynamics are not properly considered, then legislation can and most likely will suffer from negative and "unforeseen" consequences.

As Scott Hodges of the Tax Foundation today noted:

Dynamic scoring is not a plot to cut taxes without paying for them, rather it is an important tool for raising the tax IQ of members of Congress so that they understand the different effects that various tax increases or tax cuts have on the economy. The ultimate goal is to enact tax policies that improve the lives of all Americans, which won’t happen if we continue to protect Washington’s status quo.

Read the whole thing.

There is reason to be optimistic.


Benjamin Cole said...

I get an uneasy feeling.
Like Charlie Brown kicking Lucy's football.
The GOP always says they are fiscal conservatives...but then run huge deficits after getting my vote.
Now I hear talk of "primary budgets." Maybe "deficits don't matter" will get another airing.
Look for another flood of red ink.
This may even transcend party---every member of Congress wants more spending in their district, but also to cut taxes.
We may be better off with GOP Congress and a Donk White House.
A pox on both parties.

Lawyer in NJ said...

One More Time with Gusto: Tax Cuts Do Not Pay for Themselves:

EH said...

Maybe if we had any confidence in our ability to actually predict how policy changes impact the economy in the future this would be "huge", but since we do not, this is just more guessing at best, and obfuscation at worst.

Lawyer in NJ said...

Good point, EH. A "conservative" should prefer to make conservative projections, and then reap the benefits if they prove to understate the advantages that the policy achieves.

I don't love Dems either, but Republicans seem to be more about advancing an agenda that formulating sound policy that benefits all.

George Phillies said...

It depends. Is there someone who will actually do such predictions with an adequate level of accuracy, or will be the predictions be whatever level of fantasy is needed to justify whatever the Congressional Lords and Masters would find momentarily convenient to believe?

Scott Grannis said...

It strikes me that even feeble attempts to gauge the dynamics resulting from changes in spending and tax rates have to be better than what we have now.

Consider: currently methodology (simplifying) estimates that a $1 increase in spending will increase GDP by almost $1, and a 20% increase in tax rates (e.g., from 10% to 12%) will yield a similar increase in tax revenues.

In reality, the experience of recent years tells us that the government spending multiplier is likely 0 or negative, meaning that a $1 increase in spending could very well subtract from GDP.

And any substantial increase in tax rates will almost surely result in an increase in revenues that is far less than the increase in rates.

EH said...

I think your statement is supporting the point the commenters have made (my emphasis):
"In reality, the experience of RECENT YEARS tells us that the government spending multiplier is LIKELY 0 or negative, meaning that a $1 increase in spending COULD VERY WELL subtract from GDP."
Who decides what data from what time frame constitutes the "reality" of forward budget numbers? Highly susceptible to individual and political whims.

David Landy said...

The more politicians attempt to control macroeconomic variables, the more uneasy I become. They should be legislating to give us more freedom, not to better assess how their controls and taxes will effect us.

Lawyer in NJ said...

One more point: Part of the reason for the recovery such as it is to this point has been gridlock.