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This is one of a series of TaxVox guest blogs discussing dynamic scoring.
One of the strengths of the US budgeting system is that proposals are held accountable through a relatively open process of scoring the costs and benefits. This process, as run by the Congressional Budget Office and others, looks carefully at the impact on very specific federal government revenues and expenditures. It is hard to engage in too much wishful thinking in this framework.
Wishful thinking does of course occupy a prominent position in Washington – there is some element present in every political campaign. And there is nothing wrong with competing vague visions for what could happen to the macroeconomy under alternative policies; at least, this has been a cornerstone of our democracy for more than 200 years.
But this is not the 1830s of Andrew Jackson's Bank War, the late nineteenth century and early twentieth central debate on the federal income tax, or the 1930s of the New Deal. We have much more careful analytical methods available and typically much more pressure to think carefully about the consequences of our actions.
We also have – or should have at this point in our history – a better grip on the limits of what exactly we know. Take, for example, the case of potential tax cuts – one topic that comes up a lot in current discussions about dynamic scoring.
Under President Ronald Reagan, there were some broad and optimistic claims made about the positive impact on tax revenue that would arise from tax cuts. This optimism proved excessive – and effective tax rates subsequently had to be adjusted upwards, including through closing loopholes, in order to boost revenue. One example: the Omnibus Budget Reconciliation Act of 1990 that also created the pay-as-you-go (PAYGO) rule requiring that spending increases or tax cuts be offset with lower spending or higher taxes. This was not a perfect arrangement, to be sure, but it helped create a framework that limited fiscal deficits during the 1990s.
Under President George W. Bush, the experience was remarkably similar to President Reagan’s 1980s. The tax cuts in the 2001 Economic Growth and Tax Relief Reconciliation Act did not boost the economy in such a way as to “pay for themselves”. There were plenty of other shocks during the early 2000s, of course, but the direct contribution of the Bush era tax cuts was to reduce revenue and increase the budget deficit and the national debt. A fair comparison is with the 1991-2000 economic expansion (i.e., the period between two recessions), when federal government revenues averaged 18.9 percent of GDP. During the 2001-2007 expansion, federal revenue averaged only 17.3 percent of GDP.
If “dynamic scoring” means that Congress can use any macroeconomic model it wants, then we are thrown back 100 or 150 years in terms of the rigor of our thinking. There are too many models with a very wide variety of assumptions and implications. It is not exactly true that you can find a model that will support any claims, but this is sometimes uncomfortably close to the truth.
We need to continue the careful, transparent, and detailed analysis of the kind done by the CBO – which has the proven ability to annoy people on both sides of the political aisle. (I’m on the CBO’s Panel of Economic Analysis, but I’m not involved in any budget scoring.)
To be honest, I sometimes disagree with CBO’s conclusions. For example, some of their scoring around financial regulation – such as the orderly liquidation authority of the Dodd-Frank 2010 financial reforms – does not sufficiently take into account the benefits of reducing the possibility of another systemic meltdown. But what this really means is that my broad macroeconomic-financial model is not the same as that of the CBO – and I don’t really expect them to adopt my worldview any time soon.
On tax policy and the case for tax cuts, there is obviously much more pressure from some parts of Congress today. Political messaging and campaign speeches can – and will – include a wide variety of claims.
But please let’s keep the integrity and caution that has developed in our budget scoring approaches. Don’t let wishful thinking take over again.
Simon Johnson is Professor of Entrepreneurship at the MIT Sloan School of Management;, a member of CBO’s panel of economic advisers; and author, with James Kwak, of White House Burning, a book on US fiscal policy.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.