Night Thoughts on Dynamic Scoring

Live from DuPont Circle: Last Thursday two of the smartest participants at last Friday’s Brookings Panel on Economic Activity conference–Martin Feldstein and Glenn Hubbard–claimed marvelous things from the enactment of JEB!’s proposed tax cuts and his regulatory reform program.

They claimed it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).

That would leave the U.S. economy in ten years producing $840 billion more in annual GDP than in their baseline. That would mean that over the next ten years faster growth would produce an average of $210 billion a year of additional revenue to offset more than half of the $340 billion a year “static” revenue lost from the tax cuts, making the net cost to the Treasury not $340 billion/year but $130 billion/year. And that would mean that in the tenth year–fiscal 2027–the $400 billion “static” cost of the tax cuts in that year would be outweighed by a $420 billion faster-growth revenue gain.

The problem is that if I were doing the numbers I would reverse the sign.

• I would say that, on net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways–witness the subprime boom and the financial crisis.

• I would say that the incentive effects would tend to push up growth by only 0.1%/year, and that would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed.

  • If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
  • If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
  • If they were financed by cutting government programs, there might be a small boost to growth–0.1%/year–but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.

And there is substantial evidence that I am right:

• You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.

• You cannot find a drag on growth from the Obama tax increases.

• You can find an effect of the Clinton tax increases–but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.

Over the past thirty years, the agencies that do the government’s accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do–policies do affect growth rates. But is overestimating growth effects in a way that pleases one’s political masters a less-wrong thing?

[Name Redacted] suggested at the conference that the right thing to do is probably to apply a substantial haircut to the growth-boost claims of political appointees.

The problem is that when I look at the example of “dynamic scoring” that was on the table at Brookings today–the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag–the haircut I come up with, for Republican policy proposals at least, is 112.5%.

Yet the near-consensus of the meeting was that dynamic scoring–done properly–was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do.

If there were to be a day less favorable to such a consensus conclusion, I do not know what that day would have looked like…