Tag: Technocracy

DeLong Says Tax Bill Has 70% Chance of Passing | Bloomberg Daybreak Asia 2017-12-01

Posted on by Brad DeLong
The Trump Ryan McConnell Tax Cut My Angry Face

Professor DeLong Says Tax Bill Has 70% Chance of Passing: From 2017-12-01: Not a transcript but much more what I wish I had said—that is, heavily edited and revised to increase clarity, decrease stupidity, and file a little bit of the ragged stream-of-consciousness rough edges off.

Nevertheless, holds up very nicely, no? (BTW, this is my angry face):

There are still many potential stumbling blocks in the way of the high-end tax cut bill currenty inching its way through the senate. The current issue is the so-called “trigger”—the provision of the bill that would eliminate the tax cuts if the federal deficit turned out to come in high. Apparently the trigger has failed the so-called “Byrd Bath” as the Parliamentarian removes pieces of the bill that do not qualify for the special un-filibusterable Reconciliation process. The “trigger” has been removed from the bill. The bill’s proponents are frantically trying to figure things on the floor—frantically trying to come up with a substitute that would be acceptable both to the small number of members of the Republican congress who are more deficit hawkish and also to the larger number of members in the Republican caucus who are more supply-side optimistic—or, I would say, “crazy”.

I think the bill still has a 70% chance of passing. Certainly the stock market here in the United States appears to be fixing its odds at about a 70% chance of passing.

I, however, would like to step back and take a broader view. What is even crazier than Republican legislators believing this particular high-end tax cut will effectively pay for itself is the fact that we have arrived at this point at all. There are some 12 Democratic senators would gladly sign on to a corporate tax cut that broadened the base and lowered the rates. They would gladly sign on—provided they could be convinced that this was not just another shift in the income distribution from the non-rich toward the rich and that it would significantly strengthen the economy. And that test could be passed: I and many other economists not indentured to various Republican political masters see lots of opportunity to broaden the base, lower the rates, and strengthen the economy via real tax reform.

Yet, rather than take that path, McConnell and Ryan are moving forward with this Republican only thing that truly is down to the wire.

And as they get down to the wire, the potential benefits to the economy as a whole are evaporating. All that is left is a shift in the income distribution away from the non-rich to the rich. And even that is badly drafted: it is starting to look like incentives are going to be further disrupted and distorted so that there may not be growth benefits but rather growth harm to the economy as a whole.

The expensing provision—the provision by which companies get to deduct their investment expenditures from their tax base—expires. And it expires after five years. That means that McConnell and Ryan and Trump are trying to give corporations a big incentive to crowd a whole bunch of their investment spending in the five-year near future while that window is open. Then, after the window closes, they have an incentive to cut back on investment spending. That could well produce a small boom and then a small bust in the economy: stronger investment from 2018-2022, and then weaker investment starting in 2023. That go-stop is unproductive, and a good way to weaken the economy.

Republicans say that when the time comes around for expensing to expire, they will simply renew it. But that would require they maintain control of all three potential blockers—House, Senate, and Presidency. And if we have learned any lessons from ObamaCare and the Bush II tax cuts for the rich, it is that bills passed through Reconciliation along party-line votes are very unstable as policies.

Yet there are at least 12 Democrats in the senate in line to support corporate tax reform that would genuinely broaden the base, lower the rates, and provide a significant plus to the economy as a whole. Yes, such a deal would have gotten less money to the superrich who are now the key financial support base of the American economy—perhaps half as much money. But that money would be much more stable. And the chances of Republicans being able to run in 2020 on the basis of good economic stewardship would be noticeably higher.

As it is—the Joint Committee on Taxation’s report is now out, and we are talking about real GDP growth over the next decade of only 0.08%. And that is for how much is produced in the United States. For how much flows in income to Americans, it is at best a zer, more likely a small negative as a bunch of the tax cut goes to foreign investors from day 1.

I am flummoxed.

At is not as though this issue appeared by surprise. It is not as though they had to put a critical proposal today in a month without any staff preparation on options, alternatives, benefits, and costs. They had years to prepare. Yet these idiots really do seem to have done their homework in the bus on the way to the school….

A recession? Probably not. There is a significant minus to GDP growth coming in five years from the expiration of expensing. There is the risk that each time you load on the national debt a little more you increase potential financial instability. That does add a little bit to recessionary dangers. But interest rates are still extremely low . Slower growth rather than any serious risk of a session follow from this.

Hoisted from the Archives: Night Thoughts on Dynamic Scoring

Posted on by Brad DeLong

Should-Read: I say it is time to promote this guy to Admiral: AdmiralPAYGO!: Ed Lorenzen: @CaptainPAYGO on Twitter: “The Treasury Department dynamic ‘analysis’ of tax reform makes a mockery of dynamic analysis and does a disservice to those who advocate for serious dynamic estimates https://t.co/PudiRrQzu1…”

Brad DeLong: @de1ong on Twitter: This is a surprise? Static analysis was always about making a bias-variance tradeoff: A static analysis would be biased, but have lower mean-squared error because the “dynamic” terms would inevitably be overwhelmingly large-magnitude political-partisan-lobbyist-ideologue noise:

Hoisted from the Archives from 2015: Night Thoughts on Dynamic Scoring: Live from DuPont Circle: Last Thursday two of the smartest participants at the 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:

  • that 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 it would leave the U.S. economy in ten years producing $840 billion more in annual GDP than in their baseline.

  • that over the next ten years faster growth would produce an average of 210 billion dollars a year of additional revenue to offset more than half of the 340 billion dollars a year ‘static’ revenue lost from the tax cuts

  • that the net cost to the Treasury would thus be not 340 but 130 billion dollars a year.

  • that in the tenth year—fiscal 2027—the 400 billion dollar ′static′ cost of the tax cuts would be outweighed by a 420 billion dollar 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.
  • The incentive effects would tend to push up growth by only 0.1%/year
  • 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? There is a bias-variance tradeoff here.

[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—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 on which the news flow was less favorable to such a consensus conclusion, I do not know what that day would have looked like.
Twenty-two years and one month ago, after an OEOB meeting I spent carrying spears for David Cutler in one of his hopeless attempts to warn certain Assistant to the President for Health Policy precisely what reception his policy proposals would get from a CBO where Doug Elmendorf piloted the health-care desk, I returned to my office at the Treasury, and one of our career economists lectured me thus about dynamic scoring:

Brad, you people come in with your exaggerated belief in the productivity benefits of public investment. And so you command us to score your policies as having a very favorable impact on the deficit. They come in with their exaggerated belief in the benefits of tax cuts. They command us to score their policies as having a very favorable impact. We cannot say we disagree with our bosses’ analytic judgments. But by holding the line and stating that we do not consider any macroeconomic effects of policies, we can at least prevent being whipsawed by this partisan rosy-scenario ratchet.

Thus I find myself worrying about this:

  • I find myself thinking of CBO Directors past and future.
  • I think of June O’Neill, talking over and over again about how her model showed substantial disemployment effects of universal health coverage, without ever letting past her lips any acknowledgement that the people whose jobs her model showed as ‘destroyed’ had in fact voted with their feet and moved to a higher utility level by quitting.
  • I find myself thinking of the persistent rumors that after Doug Elmendorf and company had wreaked their analytic wrath on Ira Magaziner, Majority Leader Mitchell had said to Bob Reischauer: ‘You are gone on January 4, 1995’.

One unintended side effect of the budget process introduced in the 1970s and the 1980s has been to give CBO and JCT great power—has given their analytic decisions the importance of the unanimous coordinated votes of twenty senators over and above the impact of their estimates on members’ minds. They have by and large shouldered that great power with great responsibility. But with great power also comes great pressure. And it is not at all clear to me that, given the magnitude of this pressure, we want extra degrees of freedom in which these organizations can respond to the pressures they are under.

Yesterday, after all, I saw estimates of the dynamic revenue impact of Jeb!’s tax proposals that varied from negative—that the reduction in national savings would outweigh any positive incentive effects—to recouping 2/3 of the static revenue loss. And I imminently expect to see an ‘estimate’ today that it will produce 4%/year real growth and thus raise revenue–perhaps from someone at Heritage, perhaps from someone at Cato, perhaps from John Cochrane. It’s opening a can of worms. Doug and Peter may think the worms are dead. I fear they are not…

Doug Elmendorf wrote:

Based on my experience as the director of CBO from January 2009 through March 2015, the principal concerns expressed about estimated macroeconomic effects of proposals apply with equal force to other aspects of budget estimates or can be addressed by CBO and JCT. In my view, including macroeconomic effects in budget estimates for certain legislative proposals would improve the accuracy of those estimates and would provide important information about the economic effects of those proposals. Moreover, if certain key conditions were satisfied, those estimates would meet the general goals of the estimating process that estimates be understandable and resistant to misinterpretation, based on a consistent and credible methodology, produced quickly enough to serve the legislative process, and prepared using the resources available to CBO and JCT.

Doug has it wrong: they do not apply “with equal force”. As we have seen today, Monday, December 11, 2017, with the Treasury tax “reform” “study”.

Do Not Expect too Much from Individual Senators

Posted on by Brad DeLong

Joseph Britt: @zathras3 on Twitter:Thread by @de1ong in response to an observation I made about @SenBobCorker & the Senate #TaxBill-it understates resources available to a senior Senator, but is dead accurate on damage to the Senate done by McConnell trashing regular order.

Joseph Britt: @zathras3 on Twitter: “Forgive me for pointing this out, but these descriptions of Corker’s thinking suggest a guy who started thinking about fiscal policy a month ago, rather than someone who’s been in the Senate for years…”

Brad DeLong: de1ong on Twitter: Look: they have 80 hours a week to work: 20 fundraising, 20 coalition maintenance, 20 management, 20 policy.

There are, say, 20 important policy issues they have to cover. That means 1 hour a week on average on each policy issue. That means in 3 years a senator spends as much time thinking about a policy issue as does an undergraduate taking a 1-semester course. & knowledge depreciates. If you spend only 1 hour a week on something, you never become an expert at all. You pretty much have to start from sophomore level every time you try to gear up.

Now this is supposed to be solved by (1) committee chairs/ranking members who are experts and who share your values; (2) committee staff committed to the Holy Monastic mission of technocratically teaching you & answering your questions; (3) thinktanks that regard you as their boss rather than their lawful prey over whose eyes they can pull the wool; and (4) long-term personal staff who share your values and are experts.

McConnell’s breaking of regular order has broken (1). And with (1) broken, the experts on (2) have little opportunity to speak. The Republican thinktanks now regard informing senators about what the issues are and how the world works as last among their priorities—indeed, as a negative priority. And with gridlock and so much less opportunity to do some legislatin’ since McConnell began root and branch opposition to Obama, personal staff quality and continuity has, I think, greatly declined as well.

So, yes, Corker sounds like a junior who began taking his “fiscal policy” course a month ago because that essentially is what he is. And all kinds of people have been trying to help him. And he has been trying to do his best. But McConnell snookered him…

You Just Cannot Be an Honest Neoclassical Economist and Make the Trumpublican Tax “Reform” a Winner for U.S. National Income Growth…

Posted on by Brad DeLong

…or, especially, after-tax real median growth. Or even 2%-ile income growth. Let alone well-being after cuts in public services.

You just can’t.

It doesn’t add up at any level. As a matter of arithmetic…

Just too much of existing capital income flows to foreigners. Too much of extra production generated by a capital inflow would be credited to foreigners. And domestic savings supply is relatively inelastic. Even if you put both hands on the scale and lean hard, it just doesn’t work, even without noting how much of payments to capital are monopoly rents and payments to other forms of capital that are not interest sensitive…

And Paul Krugman has been on fire this fall:

Figure 2 Accurate Diagram

(Plus the salmon (on my machine) rectangle, minus the… what color is that? (on my machine) brownish-gold rectangle—that’s the long-run change in U.S. national income from a budget neutral tax “reform” like that Trumpublicans are proposing. The effects of a deficit-increasing one are… less favorable.)

Krugman this fall:

  • (2017-10-05) Paul Krugman: The Transfer Problem and Tax Incidence: “Assuming I’ve done the algebra right, I get a rate of convergence of .059–that is, about 6 percent of the deviation from the long run eliminated each year. That’s pretty slow: it will take a dozen years to achieve even half the adjustment to the long run. What this says to me is that openness to world capital markets makes a lot less difference to tax incidence than people seem to think in the short run, and even in the medium run…”

  • (2017-10-21) Paul Krugman: Some Misleading Geometry on Corporate Taxes: “What’s wrong with this picture?… Four reasons I can think of…. A lot of what we tax with the corporate profits tax is… monopoly profits and other kinds of rents…. Capital mobility is far from perfect…. The US isn’t a small open economy…. Finally… capital inflows… have to be created by a temporarily overvalued real exchange rate… meaning very big trade deficits, meaning a strongly overvalued dollar…”

  • (2017-10-24) Paul Krugman: The Simple and Misleading Analytics of a Corporate Tax Cut: “The claim here is that the wage gains from a corporate tax cut exceed the revenue loss by a ratio that depends only on the initial tax rate, not at all on the degree to which capital can be substituted for labor, which in turn should (in this model) determine how much additional capital is drawn in by the tax cut. This feels wrong–and it is…”

  • (2017-10-25) Paul Krugan: Trump’s $700 Billion Foreign Aid Program: “A simple point, but one everyone—myself included—somehow missed: the Trump tax plan is a huge giveaway to foreigners. Among other things, this means that the tax plan almost certainly reduces U.S. welfare even if you ignore distributional issues…”

  • (2017-10-29) Pul Krugman: Tax Cut Fraudulence: The Usual Suspects: “A revival of some more traditional, Bush-era fraudulence…. In particular: First, the claim that the rich pay practically all the taxes, so that of course they have to get the bulk of the tax cut. Second, claims of vast growth, because Reagan…”

  • (2017-11-01) Paul Krugman: The Gravelle Geardown: “Why does Gravelle-type analysis ‘gear down’ the wage effects of lower corporate taxes so much?…. Four reasons, three of which are conceptually easy…. First, a lot of the profits we tax are rents…. Second, corporate capital is only part of the U.S. capital stock; half of fixed assets are residential, and a lot of the rest isn’t corporate…. Third, America isn’t small…. Finally, and this is the one that I find takes some work, we’re very far from having perfectly integrated markets for goods and services…. So how great an idea is cutting corporate taxes? About as great as Dow 36,000…”

  • (2017-11-08) Paul Krugman: Leprechaun Economics and Neo-Lafferism: “Not incidentally, Kevin Hassett appears to be confused about the economics here, imagining that a paper reduction in the US trade deficit due to changes in transfer pricing would bring in real jobs. It wouldn’t. There are really two bottom lines…. The true growth impacts of Cut Cut Cut would be even more pathetic than the numbers you’ve been hearing. The other is that if you’re going to make international capital flows central to your arguments, you really need to think about the implications for future investment income…”

  • (2017-11-09) Paul Krugman: Leprechaun Economics, With Numbers: “The TF model… I don’t believe for a minute…. Tax Foundation asserts that capital inflows will be enough to raise GDP more than 3%, which is wildly implausible. But let’s go with it…. The true gain to the US is 1.05%, not 3.45%. That’s a big difference, and not in a good way…. Even if you believe the whole ‘we’re a small open economy so capital will come flooding in’ argument, it buys you a lot less economic optimism than its proponents imagine…”

  • (2017-11-11) Paul Krugman: The Tax Foundation Has Some Explaining To Do: “I’m hearing from various sources that the Tax Foundation’s assessment of the Senate plan… is actually having an impact on debate in Washington. So we need to talk about TF’s model…. During… large-scale capital inflow, you must have correspondingly large trade deficits…. Second… foreigners aren’t investing in America for their health…. Most of any gain in GDP accrues to foreigners, not U.S. national income. So how does the TF model deal with these issues? They have never provided full documentation (which is in itself a bad sign), but the answer appears to be—it doesn’t…”

  • (2017-11-14) Paul Krugman: Tax Cuts And The Trade Deficit: “If you believe the TF analysis, you also have to believe that the Senate bill would lead to enormous trade deficits—and massive loss of manufacturing jobs. What would adding $600 billion per year to the trade deficit do?… The U.S. manufacturing sector would be around 20% smaller than it would have been otherwise. How would this happen? Huge capital inflows would drive up the dollar, making U.S. manufacturing much less competitive…”

Keeping US Policymaking Honest

Posted on by Brad DeLong

Project Syndicate: Keeping US Policymaking Honest: This week here at Berkeley I heard great optimism from the illustrious Alice Rivlin. What “technocracy” in the good sense the United States has–what respect is paid to sound analysis and empirical evidence in the making of policy–is due more to Alice Rivlin than to any other living human…. Her founding of the Congressional Budget Office is only one, albeit the most important one, of the times that Alice Rivlin has indeed eaten from and forced the rest of us to eat from the tree of knowledge. And we are all massively better for it… Read more at Project Syndicate

Must-read: Noah Smith: “Policy Recommendations and Wishful Thinking”

Posted on by Brad DeLong

Must-Read: I must say I am getting more than a whiff of the disastrous trope that “it is the duty of an organic intellectual to support the Movement” here.

The technocratic view is that there will be a bunch of competing ideological views and material interests pulling and hauling, and that by always wading in and joining the tug-of-war side that has the better policy idea at the moment in the issue under dispute one will get better governance and higher societal well-being. The opposite view is: There is a Movement, the Movement is good because the Movement is supported by the class whose interest is the general interest and by Correct Ideological Thought, and all progressives must support the movement.

That is a disastrous pattern of thought. I am 100% with Noah Smith here:

Noah Smith: Policy Recommendations and Wishful Thinking: “There was a bit of a blow-up earlier this year over Gerald Friedman’s analysis of Bernie Sanders’ economic plans…

…To me, it seemed that the coup-de-grace was delivered by Justin Wolfers…. Friedman admits he made a mistake and then says that his conclusion was right anyway, because we can go find some alternative assumptions that make his original conclusion hold. To me this is transparently assuming the conclusion. That’s a big no-no, and while a lot of macroeconomists probably do this, it looks really bad to admit to it! (I’m also starting to realize that ‘Joan Robinson’ is a sort of an invincible rhetorical refuge for lefty macro types, the way ‘Friedrich Hayek’ is for righty macro types.)….

The fracas quieted down, but now it’s back. Friedman and allies are no longer saying that their analysis is ‘just standard economics’, since they had to switch to non-standard economics to make the conclusions come out the way they wanted. The line now is that Krugman, the Romers, et al. are just a bunch of pessimists, who are unintentionally playing into the hands of conservatives…. Krugman was not happy about this, and blogger ProGrowthLiberal was pretty mad:

The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest…[W]e critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys–you do not win a debate by lying about the other side’s position….

I don’t like what Friedman and Mason are doing. I think economists have a duty to look at the facts as objectively as they can, regardless of their emotions and desires. You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’…. Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don’t like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they’ll end up recommending lots of bad policies.

Cf. Henry Farrell’s 2011 attack on Matt Yglesias:

Henry Farrell (2011): The Limits of Left Neo-Liberalism: “[Doug Henwood is] wrong in the particulars…

…But… Doug is onto something significant…. Left neo-liberalism in the US… have always lacked a good theory of politics… tend[s] to favor a combination of market mechanisms and technocratic solutions to solve social problems. But… politics… requires strong collective actors…. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case…. It’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is…

People should say that policies are good if they tend to do good things–to make people freer and richer. People should not say that policies are good if they tend to build the Movement, for there is neither Correct Ideological Thought nor a universal class whose interests are identical to the general interest. And people should, especially, not misrepresent what policies are likely to do in the interest of building the Movement.

And where the Movement is good, the policies that advance it will also be the policies that make technocratic sense…

Mea Culpa: Confidence Proceedings Edition: I Really Do Think Dynamic Scoring Is a Bad Idea

Posted on by Brad DeLong

I have committed a grave sin for the first time.

In revising and extending for publication the remarks I made during the discussion of Doug Elmendorf’s paper for the Fall 2015 issue of the Brookings Papers on Political Economy, I have not done so.

Instead, I have rewritten and compressed. The below bears little resemblance to what I did say. But it is what I should have said:

Brad DeLong noted that when he was a Treasury political appointee, one of the Treasury career staff economists lectured me him about dynamic scoring thus:

Brad, you people come in with your exaggerated belief in the productivity benefits of public investment. And so you command us to score your policies as having a very favorable impact on the deficit. They come in with their exaggerated belief in the benefits of tax cuts. They command us to score their policies as having a very favorable impact. We cannot say we disagree with our bosses’ analytic judgments. But by holding the line and stating that we do not consider any macroeconomic effects of policies, we can at least prevent being whipsawed by this partisan rosy-scenario ratchet…

He noted that being whipsawed by the partisan rosy-scenario ratchet is a serious danger, as evidenced most recently by yesterday’s the recent semi-score of the Jeb Bush tax plan by Feldstein et al. There would be an upside if appropriate real technocratic dynamic-scoring corrections were significant. But, he concluded, they mostly likely are not.

I do not know whether to be encouraged or discouraged by the fact that at my age I am still finding myself committing new categories of sin. I wonder what the appropriate penance would be?

Looking back on it, it was a very strange morning indeed. Mankiw, Feldstein, Hubbard, and Cogan–people who were at the very top of the list for the post of CBO Director in Republican majority congresses a generation ago–had just come out with a semi-score of the JEB! tax plan that used dynamic scoring in exactly the way that every reality-based technocrat had always feared that it would be used.

And yet–with the honorable exception of Bill Gale–virtually every other speaker out of the whole BPEA audience agreed that there ws no danger that dynamic scoring would ever be used in the way that every reality-based technocrat had always feared.

What was going on? I did not understand it. I do not understand it…

My previous takes on this subject:

September 14, 2015: 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…

: Fall 2015 Brookings Panel on Economic Activity Weblogging: Doug Elmendorf on Dynamic Scoring: Fall 2015 BPEA 8:30 AM Fr: Twenty-two years and one month ago, after an OEOB meeting I spent carrying spears for David Cutler in one of his hopeless attempts to warn certain Assistant to the President for Health Policy precisely what reception his policy proposals would get from a CBO where Doug Elmendorf piloted the health-care desk, I returned to my office at the Treasury, and one of our career economists lectured me thus about dynamic scoring:

Brad, you people come in with your exaggerated belief in the productivity benefits of public investment. And so you command us to score your policies as having a very favorable impact on the deficit. They come in with their exaggerated belief in the benefits of tax cuts. They command us to score their policies as having a very favorable impact. We cannot say we disagree with our bosses’ analytic judgments. But by holding the line and stating that we do not consider any macroeconomic effects of policies, we can at least prevent being whipsawed by this partisan rosy-scenario ratchet.

Thus I find myself worrying about this:

  • I find myself thinking of CBO Directors past and future.
  • I think of June O’Neill, talking over and over again about how her model showed substantial disemployment effects of universal health coverage, without ever letting past her lips any acknowledgement that the people whose jobs her model showed as ‘destroyed’ had in fact voted with their feet and moved to a higher utility level by quitting.
  • I find myself thinking of the persistent rumors that after Doug Elmendorf and company had wreaked their analytic wrath on Ira Magaziner, Majority Leader Mitchell had said to Bob Reischauer: ‘You are gone on January 4, 1995’.

One unintended side effect of the budget process introduced in the 1970s and the 1980s has been to give CBO and JCT great power–has given their analytic decisions the importance of the unanimous coordinated votes of twenty senators over and above the impact of their estimates on members’ minds. They have by and large shouldered that great power with great responsibility. But with great power also comes great pressure. And it is not at all clear to me that, given the magnitude of this pressure, we want extra degrees of freedom in which these organizations can respond to the pressures they are under.

Yesterday, after all, I saw estimates of the dynamic revenue impact of Jeb!’s tax proposals that varied from negative–that the reduction in national savings would outweigh any positive incentive effects–to recouping 2/3 of the static revenue loss. And I imminently expect to see an ‘estimate’ today that it will produce 4%/year real growth and thus raise revenue–perhaps from someone at Heritage, perhaps from someone at Cato, perhaps from John Cochrane. It’s opening a can of worms. Doug and Peter may think the worms are dead. I fear they are not…

Doug Elmendorf: ‘Based on my experience as the director of CBO from January 2009 through March 2015…

…the principal concerns expressed about estimated macroeconomic effects of proposals apply with equal force to other aspects of budget estimates or can be addressed by CBO and JCT. In my view, including macroeconomic effects in budget estimates for certain legislative proposals would improve the accuracy of those estimates and would provide important information about the economic effects of those proposals. Moreover, if certain key conditions were satisfied, those estimates would meet the general goals of the estimating process that estimates be understandable and resistant to misinterpretation, based on a consistent and credible methodology, produced quickly enough to serve the legislative process, and prepared using the resources available to CBO and JCT.