Hoisted from the Archives: Night Thoughts on Dynamic Scoring

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”.

Monday Smackdown: Treasury Document Translation: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

  1. The U.S. Treasury’s Office of Tax Policy (OTP) and Office of Monday Smackdown: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

Tax Analysis (OTA) agree with the Congress’s Joint Committee on Taxation (JCT) that the Republican Senate tax “reform” bill as written will raise the debt by 1.5 trillion dollars over the next decade, and boost growth by 0.08% per year

  1. OTP does not believe that growth will be 2.9% per year over the next decade.

  2. If growth were to be boosted from the baseline 2.2% per year over the next decade to 2.9% as a result of the tax “reform”, it would pay for itself. But it won’t.

  3. No office in the Treasury Department is willing to go on record as having written this one-page document.

  4. No official in the Treasury Department is willing to go on record as having written this one-page document.

  5. Not even Steven Mnuchin has put his name on this one-page document.


Brink Lindsey and the Road to Utopia

Let me put a spotlight on the very sharp Brink Lindsey here…

Brink Lindsey believes utopia is in our grasp. Our problems today are, he thinks, at their root problems about the creation of truly human identities that people can embrace.

This is a remarkable shift.

Previous human societies have had very different problems:

  • how to keep famine and plague from the door;
  • how to maintain the peace;
  • how to somehow scrape up the resources to make the investments to raise average productivity to a level that would support even a half-human standard of living; and
  • how to avoid gross maldistribution.

Keeping the peace remains a problem.

Avoiding gross maldistribution remains a problem—but the consequences of maldistribution in creating dire and life-threatening poverty are now much much less.

But famine, plague, and low productivity are now very far from our doors. And while productivity could be higher (and it would be nice if it were higher), an absence or an insufficiency of calories or of simply stuff is no longer a huge problem.

Instead, the problem seems, at least in Brink Lindsey’s conceptualization, to be “the progressive unraveling of the human connections that give life structure and meaning…”

That is a statement I find needs unpacking. But how to unpack this? Let’s let him try to unpack it. I don’t think he gets all the way there, but he makes a lot of progress:

Brink Lindsey: The End of the Working Class: “Outside a well-educated and comfortable elite comprising 20-25 percent of Americans, we see unmistakable signs of social collapse… https://www.the-american-interest.com/2017/08/30/end-working-class/

…the progressive unraveling of the human connections that give life structure and meaning: declining attachment to work; declining participation in community life; declining rates of marriage and two-parent childrearing…. Its roots are spiritual, not material, deprivation…. Anne Case and Angus Deaton have alerted us to a shocking rise in mortality among middle-aged whites, fueled by suicide, substance abuse—opioids make headlines these days but they hardly exhaust the list—and other “deaths of despair.” And this past November, whites in Rust Belt states made the difference in putting the incompetent demagogue Donald Trump into the White House. What we are witnessing is the human wreckage of a great historical turning point, a profound change in the social requirements of economic life. We have come to the end of the working class….

The working class was a distinctive historical phenomenon with real internal coherence. Its members shared a whole set of binding institutions (most prominently, labor unions), an ethos of solidarity and resistance to corporate exploitation, and a genuine pride about their place and role in society. Their successors, by contrast, are just an aggregation of loose, unconnected individuals… [who] failed to… enter the meritocracy…. That failure puts them on the outside looking in, with no place of their own to give them a sense of belonging, status, and, above all, dignity. Here then is the social reality that the narrowly economic perspective cannot apprehend….

From the first stirrings of the Industrial Revolution in the 18th century until relatively recently, the miraculous technological progress and wealth creation of modern economic growth depended on large inputs of unskilled, physically demanding labor…. In the skill-neutral transition from an agrarian to an industrial economy… workers displaced from farm jobs by mechanization could find factory work without first having to acquire any new specialized expertise. By contrast, former steel and autoworkers in the Rust Belt did not have the skills needed to take advantage of the new job opportunities created by the information technology revolution….

The best part of working-class life, solidarity, was… inextricably tied up with all the worst parts. As work softened, moving out of hot, clanging factories and into air-conditioned offices, the fellow-feeling born of shared pain and struggle inevitably dissipated…. The postwar ascendancy of the working class was… due… not just [to] favorable labor laws, not just inspired collective action, but the combination of the two in conjunction with the heavy dependence on manual labor by technologically progressive industries of critical importance…. The truly essential element was the dependence of industry on manual labor. For it was that dependence, and the conflicts between companies and workers that it produced, which led to the labor movement that was responsible both for passage of the Wagner Act and the solidarity that translated law into mass unionization….

We must remember that, even in the halcyon postwar decades, blue-collar existence was a kind of bondage…. The creation of the working class was capitalism’s original sin. The economic revolution that would ultimately liberate humanity from mass poverty was made possible by a new and brutal form of domination. Yes, employment relations were voluntary: a worker was always free to quit his job and seek a better position elsewhere. And yes, over time the institution of wage labor became the primary mechanism for translating capitalism’s miraculous productivity into higher living standards for ordinary people…. Meager pay and appalling working conditions during the earlier stages of industrialization reflected not capitalist perfidy but objective reality. The abysmal poverty of the agrarian societies out of which industrialization emerged meant that nothing much better was affordable, or on offer to the great majority of families. But that is not the end of the inquiry…. Workers routinely rebelled against the factory system…. The recurrent want and physical hardships of rural life had existed since time immemorial, and thus seemed part of the natural order…. By contrast, the new energy-intensive, mechanized methods of production were jarringly novel and profoundly unnatural. And the new hierarchy of bourgeois master and proletarian servant had been erected intentionally by capitalists for their own private gain….

At the heart of the matter, though, was the nature of the work…. Humans are most productive in filling in the gaps of mechanization when they perform likewise. The problem, of course, is that people are not machines, and they don’t like being treated as such…. The nightmare of the industrial age was that the dependence of technological civilization on brute labor was never-ending….

Those old nightmares are gone—and for that we owe a prayer of thanks. Never has there been a source of human conflict more incendiary than the reliance of mass progress on mass misery…. But the old nightmare, alas, has been replaced…. Before, the problem was the immense usefulness of dehumanizing work; now, it is feelings of uselessness that threaten to leach away people’s humanity. Anchored in their unquestioned usefulness, industrial workers could struggle personally to endure their lot for the sake of their families, and they could struggle collectively to better their lot. The working class’s struggle was the source of working-class identity and pride. For today’s post-working-class “precariat,” though, the anchor is gone, and people drift aimlessly from one dead-end job to the next. Being ill-used gave industrial workers the opportunity to find dignity in fighting back. But how does one fight back against being discarded and ignored? Where is the dignity in obsolescence?…

There is at least one reason for hope. We can hope for something better because, for the first time in history, we are free to choose something better. The low productivity of traditional agriculture meant that mass oppression was unavoidable…. Once the possibilities of a productivity revolution through energy-intensive mass production were glimpsed, the creation of urban proletariats in one country after another was likewise driven by historical necessity…. The political incentives were truly decisive. When military might hinged on industrial success, geopolitical competition ensured that mass mobilizations of working classes would ensue. No equivalent dynamics operate today. There is no iron law of history impelling us to treat the majority of our fellow citizens as superfluous afterthoughts…. There is a land of milk and honey beyond this wilderness, if we have the vision and resolve to reach it.

Trumpism on Trade as a Wild Goose Chase

In the United States 24% of nonfarm workers were manufacturing workers in 1971.

It’s 8.6% today.

Maybe it would be 9% if NAFTA has not been negotiated and if China had not joined the WTO, but maybe it would still be 8.6%–analysts disagree on trade expansion vs. trade diversion here.

Datawrapper bzG79 Visualize

Maybe it would be 12% if the United States had followed Japan’s and Germany’s roads of being high-savings low-currency value countries focused on nurturing their communities of engineering excellence, rather than running the Reagan and Bush 43 deficits and combining that with a focus on financialization and a strong-dollar policy. I certainly think that would have been a better policy road for the United States. But it gets you only to 12% at most–not back to 24%.

The fall from 24% to 12% is the technological tide: increasing labor productivity in manufacturing, large but not infinitely elastic demand for manufactured goods.

Looking forward we can say that by 2060 manufacturing in the United States is likely to be 6% of production workers, in which case whatever you think of what the most important parts of the value chain are, tuning the location of manufacturing labor–the people watching the robots and swapping them out when they go bad and break–is unlikely to be an important part. The thing that had been a major driver of growth in employment worldwide for two centuries–since the cotton masters of Lancashire realized the first automatic spinning machines needed a lot of labor to watch and maintain them because they were fragile–will no longer be salient in our economies. Gone with it for EMs will be the road to development that used labor cost advantage to find a niche making basic manufactures and a national champion firm that could export into that niche, and then relying on learning by doing and osmotic technology transfer to carry you forward. For today’s EMs that are not already well along the road: Strait is the gait. Narrow is the way. Many are called, but few are chosen.

As Pascal Lamy said last week: “There is supposed to be an old Chinese proverb: ‘When the wise man points at the moon, the fool looks at the finger’. Market capitalism is the moon. Globalization is the finger.”

The problems of market capitalism are broad and deep. They are not solved–they are not event addressed–by trade wars, by “renegotiating” NAFTA, by (falsely today) labeling China as a currency manipulator.

And Trump’s core supporters will not be happy if his trade policies sharply raise the prices of the goods they buy at Walmart.

Must-Read: Matthew Yglesias: Trumpism Is a Natural Consequence of the GOP Refusing to Moderate on Taxes or Immigration

Must-Read: Norm Ornstein quite a while ago had a good line about why moderate Republicans have never fought to keep their core moderate voters engaged in the party by, for example, threatening to walk to the moderate Democrats if their core voters’ concerns are dissed: “It’s almost like you are in a religion. You look at misbehavior on the part of the leaders of that religion, and you are shocked and dismayed, but you are not leaving your religion. And you are still going to go to church: you just can’t give up something that you held in a lifelong way…. Democrats are just different… don’t have the same discipline…

Matthew Yglesias: Trumpism Is a Natural Consequence of the GOP Refusing to Moderate on Taxes or Immigration: “On one level, yes, Trump is an outlier…

…BuzzFeed’s editor in chief sent a memo to his staff temporarily suspending the conventions of View From Nowhere journalism to say it’s perfectly okay to call Trump a “mendacious racist” because “there’s nothing partisan about accurately describing Donald Trump.”… But as Brian Beutler put it in July, Trump is frightening Republicans in part because he’s ‘showing… what it takes’ to run and win as the party of disaffected white people in an increasingly nonwhite country…. They’ve committed to… a strategy built around the notion that the 2012 election featured a pile of ‘missing’ white voters who could be activated to push the GOP to victory without it needing to do anything to broaden its demographic appeal.

When this idea was initially being debated inside right-of-center circles, the smartest conservative thinkers specifically warned that attempting the ‘missing white voter’ strategy without meaningful gestures of economic moderation would lead to something ugly. There has been no meaningful move to the center on economics, and–as predicted–the results are ugly…