March 26, 2003

Dynamic Scoring Is Zero...

The CBO decides that the Bush deficit-augmentation plan will not pay for itself--not even partly. What the WSJ article doesn't say is that the plan produces a small boost to the economy in its first year or two, and then the drag starts to grow. In the out-years beyond the forecast cutoff, the drag grows and grows and grows--so the further out you look, the less good the Bush plan looks.

Shouldn't somebody tell Bush, Cheney, and Fleischer that their economic proposals will not pay for themselves, and will increase, not shrink the deficit?


WSJ.com - Bush's Tax Plan Won't Boost Economy, CBO Analysis Finds: By a WALL STREET JOURNAL Staff Reporter | WASHINGTON -- The Congressional Budget Office said that President Bush's tax and spending proposals will do far less to spur economic growth in coming years than the White House suggests -- and might not provide any kick at all.

For the first time, CBO used what's known as "dynamic scoring" to estimate the favorable macroeconomic and revenue effects of budget proposals, a move tax-cut advocates have long urged and deficit-phobes feared. The range of estimates released Tuesday by CBO said adding supply-side effects could add as much as 10% to conventional estimates of the five-year cost of the Bush budget or subtract as much 17%, depending on the model used.

The administration plans this week to release its own estimates that suggest Mr. Bush's proposed dividend and other tax cuts would recoup some 30% to 40% of their cost by generating more economic growth and tax revenue, a senior administration official said Tuesday.

Looking at the overall Bush budget, not just tax cuts, CBO said its analysis "suggests the proposals, on net, would probably increase labor supply [or total hours worked in the economy], but decrease investment and the stock of capital."...

Posted by DeLong at March 26, 2003 08:02 AM | TrackBack

Comments

"Shouldn't somebody tell Bush, Cheney, and Fleischer that their economic proposals will not pay for themselves, and will increase, not shrink the deficit?"

But I thought it was pretty much agreed that the idea behind the huge tax cuts is to shrink government by shrinking spending. Obviously the Bush administration doesn't admit it publicly but isn't that ultimately what this tax policy is all about? Those deficits will never really happen - either a majority of congress will cut spending to cut the deficit or a majority will increase taxes again to fund the social programs and cut the deficit - and if the latter, at worst, the Republicans feel they will have another 'tax & spend' stick to beat the Democrats with.

Posted by: SM on March 26, 2003 08:34 AM

SM is correct. "Somebody should tell Bush, et al." isn't how things work with these people. They tell us. No compromise.

They hate our government, at all levels. They are defunding it.

Voting will not matter. I wonder what will?

Posted by: John Thullen on March 26, 2003 09:38 AM

SM is correct. "Somebody should tell Bush, et al." isn't how things work with these people. They tell us. No compromise.

They hate our government, at all levels. They are defunding it.

Voting will not matter. I wonder what will?

Posted by: John Thullen on March 26, 2003 09:39 AM

The "conservative" object in fiercely supporting tax cuts is to play to the wealthiest and to present a budget problem that will force a cut in Social Security and Medicare benefits.

This administration wishes to end the legacy of the New Deal. "Conservative" thinkers wish to cut cut cut away social safety supports. A deficit provides the perfect inevitable rationale. That was why Alan Greenspan was so worried about having a surplus. Imagion, Alan was worried about a surplus that would eat Cleveland. Bah.

Posted by: anne on March 26, 2003 09:45 AM

The paper can be found here:
http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0

Currently only in PDF. The macro feedback section starts on p.16. Here are the first few paragraphs:


The overall macroeconomic effect of the roposals in the President’s budget is not obvious. For example, some provisions in the proposals would lower marginal federal tax rates on labor and capital income. By themselves, those provisions would tend to increase labor supply, investment in productive capital (such as factories and
machines), and the economy’s output. However, the proposals also would promote the consumption of goods and services by both the government and the private sector, which would tend to reduce investment. CBO’s analysis suggests the proposals, on net, would probably increase labor supply but decrease investment and the stock of capital.

Largely because of those two opposing effects, the net effect on economic output could be either positive or negative—with the difference depending not only on how the private sector would respond to the proposals themselves, but also on how the proposals would influence what budgetary policies people might expect in the future. Importantly, regardless of its direction, the net effect on output through long term changes to the supply side of the economy—including fundamental “inputs” such as labor supply or the stock of capital—would probably be
small. Under most assumptions, the proposals’ supply side effects would raise or lower the level of output by less than a percentage point, on average, from 2004 to 2013.

That modest effect on the economy is not surprising. Taken altogether, the proposals would provide a relatively small impetus in an economy the size of the United States’. Excluding any economic effects, CBO estimates that in 2004 the President’s proposals would reduce revenues by $117 billion, or 1.0 percent of gross domestic product, and would raise spending (including interest costs) by $21 billion, or 0.2 percent of GDP. From 2004 to 2008, the proposals would reduce revenues by $454
billion, or 0 .7 percent of cumulative GDP, and increase spending by $348 billion, or 0.5 percent of GDP.

Posted by: npm on March 26, 2003 09:56 AM

And if the following comment from Stuart Levine
http://taxbiz.blogspot.com/2003_03_01_taxbiz_archive.html#90815766
is correct, then the only future I can see is major efforts from the Republicans to really slash social spending. The Democrats may be able to claim small victories by mitigating the damage slightly (viz the recent 'victory' in the Senate when the size of the next tax cut was reduced) but the whole direction of social policy in the US looks really retrograde to me.

"Access to the facts that refute this argument as it pertains to the federal budget are widely available. Thus, one need look no further than the budget proposed by the White House (which is easily accessible on-line) to discover that the non-military discretionary spending proposed by the White House is only 19.24% of the total proposed spending package. (Non-military discretionary spending is everything other than entitlements, such as Social Security and Medicare, and interest on the federal debt. It represents the cost of operating virtually every governmental agency from the State Department, to the Justice Department, to the FAA, to the FDA, to the costs of running the White House.) This is less than the “off-budget deficit” (the amount that is spent on all items other than designated trust fund programs such as Social Security). *** In other words, even if non-military discretionary spending were cut to zero, the federal government would still be running a deficit with respect to its current operations. And, this would be the case even before any costs of a war on Iraq are factored in ***." (Emphasis mine.)

Posted by: SM on March 26, 2003 10:00 AM

Why does the CBO use relatively static "dynamic" scoring, when they could be using "superduperdynamic" scoring which would show how tax cuts will grow the economy, raise tax revenues, eliminate the deficit and give Americans fresher breath?

I demand that hearings be held at once on this outrage.

Posted by: alkali on March 26, 2003 11:06 AM

Help!

If one can look on "Dynamic Scoring" as a form of sensitivity testing of what if scenarios, it should be helpful in evaluating the range of possible outcomes of a particular policy or policies. However, it seems to me that the range needs to be around a baseline that is a straightforward "momentum" projection with no changes except those of the revenue impact of the policy itself.

Is such a projection a part of "dynamic scoring"?

Are these models stochastic? Are probabilities assigned to different outcomes or is this left to the intuitivity (is that a word?) of the person interpreting the results?

Perhaps I am terribly old fashioned, but from 40 years of dealing with the pricing of insurance products, an art form much simpler than national economic projections, I am very cautious about "management" allowing assumptions to be established only by professionals and never asking the common sense questions as to rreasonableness.

Please explain to me why I shouldn't worry about this nit when there are so many other things more worthy of worry...like the obvious ideological motivations of an administration that seems determined to destroy the country I have been so proud of.

Posted by: Sam Taylor on March 26, 2003 11:22 AM

There is some whiny spin about the lukewarm CBO results by Hassett and Hubbard in Wed's WSJ (subscription req.). It's so whiny I can't tell what their point is.

Posted by: P O'Neill on March 26, 2003 11:37 AM

The point for the Administration and cohorts in Congress is to pass the full tax cut no matter any sound economic analysis that shows just how awful the effects will be. These are self-styled compassionate conservatives after all. Would you expect compassion? Alms for the rich.

"Bah" with you Anne.

Posted by: jd on March 26, 2003 11:52 AM

"Shouldn't somebody tell Bush, Cheney, and Fleischer that their economic proposals will not pay for themselves, and will increase, not shrink the deficit?"

Find a Republican economist attached to this Administration who would do such a thing. Remember Glen Hubbard? Remember who replaced Glen? Please....

Posted by: jd on March 26, 2003 01:38 PM

Two years ago people thought my "Kill the New Deal with Tax cuts" theory was nuts.... Now it seems the only plausible scenario.... The sad part is, they may get away with it. The only way to stop them is to raise taxes. Try selling that idea in 2004.

Posted by: John McKinzey on March 26, 2003 02:09 PM

This is the wrong time for a tax rise, because the economy is growing far too slowly. Better to simply "ease" off the coming tax cuts after 2004. We may even need a short term tax cut stimulus. A middle class tax cut could be an important economic spur.

Posted by: jd on March 26, 2003 02:18 PM

Sam - "If one can look on "Dynamic Scoring" as a form of sensitivity testing of what if scenarios, it should be helpful..." The paper does present 9 models and how they differ from the baseline (which assumes no effect on GDP or aggregate labor supply or capital stock).

"Are these models stochastic? Are probabilities assigned to different outcomes or is this left to the intuitivity (is that a word?) of the person interpreting the results?" Each model is described, but since the results are from separate models, it would not make sense to assign probablilities (as it might if there were a variety of results from a single model with inputs that could be assigned probabilities).

"I am very cautious about "management" allowing assumptions to be established only by professionals and never asking the common sense questions as to rreasonableness." I think the way the results are presented INVITES common sense questions.

Posted by: npm on March 26, 2003 02:24 PM

"This is the wrong time for a tax rise, because the economy is growing far too slowly. Better to simply "ease" off the coming tax cuts after 2004. We may even need a short term tax cut stimulus. A middle class tax cut could be an important economic spur."

Not really. Most of the tax cuts enacted so far are back-loaded, i.e., most of the tax cuts haven't taken effect yet, so repealing them won't have any adverse stimulus effect today. It is perfectly possible to enact a fiscal stimulus today at the same time that tax rates over the next decade are raised back to their pre-2001 levels, so the need for a fiscal stimulus is no excuse.

Posted by: andres on March 26, 2003 02:32 PM

Anne-

In all fairness to Greenspan, he's very much a political guy, and tries very hard to say what he believes while treading lightly. I read what he said about surplusses, and it was that eventually excessive surplusses might hurt the bond market. This is true. But Greenspan has been consistent about the need for long term fiscal solvency.

My recollection is that his arm was twisted pretty heavily, and that after a few months he relented with his statement about the bond market, at which point National Review, Bush, Cato, and a host of others danced the dance and claimed Greenspan to be a fan of the Bush Tax Cut.

Also recall that when Greenspan was vaguely critical of the new tax cut the dancing stopped and a handful of commentators gleefully began suggesting that Greenspan might have to go.

(Tough gig!)

Posted by: Saam Barrager on March 26, 2003 03:26 PM

What the WSJ article doesn't say is that the plan produces a small boost to the economy in its first year or two, and then the drag starts to grow.

The aim is re-election, and then nothing else matters. The Bushies want to do to the US what they accused (falsely) Clinton's staffers of doing to the White House.

Posted by: nick sweeney on March 26, 2003 03:35 PM

NPM-

Thanks much for your reply. I feel better. Is there some way a human being can access the assumptions and output of these different models?

Thanks again.

Sam

Posted by: Sam Taylor on March 26, 2003 04:00 PM

Sam - I just skimmed the paper - see link above.

Posted by: npm on March 27, 2003 08:13 AM

NPM- thanks again. I had missed the link.

Sam

Posted by: Sam Taylor on March 27, 2003 02:59 PM

This discussion thread on the CBO dynamic analysis paper shows more economic insight than has been seen from the Council of Economic Analysis over the past 2 years. Excellent. My favorite was the comment as to the whining from Hubbard and Hastert. I read their op-ed and it had no real point. The author was "P O'Neill". Does the P stand for PauL - as in the honest Treasury Secretary who got fired for being honest?

Posted by: Hal McClure on March 29, 2003 01:30 PM
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