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Archive for the ‘Congressional Budget Office’ Category

I never watched That ’70s Show, but according to Wikipedia, the comedy program “addressed social issues of the 1970s.”

Assuming that’s true, they need a sequel that addresses economic issues of the 1970s. And the star of the program could be the Congressional Budget Office, a Capitol Hill bureaucracy that apparently still believes – notwithstanding all the evidence of recent decades – in the primitive Keynesian view that a larger burden of government spending is somehow good for economic growth and job creation.

I’ve previously written about CBO’s fairy-tale views on fiscal policy, but wondered whether a new GOP-appointed Director would make a difference. And I thought there were signs of progress in CBO’s recent analysis of the economic impact of Obamacare.

But the bureaucracy just released its estimates of what would happen if the spending caps in the Budget Control Act (BCA) were eviscerated to enable more federal spending. And CBO’s analysis was such a throwback to the 1970s that it should have been released by a guy in a leisure suit driving a Ford Pinto blaring disco music.

Here’s what the bureaucrats said would happen to spending if the BCA spending caps for 2016 and 2017 were eliminated.

According to CBO’s estimates, such an increase would raise total outlays above what is projected under current law by $53 billion in fiscal year 2016, $76 billion in fiscal year 2017, $30 billion in fiscal year 2018, and a cumulative $19 billion in later years.

And here’s CBO’s estimate of the economic impact of more Washington spending.

Over the course of calendar year 2016,…the spending changes would make real (inflation-adjusted) gross domestic product (GDP) 0.4 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.5 million. …the increase in federal spending would lead to more aggregate demand than under current law. …Over the course of calendar year 2017…CBO estimates that the spending changes would make real GDP 0.2 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.3 million.

Huh?

If Keynesian spending is so powerful and effective in theory, then why does it never work in reality? It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama. Or Russia and China.

And if Keynesianism is right, then why did the economy do better after the sequester when the Obama Administration said that automatic spending cuts would dampen growth?

To be fair, maybe CBO wasn’t actually embracing Keynesian primitivism. Perhaps the bureaucrats were simply making the point that there might be an adjustment period in the economy as labor and capital get reallocated to more productive uses.

I’m open to this type of analysis, as I wrote back in 2012.

…there are cases where the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.

But CBO doesn’t base its estimates on short-run readjustment costs. The references to “aggregate demand” show the bureaucracy’s work is based on unalloyed Keynesianism.

But only in the short run.

CBO’s anti-empirical faith in the magical powers of Keynesianism in the short run is matched by a knee-jerk belief that government borrowing is the main threat to the economy’s long-run performance.

…the resulting increases in federal deficits would, in the longer term, make the nation’s output and income lower than they would be otherwise.

Sigh. Red ink isn’t a good thing, but CBO is very misguided about the importance of deficits compared to other variables.

After all, if deficits really drive the economy, that implies we could maximize growth with 100 percent tax rates (or, if the Joint Committee on Taxation has learned from its mistakes, by setting tax rates at the revenue-maximizing level).

This obviously isn’t true. What really matters for long-run prosperity is limiting the size and scope of government. Once the growth-maximizing size of government is determined, then lawmakers should seek to finance that public sector with a tax system that minimizes penalties on work, saving, investment, risk-taking, and entrepreneurship.

Remarkably, even international bureaucracies such as the World Bank and European Central Bank seem to understand that big government stifles prosperity. But I won’t hold my breath waiting for the 1970s-oriented CBO to catch up with 21st-century research.

P.S. Here’s some humor about Keynesian economics.

P.P.S. If you want to be informed and entertained, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally clever sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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I’m a long-time advocate of “dynamic scoring,” which means I want the Congressional Budget Office and Joint Committee on Taxation to inform policy makers about how fiscal policy changes can impact overall economic performance and therefore generate “feedback” effects.

I also think the traditional approach, known as “static scoring,” creates a bias for bigger government because it falsely implies that ever-higher tax rates and an ever-growing burden of government spending don’t have any adverse impact on prosperity.

There’s a famous example to show the lunacy of static scoring. Back in late 1980s, former Oregon Senator Bob Packwood asked the Joint Committee on Taxation to estimate the revenue impact of a 100 percent tax rate on income over $200,000.

When considering such a proposal, any normal person with even the tiniest amount of common sense is going to realize that successful people quickly will figure out it makes no sense to either earn or report income about that level. As such, the government won’t collect any additional revenue.

Heck, it’s not just that the government won’t collect additional revenue. Our normal person with a bit of common sense is going to take the analysis one step further and conclude that revenues will plunge, both because the government will lose the money it collected with the old income tax rates on income above $200,000 (i.e., the income that will disappear) and also because there will be all sorts of additional economic damage because of foregone work, saving, investment, and entrepreneurship.

But the JCT apparently didn’t have any bureaucrats with a shred of common sense. Because, as shown in Part II of my video series on the Laffer Curve, they predicted that such a tax would raise $104 billion in 1989, rising to $299 billion in 1993.

The good news is that both CBO and JCT are now seeking to incorporate some dynamic scoring into their fiscal estimates. Most recently, the CBO (with help from the JCT) released a report on the fiscal impact of repealing Obamacare.

Let’s look at what they did to see whether the bureaucrats did a good job.

I’ll start with something I don’t like. This new CBO estimate is fixated on the what will happen to deficit levels.

Here’s the main chart from the report. It compares what will happen to red ink if Obamacare is repealed, based on the static score (no macro feedback) and the dynamic score (with macro feedback).

There’s nothing wrong, per se, with this type of information. But making deficits the focus of the analysis is akin to thinking that the time of possession is more important than the final score in the Super Bowl.

What matters for more is what happens to the economy, which is affected by the size and structure of government. As such, here’s the most important finding from the report.

Repeal of the ACA would raise economic output…the resulting increase in GDP is projected to average about 0.7 percent over the 2021–2025 period.

There are two reasons the bureaucrats expect better economic performance if Obamacare is repealed. First, people will have more incentive to work because of a reduction in handouts.

CBO and JCT estimate that repealing the ACA would increase the supply of labor and thus increase aggregate compensation (wages, salaries, and fringe benefits) by an amount between 0.8 percent and 0.9 percent over the 2021–2025 period. …the subsidies and tax credits for health insurance that the ACA provides to some people are phased out as their income rises—creating an implicit tax on additional earnings—and those subsidies, along with expanded eligibility for Medicaid, generally make it easier for some people to work less or to stop working.

Second, the analysis also recognizes that there would be positive economic results from repealing the tax hikes in Obamacare, especially the ones that exacerbate the tax code’s bias against saving and investment.

Implementation of the ACA is also expected to shrink the capital stock, on net, over the next decade, so a repeal would increase the capital stock and output over that period. In particular, repealing the ACA would increase incentives for capital investment, both by increasing labor supply (which makes capital more productive) and by reducing tax rates on capital income. …repealing the ACA also would eliminate several taxes that reduce people’s incentives to save and invest—most notably the 3.8 percent tax on various forms of investment income for higher-income individuals and families. The resulting increase in the incentive to save and invest—relative to current law—thus would gradually boost the capital stock; consequently, output would be higher.

And here’s the most important table from the report. And it’s important for a reason that doesn’t get sufficient attention in the report, which is the fact that repeal of Obamacare will reduce the burden of spending and the burden of taxation. I’ve circled the relevant numbers in red.

Returning to something I touched on earlier, the CBO report gives inordinate attention to the fact that there’s a projected increase in red ink because the burden of spending doesn’t fall as much as the burden of taxation.

My grousing about CBO’s deficit fixation is not just cosmetic. To the extent that the report has bad analysis, it’s because of an assumption that the deficit tail wags the economic dog.

Here’s more of CBO’s analysis.

Although the macroeconomic feedback stemming from a repeal would continue to reduce deficits after 2025, the effects would shrink over time because the increase in government borrowing resulting from the larger budget deficits would reduce private investment and thus would partially offset the other positive effects that a repeal would have on economic growth. …CBO and JCT…estimate that repealing the act ultimately would increase federal deficits—even after accounting for other macroeconomic feedback. Larger deficits would leave less money for private investment (a process sometimes called crowding out), which reduces output. …The same macroeconomic effects that would generate budgetary feedback over the 2016–2025 period also would operate farther into the future. …the growing increases in federal deficits that are projected to occur if the ACA was repealed would increasingly crowd out private investment and boost interest rates. Both of those developments would reduce private investment and thus would dampen economic growth and revenues.

Some of this is reasonable, but I think CBO is very misguided about the importance of deficit effects compared to other variables.

After all, if deficits really drove the economy, that would imply we could maximize growth with 100 percent tax rates (or, if JCT has learned from its mistakes, by setting tax rates at the revenue-maximizing level).

To give you an idea of why CBO’s deficit fixation is wrong, consider the fact that its report got a glowing review from Vox’s Matt Yglesias. Matt, you may remember, recently endorsed a top tax rate of 90 percent, so if he believes A on fiscal policy, you can generally assume the right answer is B.

Here’s some of what he wrote.

Let us now praise Keith Hall. …his CBO appointment was bound up with a push by the GOP for more “dynamic scoring” of tax policy. …Yet today Hall’s CBO released its first big dynamic score of something controversial, and it’s … perfectly sensible.

Yes, parts of the report are sensible, as I wrote above.

But Matt thinks it’s sensible because it focuses on deficits, which allows his side to downplay the negative economic impact of Obamacare.

…the ACA makes it less terrible to be poor. By making it less terrible to be poor, the ACA reduces the incentive to do an extra hour or three at an unpleasant low-wage job in order to put a little more money in your pocket. CBO’s point is that when you do this, you shrink the overall size of GDP and thus the total amount of federal tax revenue. …The change…is big enough to matter economically (tens of billions of dollars a year are at stake) but not big enough to matter for the world of political talking points where the main question is does the deficit go up or down.

Yes, you read correctly. He’s celebrating the fact that people now have less incentive to be self-reliant.

Do that for enough people and you become Greece.

P.S. On a totally different topic, it’s time to brag about America having better policy than Germany. At least with regard to tank ownership.

I’ve previously written about legal tank ownership in the United States. But according to a BBC report, Germans apparently don’t have this important freedom.

The Panther tank was removed from the 78-year-old’s house in the town of Heikendorf, along with a variety of other military equipment, including a torpedo and an anti-aircraft gun, Der Tagesspiegel website reports. …the army had to be called in with modern-day tanks to haul the Panther from its cellar. It took about 20 soldiers almost nine hours to extract the tank… It seems the tank’s presence wasn’t much of a secret locally. Several German media reports mention that residents had seen the man driving it around town about 30 years ago. “He was chugging around in it during the snow catastrophe in 1978,” Mayor Alexander Orth was quoted as saying.

You know what they say: If you outlaw tanks, only outlaws will have tanks.

I’m also impressed the guy had an anti-aircraft gun. The very latest is self defense!

And a torpedo as well. Criminals would have faced resistance from the land, air, and sea.

If nothing else, he must have a big house.

One that bad guys probably avoided, at least if they passed the famous IQ test for criminals and liberals.

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Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Well, here’s a chart from CBO’s slideshow presentation. I’ve added some red arrows to draw attention to the most worrisome numbers.

As you can see, entitlement programs are the big problem, especially Social Security, Medicare, Medicaid, and Obamacare.

Even CBO agrees.

…spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created by the Affordable Care Act—would rise sharply, to 14.2 percent of GDP by 2040, if current law remained generally unchanged. That percentage would be more than twice the 6.5 percent average seen over the past 50 years.

By the way, while it’s bad news that the overall burden of federal spending is expected to rise to more than 25 percent of GDP by 2040, I worry that the real number will be worse.

After all, the forecast assumes that other spending will drop by 2.2 percent of GDP between 2015 and 2040. Yet is it really realistic to think that politicians won’t increase – much less hold steady – the amount that’s being spent on non-health welfare programs and discretionary programs?

Another key takeaway from the report is that it is preposterous to argue (like Obama’s former economic adviser) that our long-run fiscal problems are caused by inadequate tax revenue.

Indeed, tax revenues are projected to rise significantly over the next 25 years.

Federal revenues would also increase relative to GDP under current law… Revenues would equal 19.4 percent of GDP by 2040, CBO projects, which would be higher than the 50-year average of 17.4 percent.

Here’s another slide from the CBO. I’ve added a red arrow to show that the increase in taxation is due to a climbing income tax burden.

These CBO numbers are grim, but they could be considered the “rosy scenario.”

The Committee for a Responsible Federal Budget (CRFB) produced their own analysis of the long-run fiscal outlook.

Like the CBO, CRFB is too fixated on deficits and debt, but their report does have some additional projections of government spending.

Here’s the key table from the CRFB report. Not only do they show the CBO numbers  for 2065 and 2090 under the baseline scenario, they also pull out CBO’s “alternative fiscal scenario” projections, which are based on more pessimistic (some would say more realistic) assumptions.

As you can see from my red arrows, federal spending will consume one-third of our economy’s output based on the “extended baseline scenario” as we get close to the end of the century. So if you add state and local spending to the mix, the overall burden of spending will be higher than it is in Greece today.

But if you really want to get depressed, look at the “alternative fiscal scenario.” The burden of federal spending soars to more than 50 percent of output. So when you add state and local government spending, the overall burden would be higher than what currently exists in any of Europe’s welfare states.

In other words, America is destined to become Greece.

Unless, of course, politicians can be convinced to follow my Golden Rule and exercise some much-needed spending restraint.

This would require genuine entitlement reform and discipline in other parts of the budget, steps that would not be popular from the perspective of Washington insiders.

Which is why we need some sort of external tool that mandates spending restraint, such as an American version of Switzerland’s Debt Brake (which you can learn more about by watching a presentation from a representative of the Swiss Embassy).

Heck, even the IMF agrees that spending caps are the only feasible solution.

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Earlier this year, President Obama proposed a budget that would impose new taxes and add a couple of trillion dollars to the burden of government spending over the next 10 years.

The Republican Chairmen of the House and Senate Budget Committees have now weighed in. You can read the details of the House proposal by clicking here and the Senate proposal by clicking here, but the two plans are broadly similar (though the Senate is a bit vaguer on how to implement spending restraint, as I wrote a couple of days ago).

So are any of these plans good, or at least acceptable? Do any of them satisfy my Golden Rule?

Here’s a chart showing what will happen to spending over the next 10 years, based on the House and Senate GOP plans, as well as the budget proposed by President Obama.

Keep in mind, as you look at these numbers, that economy is projected to expand, in nominal terms, by an average of about 4.3 percent annually.

The most relevant data is that the Republican Chairmen want spending to climb by about $1.4 trillion over the next decade (annual spending increases averaging about 3.3 percent per year), while Obama wants spending to jump by about $2.4 trillion over the same period (with annual spending climbing by an average of almost 5.1 percent per year).

At this point, some of you may be wondering how to reconcile this data with news stories you may have read about GOP budgets that supposedly include multi-trillion spending cuts?!?

The very fist sentence in a report from The Hill, for instance, asserted that the Senate budget would “cut spending by $5.1 trillion.” And USA Today had a story headlined, “House GOP budget cuts $5.5 trillion in spending.”

But these histrionic claims are based on dishonest math. The “cuts” only exist if you compare the GOP budget numbers to the “baseline,” which is basically an artificial estimate of how fast spending would grow if government was left on auto-pilot.

Which is sort of like a cad telling his wife that he reduced his misbehavior because he only added 4 new mistresses to his collection rather than the 5 that he wanted.

I explained this biased and deceptive budgetary scam in these John Stossel and Judge Napolitano interviews, and also nailed the New York Times for using this dishonest approach when reporting about sequestration.

Interestingly, the Senate plan tries to compensate for this budgetary bias by including a couple of charts that properly put the focus on year-to-year spending changes.

Here’s their chart on Obama’s profligate budget plan.

And here’s their chart looking at what happens to major spending categories based on the reforms in the Senate budget proposal.

So kudos to Chairman Enzi and his team for correctly trying to focus the discussion where it belongs.

By the way, in addition to a better use of rhetoric, the Senate GOP plan actually is more fiscally responsible than the House plan. Under Senator Enzi’s proposal, government spending would increase by an average of 3.25 percent per year over the next 10 years, which is better than Chairman Price’s plan, which would allow government spending to rise by an average of 3.36 percent annually.

Though both Chairman deserve applause for having more spending restraint than there was in the last two Ryan budgets.

But this doesn’t mean I’m entirely happy with the Republican fiscal plans.

Even though the two proposals satisfy my Golden Rule, that’s simply a minimum threshold. In reality, there’s far too much spending in both plans, and neither Chairman proposes to get rid of a single Department. Not HUD, not Education, not Transportation, and not Agriculture.

But the one thing that got me the most agitated is that the House and Senate proposals both indirectly embrace very bad economic analysis by the Congressional Budget Office.

Here’s some language that was included with the House plan (the Senate proposal has similar verbiage).

CBO’s analysis…estimates that reducing budget deficits, thereby bending the curve on debt levels, would be a net positive for economic growth. …The analysis concludes that deficit reduction creates long-term economic benefits because it increases the pool of national savings and boosts investment, thereby raising economic growth and job creation.

But here’s the giant problem. The CBO would say – and has said – the same thing about budget plans with giant tax increases.

To elaborate, CBO has a very bizarre view of how fiscal policy impacts the economy. The bureaucrats think that deficits are very important for long-run economic performance, while also believing that the overall burden of government spending and the punitive structure of the tax code are relatively unimportant.

And this leads them to make bizarre claims about tax increases being good for growth.

Moreover, the bureaucrats not only think deficits are the dominant driver of long-run growth, they also use Keynesian analysis when measuring the impact of fiscal policy on short-run growth. Just in case you think I’m exaggerating, or somehow mischaracterizing CBO’s position, check out page 12 of the Senate GOP plan and page 37 of the House GOP plan. You’ll see the “macroeconomic” effects of the plans cause higher deficits in 2016 and 2017, based on the silly theory that lower levels of government spending will harm short-run growth.

So hopefully you can understand why GOPers, for the sake of intellectual credibility, should not be citing bad analysis from the CBO.

But even more important, they should stop CBO from producing bad analysis is the future. The Republicans did recently replace a Democrat-appointed CBO Director, so it will be interesting to see whether their new appointee has a better understanding of how fiscal policy works.

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I’ve written several times about the importance of appointing sensible people to head the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT). Heck, making reforms to these Capitol Hill bureaucracies is a basic competency test for Republicans.

That’s because CBO and JCT are the official scorekeepers when politicians consider changes in fiscal policy and it has a big (and bad) impact if they rely on outdated methods and bad analysis.

The CBO, for instance, puts together economic analysis and baseline forecasts of revenue and spending, while also estimating what will happen if there are changes to spending programs. Seems like a straightforward task, but what if the bureaucrats assume that government spending “stimulates” the economy and they fail to measure the harmful impact of diverting resources from the productive sector of the economy to Washington?

The JCT, by contrast, prepares estimates of what will happen to revenue if politicians make various changes in tax policy. Sounds like a simple task, but what if the bureaucrats make the ridiculous assumption that tax policy has no measurable impact on jobs, growth, or competitiveness, which leads to the preposterous conclusion that you maximize revenue with 100 percent tax rates?

Writing for Investor’s Business Daily, former Treasury Department officials Ernie Christian and Gary Robbins explain why the controversy over these topics – sometimes referred to as “static scoring” vs “dynamic scoring” – is so important.

It is Economics 101 that many federal taxes, regulations and spending programs create powerful incentives for people not to work, save, invest or otherwise efficiently perform the functions essential to their own well-being. These government-induced changes in behavior set off a chain reaction of macroeconomic effects that impair GDP growth, kill jobs, lower incomes and restrict upward mobility, especially among lower- and middle-income families. …Such measurements are de rigueur among credible academic and private-sector researchers who seek to determine the true size of the tax and regulatory burden on the economy and the true value of government spending, taking into account the economic damage it often causes.

But not all supposed experts look at these second-order or indirect effects of government policy.

And what’s amazing is that the official scorekeepers in Washington are the ones who refuse to recognize the real-world impact of changes in government policy.

These indirect costs of government, in particular or in total, have not been calculated and disclosed in the Budget of the United States or in analyses by the Congressional Budget Office. The result of this deliberate omission by Washington has been to understate many costs of government, often by more than 100%, and grossly overstate its benefits. …It is on this foundation of disinformation that the highly disrespected, overly expensive and too often destructive federal government in Washington has been built.

Christian and Robbins look specifically at the direct and indirect costs of the income tax.

The income tax is a two-part tax, one acknowledged and one deliberately concealed. First, almost $2 trillion of income tax is collected by the IRS for government to spend for presumably beneficial purposes. Then there is the tax-induced economic damage, a stealth tax, indirectly picked from people’s pockets in the form of fewer jobs and lower incomes. This stealth tax is $3.2 trillion each year. …economists often refer to the stealth tax as a deadweight loss. …When the $2 trillion of income tax taken directly out of the economy by the IRS is added to the $3.2 trillion of indirect economic cost, the total private-sector cost of the income tax is $5.2 trillion — and the government has only $2 trillion of income tax revenues to spend in trying to repair the damage.

By the way, I must disagree with the last part of this excerpt.

Government doesn’t “repair the damage” of high taxes when it spends money. Most of the time, it exacerbates the damage of high taxes by spending money in ways that further weaken the economy.

Let’s now get back to the part of the editorial that I like. Ernie and Gary make the very important point that some taxes do more damage than others.

…when the IRS collects a dollar of income tax from corporations, the damage to the overall economy is about $4. Similarly, a dollar of tax on capital gains sets off a ripple effect that does about $6 of damage. Poison pills such as capitalizing (instead of expensing) the job-creating cost of machinery and equipment, taxing dividends, double-taxing personal saving and imposing high tax rates result in stealth taxes ranging from $3 to $8 per dollar of revenues. …Low tax rates do less damage to economic growth per dollar of revenues raised and are preferable to high tax rates, which have the opposite effect.

Here’s a chart based on their analysis.

I’m not overly fixated on their specific estimates. Even good economists, after all, have a hard time making accurate forecasts and correctly isolating the impact of discrete policies on overall economic performance. Moreover, it’s very difficult to factor in the economic impact of America’s tax-haven policies for foreign investors, which help offset the damage of high tax burdens on American citizens.

But Christian and Robbins are completely correct about certain taxes doing more damage than other taxes.

And the lesson they teach us is that the tax bias against saving and investment is extremely destructive.

And the less fortunate are particularly disadvantaged when bad methodology at CBO and JCT perpetuates bad policy.

…it is self-defeating and harmful to require that tax reforms always be revenue neutral in a near-term static sense. Imagine a tax reform that initially costs the IRS $1. Through economic growth, it promptly increases taxable income and well-offness by $2.50. At an average tax rate of 20%, the reform-induced $2.50 increase in taxable income at the outset recoups only 50 cents of the initial $1 cost to the IRS, thereby leaving the IRS 50 cents short in the near term. But who in the White House or Congress would refuse to make mostly lower and middle-income families $2.50 better off at a cost of only 50 cents to Washington’s already overflowing coffers?

The final sentence of the excerpt hits the nail on the head.

I’ve previously cited academic research and expert analysis to show that it is pointlessly punitive to raise tax rates if the damage to the private sector is several times greater than the additional revenue collected by government.

Yet there are plenty of examples of this type of short-sighted analysis, such as Obama’s proposal to expand the Social Security payroll tax (see the 6:43-7:41 section of this video)

And if you like videos, I have a three-part series on the Laffer Curve which is part of this post offering a lesson from the 1980s for Barack Obama.

The bottom line is that we’ll continue to get bad analysis and bad numbers if Republicans aren’t smart enough to clean house at CBO and JCT.

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Since I’ve accused the Congressional Budget Office of “witch doctor economics and gypsy forecasting,” it’s obvious I’m not a big fan of the organization’s approach to fiscal analysis.

I’ve even argued that Republicans shouldn’t cite CBO when the bureaucrats reach correct conclusions on policy (at least when such findings are based on bad Keynesian methodology).

So nobody should be surprised that I think the incoming Republican majority should install new leadership at CBO (and the Joint Committee on Taxation as well).

So why, then, are some advocates of smaller government – such as Greg Mankiw, Keith Hennessey, Alan Viard, and Michael Strain – arguing that Republicans should keep the current Director, Doug Elmendorf, who was appointed by the Democrats back in 2009?

Before answering that question, let’s look at some of what was written today for the Washington Post’s Wonkblog.

After a series of highly-regarded conservatives voiced their support for Doug Elmendorf, the director of the Congressional Budget Office whose term is up in January, Elmendorf haters fired back on Friday, urging Republicans to jettison the Democratic appointee as soon as possible. …This argument is advanced most forcefully in an open letter to GOP congressional leaders by Grover Norquist of Americans for Tax Reform, who…is most famous as the author of the anti-tax pledge that binds virtually every Republican in Congress never to vote to raise taxes. So why is Norquist against Elmendorf? For one thing, because CBO, under Elmendorf, has not demonized higher taxes. Instead, the agency promotes a “Failed Keynesian Economic Analysis,” Norquist says, that asserts that “higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.”

And where did Grover get the idea that CBO believes that ever-higher taxes lead to more growth?

Umm…well, from something I wrote.

As evidence, Norquist points to a 2010 post by the Cato Institute’s Dan Mitchell, titled “Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates.” “I hope the title of this post is an exaggeration,” Mitchell writes, “but it’s certainly a logical conclusion based on” CBO’s claim that paying down the national debt — regardless of whether it’s through higher taxes or lower government spending — would be a good thing for the economy. “There’s nothing necessarily wrong with CBO’s concern about deficits,” Mitchell goes on. But “what’s missing from CBO’s analysis is any recognition or understanding that the real problem is excessive government spending.” In other words, what’s missing is conservative ideology about fiscal policy.

I have two reactions, one minor and one major.

My minor point is that the author of the piece is supposed to be a neutral, even-handed reporter, yet she refers to opponents of Elmendorf as “haters” and she implies that we’re simply upset because CBO’s analysis is missing “conservative ideology about fiscal policy.”  Given that she was writing for Wonkblog, which is more akin to an editorial page, there’s nothing wrong with being opinionated. But ask yourself whether someone with such hostility can be impartial when doing straight news stories.

My major point is about policy. Why is my concern about the size of government characterized as “ideology” while we’re supposed to believe CBO’s analysis is “scrupulously impartial” even though it produced analysis which implies you maximize growth with 100 percent tax rates?!?

If my views are blind ideology, then why is there research showing the economic damage of excessive government from international bureaucracies such as the World Bank and European Central Bank? And why are there studies about the harmful economic impact of government spending from the International Monetary Fund and the Organization for Economic Cooperation and Development? Nobody has ever accused these institutions of being hotbeds of libertarian thought.

But perhaps I’m not being fair to CBO. Did the bureaucrats really imply, as part of their analysis on what would happen to the economy if the Bush tax cuts were allowed to expire, that you maximize growth with 100 percent tax rates?

You can read my original post, which holds up very well four years later. And here’s some of what I wrote yesterday to someone who asked me to justify my views on the issue.

…let’s focus on the “subsequent years,” when CBO projectst that GDP would be lower with extended tax cuts. …I’m happy to be corrected, but my reading is that CBO was stating that fiscal balance is the tail that wags the economic dog. The extended tax cuts cause larger deficits, and CBO says that these larger deficits will divert national saving from productive investment and lead to lower output. But if the tax burden is higher, as in the baseline forecast, then deficits are lower and more saving is available for productive investment and output is higher. As far as I’m aware, CBO didn’t have any limiting language back then to suggest that higher tax rates led to growth, but only up to X point. So I think I was on solid ground in asserting the CBO’s analysis implied that ever-higher tax rates led to ever-higher growth.

Seems reasonable. Moreover, I strongly suspect the Wonkblog reporter would have found several people to condemn me had I over-stated the implications of CBO’s analysis.

Now let’s return to the issue of whether Mr. Elmendorf should be re-appointed. Which fiscal conservatives are correct, the ones who want to keep him or the ones who want him replaced?

I’m in the latter category, as explained here, but Elmendorf’s defenders make plenty of good points.

The bottom line is that he is a nice guy (based on my limited interactions), a thoughtful economist, and he has been a big improvement over his predecessor. Indeed, he’s almost certainly the best CBO Director ever appointed by Democrats.

Here’s an analogy that may help make sense of this issue. Elmendorf’s predecessor was a doctrinaire leftist named Peter Orszag. If Orszag’s policy views were a country, they would be France or Greece. By contrast, I’m guessing that Elmendorf would be like Sweden or Germany.

In other words, he wants more government than I do, but at least Elmendorf basically understands that there’s no such thing as a free lunch. He realizes 2+2=4, and he’s aware that there are tradeoffs. And since his arrival, CBO has been much better on issues such as the adverse impact of higher marginal tax rates and the debilitating effect of higher transfer payments.

That being said, while it’s much better to be Sweden rather than Greece, I obviously would prefer to be Hong Kong (or, even better, pre-1913 America).

Though, to continue the analogy, the best I can probably hope for is that Republicans appoint someone akin to Australia or Switzerland.

P.S. For more information about the economics of deficits and fiscal balance, here’s a video I narrated for the Center for Freedom and Prosperity.

P.P.S. The Congressional Research Service made the same argument about higher taxes being pro-growth, asserting in 2010 that “The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.”

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The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are congressional bureaucracies that wield tremendous power on Capitol Hill because of their role as fiscal scorekeepers and referees.

Unfortunately, these bureaucracies lean to the left. When CBO does economic analysis or budgetary estimates, for instance, the bureaucrats routinely make it easier for politicians to expand the burden of government spending. The accompanying cartoon puts it more bluntly.

And when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.

Here are some examples of CBO’s biased output.

The CBO – over and over again – produced reports based on Keynesian methodology to claim that Obama’s so-called stimulus was creating millions of jobs even as the unemployment rate was climbing.

CBO has produced analysis asserting that higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.

Continuing a long tradition of under-estimating the cost of entitlement programs, CBO facilitated the enactment of Obamacare with highly dubious projections.

CBO also radically underestimated the job losses that would be caused by Obamacare.

When purporting to measure loopholes in the tax code, the CBO chose to use a left-wing benchmark that assumes there should be double taxation of income that is saved and invested.

On rare occasions when CBO has supportive analysis of tax cuts, the bureaucrats rely on bad methodology.

But let’s not forget that the JCT produces equally dodgy analysis.

The JCT was wildly wrong in its estimates of what would happen to tax revenue after the 2003 tax rate reductions.

Because of the failure to properly measure the impact of tax policy on behavior, the JCT significantly overestimated the revenues from the Obamacare tax on tanning salons.

The JCT has estimated that the rich would pay more revenue with a 100 percent tax rate even though there would be no incentive to earn and report taxable income if the government confiscated every penny.

This means the JCT is more left wing than the very statist economists who think the revenue-maximizing tax rate is about 70 percent.

Unsurprisingly, the JCT also uses a flawed statist benchmark when producing estimates of so-called tax expenditures.

Though I want to be fair. Sometimes CBO and JCT produce garbage because they are instructed to put their thumbs on the scale by their political masters. The fraudulent process of redefining spending increases as spending cuts, for instance, is apparently driven by legislative mandates.

But the bottom line is that these bureaucracies, as currently structured and operated, aid and abet big government.

Regarding the CBO, Veronique de Rugy of Mercatus hit the nail on the head.

The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.

And the Wall Street Journal opines wisely about the real role of the JCT.

Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.

Amen. For all intents and purposes, the system is designed to help statists win policy battles.

No wonder only 15 percent of CPAs agree with JCT’s biased approach to revenue estimates.

So what’s the best way to deal with this mess?

Some Republicans on the Hill have nudged these bureaucracies to make their models more realistic.

That’s a helpful start, but I think the only effective long-run option is to replace the top staff with people who have a more accurate understanding of fiscal policy. Which is exactly what I said to Peter Roff, a columnist for U.S. News and World Report.

…the new congressional leadership should be looking at ways to reform the way the institution does its business – and the first place for it to start is the Congressional Budget Office. Most Americans don’t know what the CBO is, how it was created or what it does. They also don’t know how vitally important it is to the legislative process, especially where taxes, spending and entitlement reform are concerned. As Dan Mitchell, a well-respected economist with the libertarian Cato Institute, puts it in an email, the CBO “has a number-crunching role that gives the bureaucracy a lot of power to aid or hinder legislation, so it is very important for Republicans to select a director who understands the economic consequences of excessive spending and punitive tax rates.”

Heck, it’s not just “very important” to put in a good person at CBO (and JCT). As I’ve written before, it’s a test of whether the GOP has both the brains and resolve to fix a system that’s been rigged against them for decades.

So what will happen? I’m not sure, but Roll Call has a report on the behind-the-scenes discussions on Capitol Hill.

Flush from their capture of the Senate, Republicans in both chambers are reviewing more than a dozen potential candidates to succeed Douglas W. Elmendorf as director of the Congressional Budget Office after his term expires Jan. 3. …The appointment is being closely watched, with a number of Republicans pushing for CBO to change its budget scoring rules to use dynamic scoring, which would try to account for the projected impact of tax cuts and budget changes on the economy.

So who will it be? The Wall Street Journal weighs in, pointing out that CBO has been a tool for the expansion of government.

…the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use. Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. …The Tax Foundation’s Steve Entin would be an inspired pick.

I disagree with one part of the above excerpt. Steve Entin is superb, but he would be an inspired pick for the Joint Committee on Taxation, not the CBO.

But I fully agree with the WSJ’s characterization of the budget rules being used to grease the skids for bigger government.

In a column for National Review, Dustin Siggins writes that Bill Beach, my old colleague from my days at the Heritage Foundation, would be a good choice for CBO.

…few Americans may realize  that the budget process is at least as twisted as the budget itself. While one man can’t fix it all, Republicans who want to be taken seriously about budget reform should approve Bill Beach to head the Congressional Budget Office (CBO). Putting the right person in charge as Congress’s official “scorekeeper” would be an important first step in proving that the party is serious about honest, transparent, and efficient government. …CBO has several major structural problems that a new CBO director should fix.

Hmm… Entin at JCT and Beach at CBO. That might even bring a smile to my dour face.

But it doesn’t have to be those two specific people. There are lots of well-regarded policy scholars who could take on the jobs of reforming and modernizing the work of JCT and CBO.

But that will only happen if Republicans are willing to show some fortitude. And that means they need to be ready to deal with screeching from leftists who want to maintain their control of these institutions.

For example, Peter Orszag, a former CBO Director who then became Budget Director for Obama (an easy transition), wrote for Bloomberg that he’s worried GOPers won’t pick someone with his statist views.

The Congressional Budget Office should be able to celebrate its 40th anniversary this coming February with pride. …The occasion will be ruined, however, if the new Republican Congress breaks its long tradition of naming an objective economist/policy analyst as CBO director, when the position becomes vacant next year, and instead appoints a party hack.

By the way, it shows a remarkable lack of self-awareness for someone like Orszag to complain about the possibility of a “party hack” heading up CBO.

In any event, that’s just the tip of the iceberg. I fully expect we’ll also see editorials very soon from the New York Times, Washington Post, and other statist outlets about the need to preserve the “independence” of CBO and JCT.

Just keep in mind that their real goal is to maintain their side’s control over the process.

P.S. There’s another Capitol Hill bureaucracy, the Congressional Research Service, that also generates leftist fiscal policy analysis. Fortunately, the CRS doesn’t have any scorekeeper or referee role, so it doesn’t cause nearly as much trouble. Nonetheless, any bureaucracy that produces “research” about higher taxes being good for the economy needs to be abolished or completely revamped.

P.P.S. This video explains the Joint Committee on Taxation’s revenue-estimating methodology. Pay extra attention to the section beginning around the halfway point, which deals with a request my former boss made to the JCT.

P.P.P.S. If you want to see some dramatic evidence that lower tax rates don’t necessarily lead to less revenue, check out this amazing data from the 1980s.

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