Cooking the Federal Government’s Books

January 4, 2015

And, perhaps, our goose.

As the 114th Congress opens for business, the Republican majority has already made a very important decision, one that will go largely unnoticed outside Wonkville but which nonetheless will have an enormous impact on public policy.

According to news reports, the majority is planning not to reappoint Congressional Budget Office Director Douglas Elmendorf and instead put someone in the Director’s chair who will incorporate what is called “dynamic scoring” into CBO’s calculations of the impact of legislation on the federal deficit and the economy.

So what? So, a lot. CBO estimates the cost to taxpayers of nearly all legislation through non-partisan analytic process referred to as “scoring” (the process is laid out here). The scoring process has significant impact on what legislation moves through Congress and how it is shaped; because what a bill costs is, appropriately, a major consideration.

In theory, dynamic scoring introduces various economic factors into this process, something many economists question. CBO has traditionally rejected this, calling estimates that are produced “highly uncertain.”

In practice, Republicans want CBO to use dynamic scoring in order to bless two of their fundamental beliefs: that tax cuts work as economic stimulus and that they pay for themselves and do not increase the deficit.

Bruce Bartlett, former senior policy advisor to Presidents Reagan and George H.W. Bush, snorts at dynamic scoring as “using smoke and mirrors to institutionalize ideology into the budget process.” Edward Kleinbard, former chief of staff to the Congressional Joint Committee on Taxation, the other day took to the op-ed pages of the New York Times to call dynamic scoring a “Trojan horse,” to warn that chicanery is afoot.

I’ll put the partisan arguments aside and focus instead on some history, which shows that tax cuts are not the magic economic elixir their apostles believe, and they certainly contribute to the deficit.

During the 1950s, a period of strong economic growth, the highest marginal tax rate on ordinary personal income was 90%. (All these percentages are rounded.) It fell to 70% in the mid 60s, to 50% in the early 80s and bottomed out at 28% in the late 80s. It popped up to just over 39% in the 1990s, dipped again in the early 2000s, and is currently just under 40%. These are not the effective rates, what people and corporations actually pay, but they are adequate general benchmarks.

Looking back at the 80s, 90s, and the early 2000s, it’s hard to find solid evidence that taxes, in and of themselves, had that much impact on economic growth. Very high tax rates certainly didn’t deter growth in the 50s and 60s. Some argue the 80s tax cuts sent the economy soaring, but analysis shows other powerful forces were at work. One was oil prices, which fell from $31.77 a barrel in 1981 to $12.51 in 1986, a drop of nearly 61%. That’s some serious economic stimulus. Another was monetary policy. Fed Chairman Paul Volker tightened money in 1979, which helped trigger a recession, and then loosened it again in 1982, helping precipitate the recovery. It should also be noted that President Reagan, after cutting income and certain other taxes, raised others, such as payroll taxes.

Tax cuts in 1988 didn’t trigger growth; we had a nasty recession. Tax increases in the 1990s ran side-by-side with a burst of economic growth; GDP for 2001 was $3.4 trillion higher than in 1992. Tax cuts in the early 2000s didn’t do much to prevent some of the weakest jobs/income numbers since the Second World War, and GDP grew by less than $2 trillion.

However, it is clear that cutting taxes adds to the nation’s supply of red ink, although even that is not a simple cause-and-effect. Tax cuts and spending increases in the 1980s drove the deficit from about $79 billion to $153 billion. The deficit hit $290 billion in 1992, then it started coming down. From 1998-2001, we had budget surpluses. After the tax cuts of the early 2000s, coupled with further spending, the deficit began climbing once again.

This is not to argue whether Democratic or Republican presidents are better for an economy, but rather that tax cuts are not the miracle potion some claim.

The obvious answer, many would say, is cut taxes and cut spending. The problem with that is, politically, cutting taxes is very popular; cutting spending is not. The Right would cut social programs. The Left would cut the military budget. Leaving aside arguments about which spending cuts are more desirable (the Preamble to our Constitution says government is meant to both “provide for the common defence” and “promote the general welfare”), cutting spending is not nearly as easy as people who aren’t sitting at the table might think.

Which brings us back to the CBO director. If the cost estimates produced by her or his office begin to rely on economic modeling that is suspect at best, subsequently clearing the path for legislation with unrealistic costs attached, we’ve got trouble.

Neither political party is immune to making rosy predictions for its agenda, but the CBO should be kept out of that contest. Legislating and budgeting should benefit from a truly conservative approach to analysis, including hard numbers. We cannot afford, in any sense of that term, to submit to this hoax.