'Symmetric Application of Dynamic Scoring'

Menzie Chinn:

Symmetric Application of Dynamic Scoring: Republicans are keen to sacrifice CBO’s role as impartial arbiter of fiscal measures on the altar of “dynamic scoring” of tax measures.[0] But there is no economic reason for restricting this approach to only tax measures.

First, on tax measures,... there is a tremendous amount of uncertainty — model and parameter — associated with the intertemporal models necessarily used dynamic scoring of tax policies. See also this discussion of the Bush Administration’s foray, in this post. (Of course, I am skipping nonsensical analyses such as the Heritage Foundation’s Center for Data Analysis of, for instance, the Ryan plan [1] [2] [3]).

Second, as pointed out by Alan Auerbach, there is no reason to only analyze tax policies. For instance, spending on Head Start which might enhance labor productivity should in principle be scored dynamically. And, so too should infrastructure. Consider this assessment from the IMF’s Research Department, regarding public investment. ...

Notice that debt declines 4 percentage points of GDP in response to an exogenous 1 percentage point of GDP increase in public investment. In addition output increases 1.5 percentage points relative to baseline. Now, one could argue — particularly with respect to debt-to-GDP — the response is only statistically significantly different from zero in the short term. However, one has even less empirical evidence regarding statistical significance for tax revenue responses to tax rate changes in many instances.

So, let’s think twice about dynamic scoring…