The Republicans' Dynamic Deception for 2016
This week's GOP presidential debate was notable both for what the candidates said and for what they didn't say. Noting that Presidents Obama and Clinton had added 107,000 and 240,000 jobs a month compared to George W. Bush's anemic 13,000, Fox Business moderator Maria Bartiromo asked Carly Fiorino, "How are you going to respond to the claim that Democratic presidents are better at creating jobs than Republicans?" Given that immovable 800 pound donkey in the room, Fiorina had nothing to offer in response. But one of the other most revealing moments of the evening came when Bartiromo, pointing out that the Republicans' tax plans would "cost anywhere between $2 trillion and $12 trillion over a decade," questioned Texas Senator Ted Cruz "how can you cut taxes as much as you propose without running up debt and deficits?"
In response, Cruz offered a coded response to his conservative audience, one largely overlooked by the media:
Well, the numbers the Tax Foundation had put out is that the static cost of the plan is $3.6 trillion over 10 years, but the dynamic cost of the plan, which -- which is the cost that factors in growth, is about $768 billion. It is less than a trillion. It costs less than virtually every other plan people have put up here, and yet it produces more growth. [Emphasis mine.]
Translated from Republican into English, Cruz was proclaiming that "tax cuts pay for themselves."
Unfortunately, that conservative claim--that tax cuts spur so much new economic activity that government revenue is at least as much as it would otherwise have been--has been repeatedly, thoroughly and demonstrably debunked ever since Arthur Laffer's Curve was first sketched on a cocktail napkin 40 years ago. So, Republicans have turned to a new term--"dynamic scoring"--to both magically erase the oceans of red ink their tax plans would necessarily produce and happily avoid having to explain the painful, draconian and politically unpopular spending cuts needed to offset the hemorrhaging from the U.S. Treasury. The inevitable result, now as under Presidents Reagan and Bush, will be a mushrooming national debt and, at a time of record high income inequality, a massive tax cut windfall for the wealthy.
To understand why, a little background is in order. In the past, the nonpartisan Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have generally used "static scoring" to forecast the budgetary impact of current law and proposed tax and spending legislation. Now, these models don't assume the economy is actually static in response to policy changes. As former CBO Director Douglas Elmendorf recently explained, traditionally agency "estimates for changes in benefit programs include shifts in take-up rates for those benefits among eligible people, and estimates for changes in income tax rates include shifts in the use of tax deductions." But until very recently, CBO's models for the most part did not take into account so-called "macroeconomic effects" of legislation:
Some potential behavioral responses are excluded from estimates because the responses would affect overall output, and overall output has been held fixed in cost estimates by longstanding convention. Therefore, CBO's and JCT's estimates have not included the budgetary effects of changes in labor supply, saving, interest rates, productivity, and other aggregate variables.
But with rare exceptions, until Republicans took control of both houses of Congress in 2015, CBO was wary of such dynamic scoring for two very compelling reasons: it was too hard to do and too easy to create the opportunity for partisan manipulation. But for most Republicans now, that isn't a bug, but a feature.
That wasn't always the case. Douglas Holtz-Eakin, a former CBO head and adviser to GOP presidential candidates including John McCain, warned that dynamic scoring was too difficult for too little benefit:
In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn't lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, "it is unlikely to change the bottom line very much over the budget window."
But it's not just that "there's a great deal of uncertainty" about "the right way to model things," as Donald Marron of the Tax Policy Center put it. As former deputy assistant director for tax policy at the Congressional Budget Office and fellow at the Tax Policy Center Roberton Williams warned:
"We really don't understand the science well enough to do it right. The assumption built into the model determines, in large part, what comes out of the model. There's going to be conflict unless there's some agreement on what ought to go in."
Among Republicans themselves, though, there is plenty of agreement on "what ought to go in." Despite their promises to cut taxes, raise defense spending and balance the budget, Ronald Reagan tripled the national debt during his tenure and George W. Bush nearly doubled it again. And in the 2012 campaign, Mitt Romney like his running Paul Ryan relied on dynamic scoring to magically erase $5 trillion in new debt his tax plan would produce. As Ezra Klein summed up in "The Dynamic Dodge in Romney's Budget," Mitt simply resurrected Reagan OMB chief David Stockman's "magic asterisk," the same one that ultimately required The Gipper to raise taxes 11 times after his 1981 giveaway ruined Uncle Sam's finances:
As a matter of theory, stronger economic growth could make Romney's plan work...if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up...
The technical term for the secret sauce that Romney is using in his budget projections is "dynamic scoring." The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don't cost as much as a "static analysis" -- one that didn't take into account all these effects -- would suggest."
As it turns out, Romney's 20 percent tax cut plan was basically the same one Bob Dole ran on--and lost on--in 1996. And the architect of that debacle, former Reagan Treasury official Bruce Bartlett, has long since recanted his support for the "dynamic scoring" at the heart of virtually every Republican tax plan for 2016. As Bartlett put it in 2012:
As the budget deficit increasingly inhibits Republicans' tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. But for that approach to work, the C.B.O. and the Joint Committee on Taxation, Congress's official budget and tax estimators, need to be forced to play along...
My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting...In other words, it is an issue of credibility. Republicans don't really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves, so they can pass more of them without constraint.
Constraints, that is, like the facts, the truth and the unchangeable principles of basic math. That's why new House Speaker Paul Ryan wants to rename the new math he and his GOP friends demanded the Congressional Budget Office use as of 2015:
"He also noted that he prefers the term 'reality-based scoring' over 'dynamic scoring.'"
Now, thanks to the reliably Republican Tax Foundation, the 2016 GOP White House hopefuls are manufacturing their own realities. Zach Carter summed up the Republicans' "basically insane" tax plans this way:
Republicans on debate night are all promising to slash taxes and unleash economic growth. Many of them, of course, haven't actually presented a specific tax plan. But those who have are peddling economic fantasies. Even the conservative Tax Foundation believes these plans would balloon the national debt.
Donald Trump's plan would cost over $10 trillion.
Bobby Jindal's plan would cost $9 trillion.
Rick Santorum's would cost $1.1 trillion.
Jeb Bush's plan? $1.6 trillion.
Marco Rubio? More than $1 trillion over the next decade.
But these numbers are the wildly optimistic projections of the conservative-coddling Tax Foundation. Ted Cruz, Jeb Bush, Marco Rubio, Rand Paul and company believe they can cauterize the bleeding of red ink through the magic of "macroeconomic feedback." Again, they claim, accelerated economic growth means tax revenues will still be healthy even at lower rates. Rand Paul has pledged that over a decade his "Fair and Flat Tax" will "increase gross domestic product by about 10 percent." Facing the tidal wave of red ink produced by Marco Rubio's tax plan, William McBride of the very same Tax Foundation turned to the alchemy of dynamic scoring to make an ugly picture much prettier. According to his model, over its first decade the Rubio-Lee plan would boost GDP by 15 percent more than the nonpartisan Congressional Budget Office (CBO) projects. And with his forecast of capital stock increasing by 50 percent, wages by 13 percent, work hours by 3 percent and jobs by 2.7 million, McBride presto-chango turned red ink black:
[T]he growth in the economy would eventually boost tax revenue, relative to current law. We find after all adjustments (again, about 10 years) that federal tax revenue would be about $94 billion higher on an annual basis. This is our dynamic estimate. Our static estimate, i.e. assuming the economy does not change at all, shows a tax cut of $414 billion per year. We believe the dynamic estimate is much closer to reality.
(Just not any reality lived by any American since Ronald Reagan tried to the Laffer Curve sketched into actual policy. As Reagan's OMB Director David Stockman admitted in 1981. "The whole thing is premised on faith. On a belief about how the world works.")
Writing about Rubio's "Puppies and Rainbows Tax Plan" in the New York Times, Josh Barro concluded something was fishy. And the rot, it turned out, started at the head:
If that sounds aggressive to you, you're not alone: I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. "This would not pass muster as an undergraduate's model at a top university," said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call.
Among many others, Citizens for Tax Justice doesn't share the supply-siders dynamic faith. The CTJ's analyses forecast that Marco Rubio will drain $11.8 trillion from the Treasury over 10 years. Jeb! Will siphon off $7.1 trillion! (Bear mind that total federal spending over the next decade is projected to be $41 trillion.) As Vox explained, Ted Cruz's combination of a flat tax and a value-added tax (VAT) is the most regressive of them all. The top contenders provide mammoth tax cuts to the richest one percent of Americans. And the GOP field does all of this even as they demand a balanced budget amendment to the Constitution and some refuse to raise the debt ceiling.
All that said, there are compelling reasons to use dynamic scoring models in certain circumstances, as CBO's previous director Elmendorf explained in his paper, "'Dynamic scoring': Why and how to include macroeconomic effects in budget estimates for legislative proposals." Citing the example of comprehensive immigration reform bills in 2006, 2007 and 2013, CBO concluded:
Assuming that those bills would have had no effect on overall output would have ignored one of the primary effects of the bills and distorted those estimates too severely.
Immigration wasn't the only subject where dynamic scoring was--or should have been--used by CBO. When Elmendorf's CBO reviewed former House Ways and Means Committee Chairman Dave Camp's 2014 tax reform bill, the static analysis showed a revenue-neutral outcome. But with its dynamic assessment, "JCT estimated that the proposal would raise the level of output by between 0.1 percent and 1.6 percent, on average, during the 2014-2023 period. That additional output was estimated to reduce the deficit by between $50 billion and $700 billion during the 2014-2023 period." Then there is the 2009 Obama stimulus program. As Elmendorf explained:
If dynamic scoring had been applied to the economic stimulus legislation of 2009 (the American Recovery and Reinvestment Act), its estimated budgetary effect would have been reduced by hundreds of billions of dollars: CBO (2009b) estimated that the legislation would raise output by more than $800 billion over the following decade, and that additional income would have been estimated to reduce budget deficits by more than $200 billion (or roughly one-quarter of the estimated budgetary cost of the bill reported in CBO, 2009a)
In their recent analysis of the government's response to the financial crisis which started in late 2007, Alan Blinder and Mark Zandi tallied the positive macroeconomic effects of the Obama ARRA:
- The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
- The economy would have contracted for more than three years, more than twice as long as it did;
- More than 17 million jobs would have been lost, about twice the actual number.
- Unemployment would have peaked at just under 16%, rather than the actual 10%;
- The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
And when it came to getting the most bang for the stimulus buck during the trough of the recession in 2009, spending on food stamps, infrastructure, aid to states and unemployment insurance provided a much higher return on investment than the tax cuts which comprised over 40 percent of the ARRA:
And then there's Obamacare. Much to the dismay of Republicans, CBO repeatedly forecast the Affordable Care Act to reduce the national debt. Under the leadership of the GOP's hand-picked director Keith Hall, CBO once again warned the repealing Obamacare would add to the national debt under both static and dynamic scenarios:
The agencies concluded (CBO, 2015h): "[R]epealing the ACA would increase federal budget deficits by $137 billion over the 2016-2025 period ..., [with that figure being the net effect] of two components: Excluding the effects of macroeconomic feedback federal deficits would increase by $353 billion over the 2016-2025 period if the ACA was repealed. Repeal of the ACA would raise economic output, mainly by boosting the supply of labor; the resulting increase in GDP is projected to average about 0.7 percent over the 2021-2025 period. Alone, those effects would reduce federal deficits by $216 billion over the 2016-2025 period."
To translate, the CBO has long predicted that Obamacare will help end "job lock" by allowing some employees to retire early or choose part-time work instead. If Obamacare is repealed, these 2 million plus people will return to full-time work. When Republicans used this as proof that Obamacare is "job-killing," then CBO director Elmendorf replied:
"Other people are generally happy for them and do not describe them as having 'lost their jobs.'"
Regardless, as Vox rightly concluded, "No matter how CBO scores it, Obamacare reduces the deficit." Which is why Republican leaders like then House Majority Leader Eric Cantor (R-VA) called ACA scores "budget gimmicky." Newt Gingrich went even further, declaring:
"If you are serious about real health reform, you must abolish the Congressional Budget Office because it lies."
The new Republican majorities in the Senate and the House didn't abolish CBO, but they did what for them is the next best thing. They didn't just change to rules to demand GOP committee chairs can require CBO to produce dynamic scoring of Republican bills; they prevented Democrats from asking for dynamic assessments of spending bills. As the Brookings abstract of Elmendorf's paper explained:
Elmendorf concludes that dynamic scoring would be appropriate if macroeconomic effects are only included in estimates for major legislative proposals, because CBO and JCT do not have the resources to do a careful analysis of most proposals. He suggests dynamically scoring bills whose non-dynamic effects would exceed .25 percent or more of GDP over 10-years, which would be those having a budget impact of $575 billion and above, and bills for which dynamic scoring is requested by the chairs or ranking members of the key committees. He also believes dynamic scoring should be used for legislative proposals affecting federal spending as well as revenues, because both sorts of policy changes can have notable macroeconomic effects. [Emphasis mine.]
To put its dynamic deception into place, the new Republican majorities in Congress made one other change. they refused to keep Douglas Elmendorf on at CBO, despite the broad, bipartisan support he enjoyed among economists, analysts and pundits. Instead, they replaced him with their man, Keith Hall.
Unfortunately for Congressional Republicans and the GOP presidential contenders, Keith Hall isn't going along with their conservative "Unicornomics." As he put it simply in August:
"The evidence is that tax cuts do not pay for themselves."
To translate that back into Republican for Ted Cruz and the other 2016 Republicans now trying to deceive American voters, expect more static about the dynamic scoring of your duplicitous tax plans.