Topic: Tax and Budget Policy

Dynamic Scoring in Congress

The House of Representatives voted this week to establish rules for the 114th Congress. One rule change requires that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) dynamically score legislation. The change is a much-needed reform to the federal budgeting process.

The current legislative scoring process completed by CBO and JCT is generally called static scoring. It currently incorporates some microeconomic behaviorial responses to projected changes in federal spending and taxes.

But static scoring misses a big piece of the puzzle. It assumes that the size of the economy is constant. It does not include an analysis of the economy-wide responses to  policy changes. By constrast, dynamic scoring  acknowledges the obvious fact that actions of Congress could affect gross domestic product (GDP). 

Consider a hypothetical income tax increase from 35 to 40 percent. The tax increase may cause  individuals to work fewer hours and businesses to reduce their capital investment. Those sorts of decisions will be made by millions of individuals and businesses in response to tax changes. In aggregate, these responses would affect GDP. Dynamic scoring includes these macroeconomic responses.

Contrary to some opponents, dynamic scoring is not new to CBO. CBO has used dynamic scoring before. The large immigration bill in 2013 was dynamically scored to show how less stringent immigration policy could foster economic growth. CBO estimated the economic growth effects of the 2009 stimulus. And CBO’s long run spending projections include supplementary forecasts that include the effects of future spending, taxes, and deficits on economic growth. The House rule change requires that CBO and JCT use dynamic scoring on all  legislative cost estimates above a certain magnitude.

Dynamic scoring is not perfect. Its results are influenced by the assumptions made by the models used to produce the results. For this reason, CBO should make its models, assumptions, and data available to outside experts so it can receive feedback from scholars and improve its methods. But static scoring is even less perfect than dynamic scoring. Its assumption of constant GDP leads to results that are biased against policies that lead to economic growth, such as tax rate reductions.

Dynamic scoring will not be a cure-all, but it will be a helpful tool so policymakers can better weigh  policy options. Providing Congress with the best information available on policies to help grow the economy seems like a no-brainer. Congress should understand how its actions affect economic output. This rule change starts the new Congress off on the right foot.

State Spending Machine Keeps on Rolling during Recession

While other matters dominate the headlines, American governments continue to spend more money, despite the presumed effects of the Great Recession. Washington Post reporter Abha Bhattarai lays out the latest details:

State and local governments in Maryland, Virginia and the District spent $7.82 billion more than they collected in revenue between 2007 and 2012, during the throes of the economic downturn, according to data released from the U.S. Census Bureau last month….

State and local governments in Virginia spent $1.03 billion more than they took in between 2007 and 2012, while expenditures in Maryland outpaced earnings by $6.07 billion….

Nationally, state and local governments spent $118.15 billion more than they collected between 2007 and 2012. Total expenditures during that period increased by 18.2 percent, from $2.7 trillion to $3.2 trillion, while total revenue declined 3.2 percent over the same five-year period, from $3.1 trillion to $3.0 trillion.

Over that five-year period, plenty of businesses, families, and nonprofits found their revenue declining by more than three percent, and most responded by spending less.

Of course, it’s often said that governments spend when times are good and the tax revenue is rolling in, then find themselves over-extended and facing painful cuts when growth slows down. But the evidence above suggests that governments just keep spending even as the money stops rolling in. It’s exceedingly difficult to get governments to spend less, especially when every government dollar helps to create pro-spending constituencies who will resist cuts. Spending interests never rest; taxpayer groups have to work twice as hard just to hold the line.

One side note: The online headline for this article is

State, local governments continue to spend more than they earn

Actually, I don’t think governments “earn” money. Merriam-Webster defines “earn” as “to receive as return for effort and especially for work done or services rendered.” Governments don’t earn, they take. Just try saying “I don’t find your services worth the money, and I won’t be renewing my contract.”

For more on state government spending, see Cato’s latest “Fiscal Policy Report Card on America’s Governors.”

 

Another “Oops” Moment for Paul Krugman

I’m tempted to feel a certain degree of sympathy for Paul Krugman.

As a leading proponent of the notion that bigger government stimulates growth (a.k.a., Keynesian economics), he’s in the rather difficult position of rationalizing why the economy was stagnant when Obama first took office and the burden of government spending was rising.

And he also has to somehow explain why the economy is now doing better at a time when the fiscal burden of government is declining.

But you have to give him credit for creativity. Writing in the New York Times, he attempts to square the circle.

Let’s start with his explanation for results in the United States.

…in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments.

If you define “austerity” as spending restraint, Krugman is right. Overall government spending has barely increased in recent years.

But then Krugman wants us to believe that there’s been a meaningful change in fiscal policy in the past year or so. Supposedly there’s been less so-called austerity and this explains why the economy is doing better.

The good news is that we…seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along… What held us back was unprecedented public-sector austerity…now that this de facto austerity is easing, the economy is perking up.

But where’s his evidence? Whether you look at OMB data, IMF data, or OECD data, all those sources show that overall government spending has been steadily shrinking as a share of GDP ever since 2009.

Loosie In the Streets, With Patdowns

In a Saturday editorial, the Washington Post calls for further hiking Maryland’s tobacco tax so as to push the state’s smuggled-cigarettes rate, currently around 20%, closer to New York state’s Bloomberg-influenced, nation-leading 57%. The New York policy has proved a highly effective way to bring petty and not-always-so-petty crime to New Yorkers’ everyday lives. With I-95, I-70 and other corridors, Maryland is already one of the most accessible states for contraband smugglers, and if the Post has its way organized gangs on the streets of Baltimore stand to get their hands on a new cash engine that, as one Brooklyn distributor is said to have boasted on wiretap, is “better than selling drugs.” What could go wrong?

P.S. The Post’s editorial never even mentions smuggling or evasion of the law, let alone bring up the Eric Garner case in Staten Island, although the Post’s own news analysts and opinion writers have repeatedly explored the role of taxes in that case. Is it too much to ask of the Post editorialists that they keep up with their own paper?

[cross-posted from my blog on Maryland issues, Free State Notes]

The Final Nail in the Keynesian Coffin?

I wrote earlier this year about the “perplexing durability” of Keynesian economics. And I didn’t mince words.

Keynesian economics is a failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. And it didn’t work for Bush or Obama in recent years. No matter where’s it’s been tried, it’s been a flop. So why, whenever there’s a downturn, do politicians resuscitate the idea that bigger government will “stimulate” the economy?

And I specifically challenged Keynesians in 2013 to explain why automatic budget cuts were supposedly a bad idea given that the American economy expanded when the burden of government spending shrank during the Reagan and Clinton years.

I also issued that same challenge one day earlier, asking Keynesians to justify their opposition to sequestration given that Canada’s economy prospered in the 1990s when government spending was curtailed.

It seems that the evidence against Keynesianism is so strong that only a fool, a politician, or a college professor could still cling to the notion that bigger government lead to more growth.

Fortunately, it does appear that there’s a growing consensus against this free-lunch theory.

A Practical (and Semi-Optimistic) Plan to Tame the Federal Leviathan

Like a lot of libertarians and small-government conservatives, I’m prone to pessimism. How can you be cheerful, after all, when you look at what’s been happening in our lifetimes.

New entitlement programs, adopted by politicians from all parties, are further adding to the long-run spending crisis.

The federal budget has become much bigger, luring millions of additional people into government dependency.

The tax code has become even more corrupt and complex, with more than 4,600 changes just between 2001 and 2012 according to a withering report from outgoing Senator Tom Coburn of Oklahoma.

And let’s not forget the essential insight of “public choice” economics, which tells us that politicians care first and foremost about their own interests rather than the national interest. So what’s their incentive to address these problems, particularly if there’s some way to sweep them under the rug and let future generations bear the burden?

And if you think I’m being unduly negative about political incentives and fiscal responsibility, consider the new report from the European Commission, which found that politicians from EU member nations routinely enact budgets based on “rosy scenarios.” As the EU Observer reported:

EU governments are too optimistic about their economic prospects and their ability to control public spending, leading to them continually missing their budget targets, a European Commission paper has argued. …their growth projections are 0.6 percent higher than the final figure, while governments who promise to cut their deficit by 0.2 percent of GDP, typically tend to increase their gap between revenue and spending by the same amount.

Needless to say, American politicians do the same thing with their forecasts. If you don’t believe me, just look at the way the books were cooked to help impose Obamacare.

But set aside everything I just wrote because now I’m going to tell you that we’re making progress and that it’s actually not that difficult to constructively address America’s fiscal problems.

First, let’s look at how we’ve made progress. I just wrote a piece for The Hill. It’s entitled “Republicans are Winning the Fiscal Fight” and it includes lots of data on what’s been happening over the past five years, including the fact that there’s been no growth in the federal budget.

Senator Coburn’s Final Report

One the best U.S. senators of recent decades is leaving. No one has spotlighted the ongoing waste in federal spending more than Tom Coburn of Oklahoma. In his farewell address, he advised his colleagues: “Your whole goal is to protect the United States of America, its Constitution and its liberties … it’s not to provide benefits for your state.” As if to underline Coburn’s point, the Washington Post yesterday described how Senator Roger Wicker helped pour $349 million down the drain on an unused NASA facility in his home state of Mississippi.

One of Coburn’s strategies has been to use his expert staff to write investigative reports on federal activities. The huge collection of reports his staff has produced is remarkable. Each one is a big fat indictment of malfunctioning government.

Seeing this stream of high-quality and fun-to-read reports over the years has made wonder what the staffs of the other 99 senators do with their time. Every senator ought to be using his taxpayer-funded staff to try to save taxpayer money. Every senator ought to be digging into the giant $3.6 trillion spending empire that they have collectively created and trying to cut out some of the fat.

Coburn’s final report released last week is another impressive document. Coming in at 320 pages, Tax Decoder digs through the massive federal tax code and highlights hundreds of special deals, carve-outs, and illogical breaks. Tax Decoder’s findings are too voluminous to summarize here, and even seasoned tax wonks will find interesting stuff that they did not know.

Consider the chapter on nonprofit organizations, which spans 42 pages and is buttressed by 462 endnotes. This part of the tax code is a complex mess rife with abuse. Coburn’s staff found that Lady Gaga’s charity raised $2.6 million and handed out just $5,000 one year in benefits, while spending the rest on salaries, promotions, and parties. The Kanye West Foundation spent $572,383 one year, but not a dime on charity.The Cancer Fund for America raised $80 million, but handed out just $890,000 to cancer patients.

While the GAO—an arm of Congress—investigates federal activities, its reports are usually dry and timid. The agency’s role is not to upset its political masters. Similarly, most members of Congress don’t want to upset their colleagues, and so they shy away from criticizing wasteful spending directed to any state, not just their own. It’s easier for them to follow the herd, play the game, grab benefits, and hopefully cruise to safe reelection. Many outside groups and reporters do a great job investigating the government, but senators are in a uniquely powerful and privileged position to lead the charge. 

That’s why Senator Coburn and his staff filled a void with their reports. They uncovered idiocy in the budget, and they informed the public with the juicy details. Many members of Congress say that the government spends too much, but they shy away from specifics. But now that Tom Coburn is going, which members are willing to step up to the plate?