One of the big problems in Greece over the past decade or so is that the government was not honest with its data. Various people assisted in the matter -- including Goldman Sachs with respect to some debt issues -- but ultimately this was a political decision at the highest level. The people running the country decided to conceal the true nature of their budget and their debt. This deception ended up costing the country dearly -- completely undermining its credibility under pressure and making it much harder to turn the fiscal and economic situation around.
House Republicans are now proposing something similar for the United States.
Because this concerns deficits and debt, the details may seem arcane - and that is how similar details escaped attention by almost everyone in Greece. Fortunately, in the United States we have an excellent guide -- an article in Tax Notes by John Buckley. ("Dynamic Scoring: Will S&P Have Company?," February 28, 2012*)
The key issue here is a concept known as "dynamic scoring." This may sound like boring jargon but in fact it cuts to the heart of the most important political issue of the day - the effect of tax cuts.
Republicans want to cut taxes - there is no secret about that. All four remaining presidential candidates have fiscal proposals with major tax cutting elements. The problem for them and for their congressional colleagues is that we have an honest broker in the fiscal arena -- the nonpartisan Congressional Budget Office (CBO) -- that "scores" fiscal proposals according to their likely impact. (The CBO scores official proposals; it does not score candidates - but its approach to scoring is influential and largely followed by others, such as the Committee for a Responsible Federal Budget, CRFB.)
In the modern United States, cutting taxes leads to lower revenue and larger budget deficits. There are no two ways about this -- as Ronald Reagan discovered in the early 1980s. (In our new book, White House Burning, we go through the evidence on this point in detail, including important work by Greg Mankiw, former top economic adviser to George W. Bush and now working with Mitt Romney, which confirms that cutting taxes in the U.S. will lower revenue.)
But many Republicans feel that this is not true -- in my conversations with them, for example in congressional hearings over the past year, the conviction seems to be that the research on this topic is bad science, even when done by Republicans. But convincing the CBO to abandon its proven and sensible approach to budget scoring has been difficult.
The solution currently under consideration is simple in its elegance - and downright frightening in its implications.
The CBO was created by Congress and receives its instructions directly from the House and Senate Budget Committees. If the Republicans controlled both committees, it would be a simple matter to convey to the CBO director that instead of using established scoring practices, it should switch to "dynamic scoring." (If Doug Elmendorf, the highly respected current CBO director, were to resist, he could be replaced -- his four year term of office will be up for renewal next year.)
What's wrong with "dynamic scoring" -- a procedure that would attach magical growth implications to tax cutting? Mr. Buckley's article contains all the details, but his basic point is simple.
The macroeconomic models used to claim big growth effects for tax cuts are simply wrong - and completely at odds with the empirical evidence. A smart modeler can assume something different and show you that with a great deal of math, but this is just an assumption dressed up in a complicated fashion.
Put more bluntly - there is no magic in the real world, just very large budget deficits. As Mr. Buckley puts it, "One cannot find in the economic data for the last 30 years any evidence that supply-side-based tax policy has delivered its promised benefits."
If you cut taxes, revenues will fall and deficits will increase. If you change the CBO's scoring process to hide this fact -- as is under consideration by leading Republicans on the House Budget Committee and the House Ways and Means Committee -- you are engaging in exactly the same sort of deception that brought down Greece.
Alan Greenspan -- a leading Republican in his day -- got this right in congressional testimony back in 1995 (quoted by Mr. Buckley),
"Should financial markets lose confidence in the integrity of our budget scoring procedures, the rise in inflation premiums and interest rates could more than offset any statistical difference between so-called static and more dynamic scoring."
* In my post this morning on dynamic scoring and how to turn the United States into something closer to Greece, I requested that the publication Tax Notes bring an article by John Buckley out from behind their paywall ("Dynamic Scoring: Will S&P Have Company?," published February 28, 2012.)
The publishers have now done so, for which I would like to thank them - this is a public service that is greatly appreciated. I don't know how long the article will remain in the open access part of their website, so I strongly advise anyone who cares about the fiscal future of this country to read it now (and tell your friends).
"Dynamic scoring" of U.S. budget proposals would be a disaster.
Here's another version of the link, in case you prefer things that are not embedded: http://www.taxanalysts.com/www/features.nsf/Articles/43736B49FCB019E3852579B5006E1933?OpenDocument
Follow Simon Johnson on Twitter: www.twitter.com/baselinescene
America has more than enough clean burning coal, oil, and natural gas to become energy independent. Obama will not allow us to drill or refine our treasure. Meaning hundreds of thousands of American jobs Obama will not allow us to create. He has, however, promised Brazil billions of your SALARY dollars to help Brazil develop THEIR oil drilling ! Trillions more of your tax dollars are paying for oil from countries who threaten our economic and national security.
Since the Obama's are even trying to control our diets, I suggest that they EAT the ALGAE they want us to fuel our cars with. I suggest Obama's energy secretary get a real job, like a teacher or police officer, and then lecture us on how lovely $10-$15 dollar a gallon gas would be! Meanwhile, Americans will return corn to it's rightful place in feeding millions of the world's poor, and we will explore,drill, pump, refine, and run our cars, homes, and businesses, on American/Canadian coal, oil, and gas.
Taxes are lower than at any time in the last 60 years.
By contrast, lower tax rates leave more money in the hands of the people who earned it and increase the capital available to invest in a profitable venture that will add new production and new employees who will be paying taxes year after year.
The Federal budget is about $3,800,000,000,000. Divide that by about 115,000,000 households and you come up with spending of $33,000 per household. To close the yearly deficit with taxes alone would require about $13,000 in new taxes per household.
Does anyone really believe that any new money the government receives will be used to reduce the debt? I for one believe that it is more likely that spending and debt will be increased even more.
national private sector wealth = national govt_debt. Govt debt means the exact opposite of household debt.You can see USA sectoral balances(including the foreign sector) in figure 4 of
http://pragcap.com/resources/understanding-modern-monetary-system and
http://pshakkottai.wordpress.com/2012/02/27/national-debt-and-national-wealth-compared/
http://krugman.blogs.nytimes.com/2010/07/15/carter-reagan-revenue/
The fact that revenues grow because the economy grows, regardless of tax cuts or increases, is the source of the oft-quoted GOP message that "revenues grew after the Reagan tax cuts". Sure they did, just not BECAUSE of the Reagan tax cuts.
http://pshakkottai.wordpress.com/2011/10/16/us-gdp-vs-govt-spending-2/
GDP is approximately equal to five times govt_spending with various levels of taxation.
Our government is not honest with the data either. To mask inflation and reduce cost of living social security payments, the government altered the CPI market basket. The thought is, if you can no longer afford to buy steak, you'll buy hamburger instead, it's all the same. Greenspan still pats himself on the back for pushing the BLS basket change. Reduced quality of life, so what. Who cares if your grandparents worked all their lives and are now in the poor house. BTW, using the old method, our inflation is around 10%, and anybody who does their own shopping realizes this.
column of comments ever published. As Sam Clements is so frequently quoted---
"there are lies, damned lies, etc."
http://www.huffingtonpost.com/social/pshakkottai/announcing-huffpost-money_b_1311863_138326055.html
Reminds me of that ever true saying;"The truth will set you free". In our case to ignore that would be tantamount to risking the same fate as Greece........................we have enough problems and don't need to add this one.
http://www.huffingtonpost.com/social/pshakkottai/announcing-huffpost-money_b_1311863_138326055.html
Incidentally; your equations are way out and I must admit left me with ???. Could you please elaborate for us less mentally endowed? (No double talk allowed)
Then GW cut the, thus increasing the deficit, and the rest is history
Actually, I think cutting taxes from the 70% rates does work ala the Laffer Curve. That's where the Republicans went so horribly wrong. What worked at those extremely high rates had the opposite effect when the cuts went to far. Some Republicans still think this works; this is the Republican grift that is still going on. Really, it is all they got in the way of "ideas."
With the historicallyh low rates of taxation on the most wealthy that we have now, we just have less revenue and, therefore, bigger deficits. Please, just let the CBO "do the math".
We need to let the Bush Tax Cuts expire; a step in the right direction. Let's not hide this fact by distorting the calculations. Typical Republican "strategy"; fudge the numbers. Stop the grift!
Or would Obama simply need raise taxes "a little", and he'd get a surplus?
Next this professor says nothing about cutting spending. We need to cut 1 trillion a year from the federal budget for a start. But under Keynesian economics that I am sure this professor teaches this cannot happen.
Remember with the formula this professor does not like in the 80's disposable income grew 18%, the standard of living grew 20% and the economy grew 30%. All while government spending went from 24% of GDP to 22% of GDP. Compared to Keynesian economics today where disposable income is shrinking the standard of living falling and the economy growing at 1%.