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Fiscal Affairs: Making the United States More Like Greece

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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