The Dismal Science At Work

babinbudget-thumb-633x467-14415Devising sensible budgets is hard work. Whether it’s legislators considering the national budget or an average person working out her household budget, there are two major considerations. You  determine what you want to do and then you calculate how much that will cost and see if it is affordable. None of that is easy, especially at the national level. Let’s set aside the policy issues for the moment. How do legislators determine the cost of their proposals? Their best resource at present is the scoring developed by the non-partisan Congressional Budget Office (CBO).

The CBO does a pretty good job, meaning that no one likes their output. Policy proponents don’t like to hear how expensive their ideas are, and opponents think that CBO doesn’t account for all the negative impacts. This has led to ideas for how to “improve” CBO estimates, the latest of which is dynamic scoring. Superficially this seems like a fine idea. In essence it means that CBO estimates must account for consequential macro-economic effects. Presently, using static scoring, they only account for direct effects.

An example makes the difference easy to understand. Suppose you raise the excise tax on tobacco products. Using static scoring, you account for the increase in revenue, assuming no effects on habits or policies of users and producers. Using dynamic scoring, you would estimate the negative impact on tobacco sales, the impact of farmers switching to more lucrative products, etc. How far you take this is limited only by your schedule and imagination. Makes sense doesn’t it?

The problem is that the experts don’t know how to do this with any accuracy, so they place big error bands around their projections. Legislators either don’t understand them, or far worse, they choose the outer estimate that they like best. Clearly this is nonsense and that is precisely what the experts are telling legislators.

The kicker is that the House of Representatives just passed a rule that dynamic scoring must be used for any bill so designated by the responsible committee chairman. Nothing good is going to come of this.

There is a nuance. Dynamic analysis does make sense and is doable, so say the experts. This merely discusses the overall macro-economic impacts and generally indicates how they may impact budgets. Legislators could use this to get a basic idea of whether they are getting into deep waters or not. The next step, dynamic scoring, is flawed. It takes this analysis and plugs in numbers that are largely plucked out of the air.