As expected, yesterday that House of Representatives adopted as part of its Rules a provision requiring dynamic budget scoring. This controversial provision changes the way legislation is analyzed for budgeting purposes (see NY Times story “House Republicans Change Rules on Calculating Economic Impact of Bills”). Existing rules require legislation to fit in certain budget caps, otherwise a budgetary offset (i.e. new revenues or cuts elsewhere) are needed. Dynamic scoring allows projected future revenues based on the estimated macroeconomic effects to be counted as part of the overall cost of the legislation (reducing the need for an offset if the estimate is of a positive effect on revenues).
As I noted in an earlier posting, I am not a big fan of dynamic scoring. As a recent report from The Center for Budget and Policy Priorities points out, “the estimates are highly uncertain and subject to manipulation.”
But I believe that using the interest in dynamic scoring could have been an opportunity to increase our understanding of investments in intangibles. Unfortunately, that will not happen.
Under the new House rules, legislation that meets a threshold impact test that is equal to or greater than 0.25 percent of the projected GDP for that year must be scored using “macroeconomic scoring.” In addition, the chair of the House Budget Committee can require such scoring for any direct spending legislation that he designates as “major legislation” — see Rule XIII clause 8(d)(1)(B). However, the explanation on the House Budget Committee website makes clear that the rule will have a limit applicability:
Q. Why doesn’t this rule apply to appropriations bills?
A. This rule builds on section 402 of the Congressional Budget Act, which requires formal cost estimates for legislation. This longstanding provision of the Budget Act has never applied to appropriations bills. In addition, since the rule applies to legislation making large increases or decreases in budgetary effects, it would be unusual for an appropriations bill to meet the threshold because it would have to make such a large change in annual funding levels.
Q. Why does this rule exclude proposals like infrastructure and education funding that could benefit the economy?
A. The legislation applies to mandatory spending and revenue legislation. Pell grants and student loans are mandatory funding and would be covered by the rule if the legislation had a budgetary effect greater than 0.25 percent of the economy. The rule modifies existing requirements for formal cost estimates for reported legislation. The Congressional Budget Act does not require CBO to produce a formal written cost estimate for appropriations bills. As a result, the rule does not apply to appropriations bills. And even if it did, it almost certainly would not be triggered, since appropriations bills provide funding only one year at a time, and the change in spending caused by an appropriations bill is unlikely to reach 0.25 percent of the economy.
This is fatal flaw in the rule. As the Director of the Office of Management and Budget notes:
dynamic scoring can create a bias favoring tax cuts over investments in infrastructure, education, and other priorities. While the House rule would require dynamic scoring for legislation making large changes in revenues and/or mandatory spending, and makes it permissible at the option of leadership for any such legislation (even if modest), it would not apply to discretionary spending, ignoring potential growth effects of investments in research, education, and infrastructure. More insidious, economic models that find large growth effects of tax cuts are often based on the assumption that they would be paid for entirely through reduced spending – without taking into account at all the economic consequences the reduction in government investment.
If dynamic scoring is to be used on the revenue (tax) side, it must also be used on the expenditure side. For example, if it is both proper and possible to assess the macroeconomic impact on federal tax revenues of an R&D tax credit, such analysis should also apply to government spending on R&D.
One other point. Edward Lazear (former Chair of the Council of Economic Advisors in the Bush Administration) defends the use of dynamic scoring in today’s Wall Street Journal (‘Scoring’ Legislation for Growth). But he adds three important caveats:
First, to prevent manipulation, the CBO should be required to use the same macroeconomic model for all pieces of legislation. This will limit the influence of politics on the estimates. The models can be updated periodically, but not on a case-by-case basis.
Second, the CBO should be required to make its models and approaches public so that the economics community can comment on the validity of the estimates and legislators can attach their own weights to the estimates.
Third, the CBO should be required to use the best science available to model the economy. Although what is best will always be subject to debate, this stipulation, coupled with the requirement that the models be made public, will force the CBO to defend its assumptions, just as nongovernment economists do in their published work.
These are very important points that highlight why I have argued that such scoring should be supplemental and not mandatorily used for parliamentary budgeting rules.
We should take a step back and look carefully at our process. Lazear’s three points could help advance our understanding of macroeconomic effects of legislation as a supplemental analysis and if properly applied to investments as well as revenues. That would require the economics profession to take a serious look at the effects of investment — and hopefully improve their analysis.
Sadly, that is not what will happen.