We’ve just posted a brief reminder of the economic voodoo peddled by a certain well known U.S. economist, Arthur Laffer. Now we bring you a second, related example of economic prestidigitation: a devious and increasingly popular wheeze known as “dynamic scoring.” It emerged in the United States but has been seeping into the United Kingdom and other countries.
The basic idea is, in essence, that when you put together a tax policy plan you need to consider its “dynamic” effects on the economy. If you expect your plan to make the economy grow faster than it would otherwise have done, then tax revenues will presumably be higher than they would otherwise have been. And that feedback needs to be taken into account in the ‘dynamic’ model.
It all sounds so reasonable, right?
Wrong. And it’s so horribly wrong that we’re going to spend a bit of time discussing how and why it’s wrong.
We at TJN are a non-partisan organisation but even so we’re going to quote from this short, partisan video from U.S. Congressman Lloyd Doggett, because he lays it out in such clear terms. Via e-mail, a press release from Doggett notes:
“To those who have wondered what would be the top priority of this Republican-controlled Congress, now we know—deception, what some could even rightly call ‘tax fraud,’” said Rep. Lloyd Doggett. “ Republicans are compelling this House, for the first time in American history, to rely upon something they call ‘dynamic scoring’—a mere euphemism for whimsy, speculation, and wishful thinking—the thin veneer for a failed political ideology. Passing a balanced budget requires hard work, where everyone needs to lend a hand. Unfortunately, Republicans would rather use sleight of hand.”
The teensy problem with Dynamic Scoring is that economic forecasting is famously hopeless, and endlessly susceptible to the tweaks and loaded assumptions of the shills and ideologically-blinkered cut-taxes-at-all-costs brigade. As the OECD notes in a report on dynamic scoring:
“We have no idea of the magnitudes of likely responses by households and firms to many of the kinds of tax reforms often proposed in the real world, and still less idea of likely responses to changes in public spending programmes and regulations. We have no macroeconomic model that even incorporates the main features acknowledged by all as desirable, and no consensus on which of the multiplicity of radically different models best captures reality.”
Dynamic scoring also often involves circular argument: you begin with an assumption that a tax cut will lead to growth or reduced avoidance or higher tax revenues, then feed that assumption into the model, to produce a result that shows tax cuts will lead to growth and higher tax revenues! As the last post notes, of course, in the real world these models are bunk.
In the words of Shaun Donovan, director of the U.S. Office of Management and Budget:
“Estimates from different CBO [U.S. Congressional Budget Office] models of the long-run growth effects of a 10 percent tax cut differed by a factor of 15 – and ranged from positive to negative – when dynamic scoring was used.”
And there’s plenty more in that particular post, taking the arguments further. He also notes that dynamic scoring has in-built bias: it “ignores potential growth effects of investments in research, education, and infrastructure.” Which is quite a biggy.
In the words of Bruce Bartlett, an economist in the Reagan and George H.W. Bush administration:
“Republicans want to use dynamic scoring only for tax cuts. . . They refuse to acknowledge that spending, such as public works spending, also has dynamic effects. They should either do it for spending and taxes or not at all.”
In short, dynamic scoring is an out-and-out nonsense, and a crowbar for the worst kind of economic tomfoolery.
Will any of this cold shower stop the shills, lobbyists and tax-cutting politicians?
Of course not! You just select the radical model you want, feed in just the right assumptions, plug it into your dynamic scoring machine, and Hey Presto! A tax-cutting balanced budget!
As Doggett continues in his video:
“It’s deception. What some could even rightly called tax fraud, since it amounts to deliberate misrepresentation of tax data. . . . When the books won’t balance with the numbers that you’ve got, [they] say ‘use the numbers you would like to have.’ “
Update: read John McDermott’s devastating take-down in the FT:
If the advocates of this mathematical economic modelling technique get their way, then it could transform how public policy is assessed in Britain. In doing so, it could make arguing for tax cuts and a smaller state a lot easier.