Monday, January 5, 2015

Dynamic Scouring

Mark Thoma and Edward Kleinbard both have op-eds about Republican proposals for "dynamic scoring" of tax cut legislation. It would be helpful to point out that dynamic scoring is a euphemism for "secondary and indirect benefits" -- particularly those arising from what is known as the Keynesian multiplier.

Sandwichman has been documenting the controversy over secondary and indirect benefits in the early 1950s that eventually resulted in their virtual exclusion from standard cost-benefit analysis, as per Bureau of the Budget Circular A-47. Implementing dynamic scoring for tax cuts would, in effect, declare "multipliers for me but no multiplier for thee."

As the panel of consultant's report from 1952 outlined in excruciating detail, there are limits to the usefulness and transparency of incorporating secondary and indirect benefits in a quantitative cost benefit analysis. There are also huge pitfalls in disregarding these difficult or impossible to quantify outcomes. Familiarity with the panel's discussion could inform deliberation over the dynamic scoring proposal.

I have so far posted Parts I and II of the report. I have scanned in and proof read Part III but its considerable length poses some formatting challenges for posting on the blog.

Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

Part IB. Summary Response to the Commissioner's Instructions

Part IIA. Conclusions and Recommendations: Introduction

Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

Part III. Several Principles, and Some of Their Consequences


Thomas L. Hutcheson said...

There is a case for dynamic scoring of any government action that affects real income which will then feed back to some degree on revenues. In a recession when borrowing costs are low and the opportunity costs of some inputs are substantially less than their market prices, the increase in real income could be substantial. Since this kind of positive feedback is easier to track in public sector projects, use of "dynamic scoring" would be more applicable to public investment than to tax cuts. Since the magnitude of these increases are arguably much harder to estimate than direct budgetary effects, I doubt it wi wise to include them in CBO estimates. Certainly it would be an error to include them only for tax cuts.

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