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Thursday, September 14, 2006
Who's Afraid of Dynamic Analysis?
Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO), testified at a House Budget Committee hearing on dynamic analysis yesterday. He is a well-respected, center-right economist, and people take his opinion seriously. And he is a fan of dynamic analysis.
Lots of progressives worry that dynamic analysis could justify nasty tax cuts with voodoo-supply-side economics. But from a political perspective, dynamic analysis may not be such a bad thing.
Dynamic analysis, as you may recall, is just a way of figuring out how much a bill costs , or "scoring" a bill. The CBO already does some dynamic analysis, in that it tries to predict how people on a micro-level will react to a policy. The kind of dynamic analysis that Holtz-Eakin is talking about would open up scoring to predictions about how policy could affect macroeconomic trends, or how the economy works at the big-picture level.
Holtz-Eakin and his successor at CBO have been experimenting with macro-dynamic analysis, and the results have been pretty interesting. And the Treasury Department found that if the tax cuts were made permanent, they would make almost no impact on the economy. If CBO and Treasury had made such a claim when the tax cuts were being debated, it would have been much more difficult for anti-tax zealots to argue that tax cuts are good for the economy, and that they'll pay for themselves.
Plus, real dynamic analysis would also have to take into account the affect that deficit spending has on the economy, which could even show that tax cuts negatively impact economic growth. Peter Orszag at the Brookings Institute has done a lot of interesting work on this subject.
Now, not all forms dynamic analysis are equal. It all depends on how you do the analysis. We would need to see if a proposal to institute dynamic analysis treated spending and taxation fairly, and if the analysis was based on sound assumptions. Economists disagree on what a sound assumption really is, and it may be that economic models are just not capable of making the elaborate predictions required of macro-dynamic analysis.
So the debate might come down to the important question of whether dynamic analysis can be done reliably, as Leonard Burman of the Urban Institute testified at the Budget hearing. If it can't, we probably shouldn't use it.
Even so, politically speaking, the facts are on our side. We shouldn't be afraid of dynamic analysis. In fact, we might think about embracing it.
UPDATE:I mistakenly used the term "dynamic analysis" in this post, when I meant "dynamic scoring." Dynamic analysis is a way of determining the affect of a policy on the economy. Dynamic scoring uses dynamic analysis to assign a cost to a bill.
Posted by Matt Lewis
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