Live from DuPont Circle: Last Thursday two of the smartest participants at last Friday's Brookings Panel on Economic Activity conference--Martin Feldstein and Glenn Hubbard--claimed marvelous things from the enactment of JEB!'s proposed tax cuts and his regulatory reform program.
They claimed it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).
That would leave the U.S. economy in ten years producing $840 billion more in annual GDP than in their baseline. That would mean that over the next ten years faster growth would produce an average of $210 billion a year of additional revenue to offset more than half of the $340 billion a year "static" revenue lost from the tax cuts, making the net cost to the Treasury not $340 billion/year but $130 billion/year. And that would mean that in the tenth year--fiscal 2027--the $400 billion "static" cost of the tax cuts in that year would be outweighed by a $420 billion faster-growth revenue gain.
The problem is that if I were doing the numbers I would reverse the sign.
I would say that, on net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways--witness the subprime boom and the financial crisis.
I would say that the incentive effects would tend to push up growth by only 0.1%/year, and that would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed.
- If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
- If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
- If they were financed by cutting government programs, there might be a small boost to growth--0.1%/year--but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.
And there is substantial evidence that I am right:
You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.
You cannot find a drag on growth from the Obama tax increases.
You can find an effect of the Clinton tax increases--but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.
Over the past thirty years, the agencies that do the government's accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do--policies do affect growth rates. But is overestimating growth effects in a way that pleases one's political masters a less-wrong thing?
[Name Redacted] suggested at the conference that the right thing to do is probably to apply a substantial haircut to the growth-boost claims of political appointees.
The problem is that when I look at the example of "dynamic scoring" that was on the table at Brookings today--the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag--the haircut I come up with, for Republican policy proposals at least, is 112.5%.
Yet the near-consensus of the meeting was that dynamic scoring--done properly--was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do.
If there were to be a day less favorable to such a consensus conclusion, I do not know what that day would have looked like...