Dynamic Scoring Gets Legitimacy

All of a sudden the concept of dynamic scoring isn’t being demonized. In fact, it’s actually become something of the darling of the liberal economic set.

If you aren’t familiar with the term-and kudos to you if you find better things to do with your time than think about this sort of thing-it refers to a process of trying to estimate the revenue affects of fiscal stimulus. Simply put, if a given dollar of revenue results in an increase in economic activity then that will naturally produce taxable revenues that accrue to the government. If that happens then the actual cost of the original stimulus should be adjusted downward to account for the increased revenue that the government collects.

It sounds pretty simple on its face but it has been the basis for several decades worth of political and economic argument. The public got its first taste of the argument in the 1980’s when supply side proponents began advancing the thesis the cost of a tax cut was less than the initial foregone tax revenue that resulted from the cut. Liberal politicians hated the concept and insisted on maintaining a static analysis of tax cuts. In other words, they insisted that the cost of a tax cut be measured by lost revenue and not adjusted for future revenue gains as a result of increased economic activity.

Nothing was ever really resolved as the two sides of the argument settled down in their bunkers and didn’t budge. The liberal faction was, however, successful in fending off the dynamic scorers in one important venue. They never allowed the Congressional Budget Office, which makes the final call on the cost of tax and spending programs, to use dynamic scoring. The CBO has never veered from the use of the static method.

But strange things seem to happen when faced with the prospect of spending a trillion dollars or so. It turns out that all of those liberal economists were just closeted dynamic scorers. At least, that’s the only theory I can come up with. The likes of Paul Krugman are all over the idea that the pending fiscal stimulus bill is going to so goose up the economy that we will get back a lot of what we spend in tax revenue. In fact, I saw a report today that said that the stimulus bill could pay for 40% of itself. Whew, does that make me feel better.

Now, I am not making this up. Here is a link to WSJ Real Time Economics which has the good news about the 40% savings. Here is another to Economist’s View which has a pretty wonkish discussion that attempts to rationalize the reason dynamic scoring makes sense for spending but not tax cuts and lastly here is a link to Krugman’s column on the subject. I particularly like the last line in Krugman’s column,” So thinking about how stimulus comes back via revenues is important.” I assume he means any stimulus, not just spending.

Now we have to see if the political class that fought dynamic scoring so fiercely climbs on board. My bet is they will since their economists are providing the cover and have you ever seen a politician who wouldn’t turn on a dime when it was expedient.

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