Doesn’t Anybody Know the Score?
by Newt Gingrich and Peter Ferrara
While Katrina relief has now jumbled the numbers, the rapidly declining federal deficit projections this past summer revealed a critical challenge for national economic policy making. Once again, they showed that the scoring of the effects of major policy changes performed by the Office of Management and Budget and the Congressional Budget Office were highly erroneous.
The errors were not random. They were strongly and consistently biased against pro-market, pro-growth reforms, and they are the long-recognized results of outdated methodologies employed by federal scoring agencies. The end result is that such errors greatly hamper or prevent Congress from adopting policies that would maximize economic growth and personal prosperity.
In February, for example, OMB projected a federal budget deficit of $427 billion for the current 2005 fiscal year (ending in October). A few months later, in July, OMB projected the deficit at $333 billion. The February projection was off by almost $100 billion, or 28%. This episode is not unique. In February 2004, OMB’s projected deficit (for fiscal year 2004) was off by $109 billion.
CBO is no different. In March, CBO projected a deficit of $394 billion for the current fiscal year. Last month, its projected deficit was $331 billion. CBO’s numbers changed by $63 billion in five months. The changes in these federal deficit projections resulted because OMB and CBO had projected massive losses from the 2003 Bush tax cuts. Those losses never happened. Thus, in February 2003, OMB projected federal revenues of $2.135 trillion for fiscal year 2005. That was before the Bush tax cuts. Now OMB projects that, with the tax cuts, federal revenues for 2005 will be $2.140 trillion — slightly more than the revenues it projected before the tax cut.
OMB and CBO are not the only players in the scoring game. The Congressional Joint Committee on Taxation (JCT) and the Treasury Department also estimate the revenue impacts of tax policy changes. Their projections have similar problems. Consider the 1997 tax changes, which primarily involved a cut of 28.6% in the capital gains tax rate. According to a recent report from the American Shareholders Association by Dan Clifton, JCT estimated that revenues would increase $7.8 billion from 1997 to 1999, but decline $28.8 billion over the next seven years. Instead, the actual increase in federal revenues from capital gains taxes from 1997 to 1999 was more than 10 times higher — $84 billion. What about the projected losses later on? Capital gains revenues have now grown to double their levels of 1996, just before the tax cut.
For estate taxes, JCT estimates that total repeal would cost the federal government $70 billion a year, even though the death tax now raises only $20 billion per year. Academic analyses, on the other hand, estimate either no revenue loss or even a net gain.
The methodologies used by analysts across the federal government to score the impact of legislation still do not take into account the dynamic, pro-growth effects of policy changes. They continue to use mostly static methodologies that assume no significant changes in behavior in response to changes in incentives. The result of these antiquated scoring practices is that Congress is forced to discount any policy change that would increase economic growth or enhance efficiency in federal programs. Instead, Congress is constrained to consider legislation designed to meet a politically acceptable score from the CBO, even though experience demonstrates that the scoring will surely be erroneous — indeed, is effectively designed to be so.
Take Social Security. The CBO fails to recognize the growth impact of personal accounts for Social Security, which Harvard’s Martin Feldstein has estimated to be in excess of $10 trillion in present discounted value terms. CBO scores assume that stocks earn no more than bonds in the market, a historically false assumption which would render all stock investments irrational. Similar scoring failures prevent tax reform to make the tax code flatter, fairer, and simpler.
On health care, the adoption of modernizing technologies to enable doctors to prescribe drugs over the Internet and maintain medical records on the Web would save the Feds billions, and save lives as well. Federal scorers, however, count only the costs of acquiring the new technologies and not the resulting savings. So nothing has happened.
Federal scoring methodologies must be revamped to achieve the most accurate results possible. President Bush should start reform by ordering the OMB and Treasury to utilize whatever dynamic scoring methods are available to maximize accuracy. Congressional leadership should do the same with the CBO and JCT. Without such reform, Washington will be hopelessly blocked from adopting the pro-growth solutions necessary for the 21st century.
Mr. Gingrich was Speaker of the House and is a senior fellow at the American Enterprise Institute. Mr. Ferrara is a senior fellow at the Institute for Policy Innovation and director of policy for the Free Enterprise Fund.
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