On the very first day of the 114th Congress, U.S. House leadership adopted a new, hyper-partisan and hyper-political rule that has the potential to add billions on top of billions to the federal deficit with every bill that passes.
So-called “dynamic scoring” completely invents a future where unlimited and unpaid-for tax cuts and loopholes for large corporations and the very wealthy create a more prosperous environment for us all — simply to circumvent the nonpartisan Congressional Budget Office that Republican and Democratic majorities in Congress have used since 1974. This rule passed with only Republican support, 234-172.
This strategy gives complete leeway to the Republican House majority to “pretend-then-spend.” They’re allowing the author of any bill for at least the next two years to invent an outcome where massive giveaways to special interests help everyone — with no budgetary, economic or historic evidence to back up their claims. When you couple this strategy of dynamic scoring with recent laws and Supreme Court cases that allow big corporations and the nation’s wealthiest to flood Washington with money to get their way, we are entering very dangerous territory. — U.S. Congressman Paul Tonko, 20th Congressional District, New York (“Viewpoint,” Albany Times Union, January 14, 2015, here).
On this blog in recent months I have followed the federal budget situation with growing alarm, and attempted to clarify the extreme danger it poses to our country and its economy. Rep. Tonko has accurately described the problem posed by the new “dynamic scoring” rule: The rule further enables the dangerous Republican agenda. The continuous deficit spending since the Reagan Administration, interrupted only by brief surpluses in the Clinton Administration, has finally brought the country to the brink of economic disaster, and this is indeed “very dangerous territory.”
The dynamic scoring rule requires the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to include “the economic effects of legislation . . . in a bill’s official cost to the Treasury” (“House Republicans Change Rules on Calculating Economic Impact of Bills,” by Jonathan Weisman, The New York Times, January 6, 2015, here). This rule underscores the fact that only the proposed amounts of changes in budget proposals are normally accounted for. CBO produces a ten-year “forecast,” but the forecast is not changed to reflect the estimated effects of legislation, as I have verified in my recent posts on CBO “forecasts.”
The official argument for dynamic scoring is this: “To predict the budgetary impact of a major federal policy accurately, analysts should take into account the policy’s potential macroeconomic effects.” (“Accurate Budget Scores Require Dynamic Analysis,” by Salim Furth, The Heritage Foundation, December 30, 2014, here.) That sounds sensible, but as the Center on Budget and Policy Priorities (CBPP) points out:
In reality, however, the House would be asking CBO and JCT [Joint Committee on Taxation] for less information, not more, and the new rule could facilitate congressional passage of tax cuts that are revenue-neutral only on paper.
CBO and JCT already provide macroeconomic analyses of some proposed bills as a supplement to the official cost estimates they produce. These analyses typically present a range of estimates of the legislation’s impact on the economy.
The new House rule, in contrast, asks for an official cost estimate that only reflects a single estimate of the bill’s supposed impact on the economy and the resulting revenue impact. (House “Dynamic Scoring” Rule Likely Will Mean More Tax Cuts — Not More Information” (PDF), by Chye-Ching Huang and Paul N. Van de Water, January 5, 2015, here.)
The concern is that this rule will be used to enable a one-sided point of view on the potential effects of legislation:
If highly optimistic economic and fiscal assumptions . . . are included in official cost estimates but then fail to materialize, the result will be higher deficits and debt. And as CBO, JCT, and other analysts have warned, tax cuts that ultimately expand deficits can slow economic growth, rather than increase it, because the higher deficits can create a drag on saving and investment (Id.).
And CBPP adds this understated caveat:
Dynamic scoring could facilitate congressional passage of large rate cuts in tax reform by making the rate cuts appear — on paper — less expensive than under a traditional cost estimate. That’s because some of the models of the economy and related assumptions used to produce a dynamic cost estimate might show some tax reform packages boosting economic growth and thereby generating additional revenue (Id.).
But these objections state the case far too mildly, and far too politely. Alas, this polite conversation about how dynamic scoring is really about trying to enable more tax cuts, which might lead to higher deficits and debt, simply avoids a very unpleasant truth: Our plutocrats have used our government to enrich themselves, and a close look reveals that the well has nearly run dry — but they keep scraping and gouging for more. It does not appear that they have made a calculation of when, if ever, they will have to stop.
Unfortunately, the “trickle-down” idea that tax cuts will even partially pay for themselves is entirely wrong-headed, and it is traceable, ultimately, to the rejection by mainstream economics of the Keynesian principle of effective demand. So is the “austerity doctrine,” which posits that cuts in government spending will create growth to make up for the lost revenues caused by reduced taxation. I won’t go back over my discussions of the disproof of the austerity doctrine accomplished by the correction of the Reinhart/Rogoff study “Growth in a Time of Debt” (GITD), which had been Paul Ryan’s sole “economic” support for the claim that the massive spending cuts in his 2012 and 2013 budget proposals would, somehow, stimulate growth and produce deficit-reducing tax revenues. (See “Reinhart, Rogoff, and Reality,” May 30, 2013, here; “Reinhart, Rogoff, and Ideology,” June 6, 2013, here; and “Reinhart, Rogoff, and Redistribution,” June 30, 2013, here.)
The bottom line is that reduced government spending is a direct contraction of the economy, the exact opposite of growth. Doing that to reduce budget deficits, instead of increasing taxation of corporations and the wealthiest Americans, has exactly the wrong macroeconomic result: It reduces growth, instead of increasing it.
Similarly, the “trickle-down” notion that still more tax cuts for the wealthiest Americans and corporations will somehow stimulate growth and increase tax revenues has been repeatedly disproved. The incredible idea that such tax reductions might even somehow pay for themselves is, quite frankly, absurd. In an earlier post (“Amygdalas Economicus: Perspectives on Taxation,” originally posted January 24, 2013, here) I included a report on the Heritage Foundation’s delusional trickle-down forecast for the “dynamic” effects of the Bush tax cuts:
In their April 27, 2001 report “The Economic Impact of President Bush’s Tax Relief Plan” (The Heritage Foundation, Center for Data Analysis Report #0101, April 27, 2001, here), D. Mark Wilson and William Beach predicted that the Bush plan would significantly increase economic growth and family income while “substantially reducing federal debt.” In fact, they predicted, the Bush plan would greatly increase government revenue, so much so that “the national debt would effectively be paid off by FY 2010.” In other words, they argued that the Bush tax cuts would more than pay for themselves, by an incredible amount.
What actually happened, however, is that the federal debt, which was at about $6 trillion in 2001, increased to about $13.6 trillion by the end of 2010 (Treasury Direct, here). The Heritage Foundation’s estimate of supply-side “stimulation” was off by almost $14 trillion, nearly one year’s GDP. In those years the economy suffered stagnation, not growth, climaxing with the Crash of 2008 and the Great Recession. So, whatever the actual isolated effects of the Bush tax cuts were, the Heritage Foundation’s prediction that they would more than “pay for themselves” was pure fantasy.
It is alarming to see this same Heritage Foundation, only a few years later, arguing for dynamic scoring on the ground that we need to improve the accuracy of macroeconomic predictions. The Republican agenda of massive tax cuts for the rich and corporations hasn’t changed, and neither has the nature of reality. Whatever the Heritage Foundation’s agenda for the future of America and its economy may be, it does not depend on the accuracy of macroeconomic projections.
The underlying problem lies in the gimmicky, static nature of supply-side forecasting, which is based in neoclassical supply-and-demand economics. The CBO and other mainstream forecasters can not realistically predict growth based solely on supply-side forecasting, because it only attempts to emulate optimal productive capacity. That is essentially a “static” model, completely ignoring the effects of demand on growth; so trying to make it more “dynamic” is like putting lipstick on the proverbial pig. To put it more politely: It involves nothing but subjective guesswork; it is a fertile field for biases and fantasies.
Demand factors, which create drags on growth, are excluded from direct consideration in supply-side models, and are unlikely to be considered in any supplemental macroeconomic analyses. The biggest deficiency of forecasting at this point is the failure to comprehend, much less reflect, the continuously growing inequality of incomes and concentration of wealth in America. Any serious “dynamic scoring” would have to reflect the effects on growth and tax revenues of the continuous concentration of wealth at the top, a concentration that has averaged more than $500 billion annually since 1979-80. It is now apparent that the demand-side effects of inequality growth materially depress the rate of income growth:
Of course, CBO’s underlying forecast does largely incorporate these effects, as experienced so far, by predicting only about 2.1% annual growth through 2025 — although it remains on the optimistic side, for growth since the crash has averaged less than 2% per year.
Moreover, given that the high level of inequality growth is a consequence of the tax cuts on top incomes and corporate earnings that created the national debt — now over $18 trillion (Information Station, December 5, 2014, here; Economic Research, Federal Reserve Bank of St, Louis, here) — any accurate scoring of proposed additional tax cuts would have to include a careful analysis of the resulting increase in wealth transfers to the top. Wealth concentration is an ongoing, dynamic process, continuously reducing the growth of tax revenues, and increasing deficits. In other words, the negative effects of failed trickle-down policy would have to be taken into account. The current dynamic scoring proposal is a one-sided affair which, as Congressman Tonko properly points out, only further obscures our perception of danger.
The national debt now exceeds $18 trillion. If it were increasing only by the amount of the interest payments on the outstanding balances, the debt would simply be naturally compounding, in an exponential growth. However, the debt is growing even more rapidly than that, because tax revenues remain insufficient not only to cover the interest payments, but also to cover current expenses.
The consequences were fully displayed in CBO’s February 2014 presentation of “The Budget and Economic Outlook: 2014 to 2024″ (here), which was extended through 2039 in the “Long-term Budget Outlook,” July, 2014, (here). The February 2014 report revealed a rapidly increasing danger posed by the exponential growth of the interest on the national debt. Here is CBO’s table from that report, showing that debt held by the public is projected to grow from $12.7 trillion in 2014 to $21.3 trillion in 2024, nearly doubling (government-held “internal” debt, e.g., the Social Security balance, will also grow, but the interest it accrues is not immediately payable):
This $8.6 trillion increase in debt held by the public is the accumulation of annual deficits which are projected by CBO to grow to $1 trillion per year by 2024, as reported by The Wall Street Journal (“Deficit Forecast Trimmed as Rates Stay Low,” by Damian Paletta, WSJ, August 27, 2014, here):
As the debt grows, the interest increases commensurately; the following table from the February 2014 report shows the CBO projections of interest costs, along with all other federal outlays, over the next decade:
These data reveal how much faster debt interest is projected to grow than any other expense category through 2024:
- Total mandatory outlays are projected to increase from $2.1 trillion in 2014 to $3.7 trillion in 2024, a 77% increase;
- Total discretionary outlays are projected to increase from $1.2 trillion in 2014 to $1.4 trillion in 2024, a 16% increase;
- The defense budget portion of discretionary outlays is projected to increase from $604 billion in 2014 to $719 billion in 2024, a 19% increase;
- Interest on the national debt is projected to increase from $233 billion in 2014 to $880 billion in 2024, a 278% increase.
Growing debt interest is steadily swamping the entire budget. Stunningly, debt interest is projected to surpass the entire defense budget by 2021, at which point defense spending is projected to be 52% of all discretionary spending. And by 2024, interest paid on publicly-held debt is projected to have grown to $880 billion, an incredible 39% of the total of interest and all discretionary spending ($1.383 trillion)! And, of course, inter-governmental debt is also growing and accruing interest, a major unresolved problem. A default on the national debt would crush Social Security, Medicaid, and Medicare, the so-called “entitlement” programs, the contributions to which have been replaced with interest-bearing government debt.
It’s a Distributional Problem
CBO has casually stated from time to time that this trend cannot be allowed to continue indefinitely. It has failed to evaluate, however, how much longer the U.S. government might be capable of continuing on with these perpetual deficits, and paying out debt interest as a perpetual annuity to bond holders. CBO blandly charts budget trends out to 2039, as if somehow it might be possible to get that far.
Wikipedia gives us this common, and commonly understood, definition of “bankruptcy”:
Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
By this legal standard, our federal government has been bankrupt for many years, unable to generate enough revenue from its taxpaying “customers.” But the creditors in this instance, at least those on this side of the Pacific Ocean, are not interested in repayment. They are content with a perpetual annuity paid for by those U.S. taxpayers who do not own government bonds.
This munificence has not been voluntarily permitted by taxpayers; it is enforced by the plutocrats that run our government. No corporation would dream of continuing on such a basis. A few days ago, for example, Target announced that it was shutting down its entire Canadian operations, closing 133 stores, having lost $2 billion in less than two years of Canadian operations. (Kavita Kumar, The Star Tribune, January 15, 2015, here). American taxpayers have no such easy way to cut their losses.
Tragically, the debt itself is a major benefit to the plutocracy, because with its unduly low tax burden, it is allowed to keep its ever more highly concentrating wealth. The wealthy elite that has requested “dynamic scoring” is not interested in being more precise about macroeconomic impacts. Rather, its financial interest lies in continuing to increase the debt as much as possible, because interest is paid on the debt in a perpetual annuity. That is why they perpetuate the “trickle-down” myth; and that is why, given the expanded opportunity offered by “dynamic scoring” to imagine that there will be fantasy growth from Republican austerity and tax cut proposals, they can be counted on to attempt to use this device to its fullest advantage.
Of course, the federal banking system has in the past been able to print more money when needed to feed this insatiable desire. But the $18 trillion of debt is the cost to all Americans of money “printed” so far to finance the increasing net worth of the wealthiest Americans. Including off-shore accounts, as I estimated more than a year ago, the net worth of the top 1% of America’s wealthiest households has increased by some $22-25 trillion since 1980, indicating that the economy is structured to reduce the wealth and incomes of lower income and wealth classifications.
That is where the money went, and that is why we have an intractable inequality problem. Our plutocrats have used our government to enrich themselves, and it does not appear that they have made a calculation about when, if ever, to stop. We can only wonder how much longer the rest of the world will tolerate this continuing abuse of its prime currency, the U.S. dollar, and when the next major collapse of the dollar will come. Obviously, the well has nearly run dry, and our nation has nothing to show for it but vast inequality, a rising depression, and a hopelessly bankrupt government.
JMH -1/19/2015 (ed. 1/21/2015)