    [Joint House and Senate Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-122

            DYNAMIC SCORING: HOW WILL IT AFFECT FISCAL POLICYMAKING?

    =======================================================================

                                    HEARING

                                   before the

                            JOINT ECONOMIC COMMITTEE
                         CONGRESS OF THE UNITED STATES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 28, 2015

                                   __________

              Printed for the use of the Joint Economic Committee

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                            JOINT ECONOMIC COMMITTEE

        [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

    SENATE                               HOUSE OF REPRESENTATIVES
    Daniel Coats, Indiana, Chairman      Kevin Brady, Texas, Vice Chairman
    Mike Lee, Utah                       Justin Amash, Michigan
    Tom Cotton, Arkansas                 Erik Paulsen, Minnesota
    Ben Sasse, Nebraska                  Richard L. Hanna, New York
    Ted Cruz, Texas                      David Schweikert, Arizona
    Bill Cassidy, M.D., Louisiana        Glenn Grothman, Wisconsin
    Amy Klobuchar, Minnesota             Carolyn B. Maloney, New York,
    Robert P. Casey, Jr., Pennsylvania       Ranking
    Martin Heinrich, New Mexico          John Delaney, Maryland
    Gary C. Peters, Michigan             Alma S. Adams, Ph.D., North
                                             Carolina
                                         Donald S. Beyer, Jr., Virginia

                      Viraj M. Mirani, Executive Director
                     Harry Gural, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                         Opening Statements of Members

    Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana.........     1
    Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative
      from New York..................................................    10

                                   Witnesses

    Hon. Phil Gramm, Ph.D., Former Chairman of the U.S. Senate
      Committee on Banking, Housing, and Urban Affairs and Senior
      Advisor, U.S. Policy Metrics, Washington, DC...................     3
    Dr. Kevin A. Hassett, Director of Economic Policy Studies,
      American Enterprise Institute, Washington, DC..................     5
    Dr. John W. Diamond, Edward A. and Hermena Hancock Kelly Fellow
      in Public Finance, Baker Institute of Public Policy, Rice
      University, Houston, TX........................................     7
    Mr. John L. Buckley, Former Chief of Staff to the Joint Committee
      on Taxation, Washington, DC....................................     8

                           Submissions for the Record

    Prepared statement of Hon. Daniel Coats..........................    32
    Prepared statement of Hon. Kevin Brady...........................    32
    Prepared statement of Hon. Carolyn B. Maloney....................    33
        Chart titled ``Corporate Tax Revenue as a Share of GDP Near
          Historical Lows''..........................................    36
        Chart titled ``Total Tax Revenue as a Share of GDP''.........    37
    Prepared statement of Hon. Phil Gramm............................    38
    Prepared statement of Dr. Kevin A. Hassett.......................    40
    Prepared statement of Dr. John W. Diamond........................    49
    Prepared statement of Mr. John L. Buckley........................    60
    Report titled ``Dynamic Scoring and Infrastructure Spending'' by
      Douglas Holtz-Eakin and Michael Mandel submitted by Vice
      Chairman Kevin Brady...........................................    69
    Report titled ``House `Dynamic Scoring' Rule Likely Will Mean
      More Tax Cuts--Not More Information'' by Chye-Ching Huang and
      Paul N. Van de Water submitted by Representative Carolyn B.
      Maloney........................................................    87
    Questions for the Record for Dr. Diamond and Mr. Buckley and
      Responses submitted by Representative Maloney..................    92

            DYNAMIC SCORING: HOW WILL IT AFFECT FISCAL POLICYMAKING?

                                  ----------

                             TUESDAY, JULY 28, 2015

                 Congress of the United States,
                              Joint Economic Committee,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 2:02 p.m. in Room
    216 of the Hart Senate Office Building, the Honorable Dan
    Coats, Chairman, and Kevin Brady, Vice Chairman, presiding.
        Representatives present: Brady, Paulsen, Hanna, Schweikert,
    Grothman, Maloney, Delaney, and Beyer.
        Senators present: Coats, Cruz, Cassidy, Klobuchar, and
    Peters.
        Staff present: Cary Elliott, Connie Foster, Harry Gural,
    Colleen Healy, Jason Kanter, David Logan, Kristine Michalson,
    Viraj Mirani, Thomas Nicholas, Aaron Smith, Sue Sweet, and
    Phoebe Wong.

       OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S.
                          SENATOR FROM INDIANA

        Chairman Coats. The Committee will come to order. Members
    will be joining us. We are just finishing up on our caucus
    luncheons, and I am told the House has some votes but they will
    be drifting in also.
        We want to start. We have got a terrific panel in front of
    us, and we want to welcome our witnesses, including my former
    colleague and very good friend, Former Senator Phil Gramm, who
    I am not used to seeing on the other side of this dias. But I
    thank all of our witnesses for being here today to discuss the
    concept of dynamic scoring, a topic that has been much debated
    since the House passed a rule earlier this year requiring the
    Congressional Budget Office and the Joint Committee on Taxation
    to use dynamic scoring when evaluating, ``major legislation.''
        The Joint Committee on Taxation and Congressional Budget
    Office have long provided lawmakers with estimates of spending
    and revenue changes that would occur should a bill become law.
        For decades, however, these scores, as they are known, have
    largely ignored the largest driver of surpluses and deficits:
    economic growth.
        That is because the current method of estimation, known as
    ``static scoring,'' does not reflect the reality that the
    economy can grow or contract as a result of public policy. Most
    notably, it does not account for the massive effects a policy
    can have on labor supply or private investment, two of the
    largest drivers of the U.S. economy.
        Ignoring these effects leaves lawmakers unable to debate
    legislation with all available information at their disposal.
        While dynamic scoring has been debated for decades, it is
    no longer as it has been previously described, ``voodoo
    economics.'' In fact, advances in computer technology and
    economics have finally brought us from the question of ``Can
    dynamic scoring be done?'' to the answer of ``Yes, and here's
    how.''
        We have the rare opportunity today to hear from those who
    have been in the trenches of this debate as lawmakers,
    Congressional staffers, and academics.
        I would like now--well, I was going to recognize Ranking
    Member Maloney for her opening statement, but let me turn to
    the brief introduction of our witnesses today.
        We are really privileged to have people here who have long-
    time experience, and we are really looking forward to hearing
    what their thoughts are as we go forward with the enormous
    impact for decisions lawmakers have to make if we get this
    right.
        Senator Gramm served 6 years in the U.S. House of
    Representatives, and 18 years in the United States Senate. His
    legislative record includes landmark bills like the Gramm-Latta
    budget, which reduced federal spending, rebuilt national
    defense, and mandated the Reagan tax cut. And, the Gramm-Rudman
    Act which placed the first binding constraints on federal
    spending.
        As Chairman of the Banking Committee, Senator Gramm steered
    legislation modernizing banking, insurance, and securities law
    which had been languishing in Congress for 60 years.
        Those are but a few of the many substantive issues and
    reforms that Senator Gramm introduced and brilliantly managed
    to complete in his 24 years of service in both the House of
    Representatives and the U.S. Senate.
        Dr. Kevin Hassett is the State Farm James Q. Wilson Chair
    in American Politics and culture, and Director of Economic
    Policy Studies at the American Enterprise Institute. Before
    joining AEI, Dr. Hassett was a senior economist at the Board of
    Governors of the Federal Reserve System, and an Associate
    Professor of Economics and Finance at Columbia Business School
    in New York.
        Dr. John Diamond is the Edward A. and Hermena Hancock Kelly
    Fellow in Public Finance--boy, this is a mouthful here--at the
    Baker Institute, Adjunct Professor of Economics at Rice
    University, and CEO of Tax Policy Advisors LLC. His current
    research focuses on the economic effects of corporate tax
    reform, the economic and distributional effects of fundamental
    tax reform in individual portfolio allocation in the 2000s, and
    various other tax policy issues. He is co-author of ``The
    Fundamental Tax Reform: Issues, Choices, and Implications,'' a
    former editor for the National Tax Journal, and has served as
    staff on the Joint Committee on Taxation from 2000 to 2004. So
    welcome back, and sitting--there you are--sitting at the table,
    rather than back here.
        And finally, John Buckley has advised senior members of
    Congress on tax legislation, and written extensively on the
    subject. His career as a Congressional staffer spanned over 35
    years, most recently serving as Chief Democrat Tax Counsel for
    the House Ways and Means Committee until his retirement in
    2010. He also served as Chief of Staff of the Joint Committee
    on Taxation; and before that, Assistant Legislative Counsel on
    the House Legislative Counsel's office. Off the Hill he has
    been an Adjunct Professor at Georgetown University Law Center
    for the last several years.
        You know, I might take a little liberty here, Dr. Cassidy,
    if there are a few opening remarks you want to make, I am happy
    to do that. Otherwise, we will turn to our witnesses.
        Dr. Cassidy. I am ready for the witnesses.
        Chairman Coats. All right. Senator Gramm, you are on.
        [The prepared statement of Chairman Coats appears in the
    Submissions for the Record on page 32.]

      STATEMENT OF HON. PHIL GRAMM, Ph.D., FORMER CHAIRMAN OF THE
     U.S. SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS;
          SENIOR ADVISOR, U.S. POLICY METRICS, WASHINGTON, DC

        Dr. Gramm. Well, Mr. Chairman, first I am very happy to be
    here. I am especially honored to testify before your committee.
    We served for many years in the Senate together, and I
    appreciate you affording me this opportunity.
        I also need to mention that the Vice Chairman of the
    Committee, Kevin Brady, is an old friend of mine from Texas.
        Let me say that when I was in Congress I spent a lot of
    time working on issues related to the economy and the budget.
    And there may be people who have looked at more budget numbers
    than me, and I am sure there are people who have looked at them
    with a larger knowledge base than me, but I paid very close
    attention to budgets when I was a Member of the House and the
    Senate.
        The one thing that I discovered that is irrefutable is that
    the general condition of the economy overwhelms everything
    else. Over and over again if you study these budget numbers,
    you've got to conclude that we take actions to raise taxes, to
    cut taxes, to increase spending, to reduce spending and almost
    every member argues for every program they are for that it is
    going to be good for the economy. But the bottom line is, the
    changes in the economy swamp even the largest legislative
    change that we make.
        So obviously one of the objectives that I have always felt
    that we needed to have was to find a way to take into account
    in some manner the impact of our proposed policy changes on the
    economy because most of the things that we undertake we claim
    that we are trying to benefit the economy, whether it is an
    increase in expenditures on some government program, or whether
    it is cutting taxes, the objective that is presented in the
    debate is almost always: this is going to be good for the
    American economy, good for working people. And yet we, for all
    practical purposes, have had no consistent ability to make even
    a broad estimate of what the impact was going to be.
        It seems to me that there are three conditions that ought
    to be met for using dynamic scoring. And let me make it clear,
    I am not talking about dynamic scoring as a substitute for
    static scoring.
        I think we do an excellent job in static scoring. I think
    the Congressional Budget Office and the Joint Tax Committee
    have gotten better and better at it, but I see it as a
    supplement to static scoring because only when we bring the two
    together can we look at the cost and benefits of various
    policies.
        So what are the three conditions that I believe should
    exist for you to use dynamic scoring?
        First, I think you have got to have a clear and consistent
    economic theory that the policy is going to have a substantial
    economic impact.
        Secondly, you have got to have some evidence that it is
    going to have an impact within the period that you are writing
    the budget for, which is generally 10 years or less.
        And finally, you need a base of information that shows that
    in the past similar policies have produced empirical evidence
    that would substantiate the claim that you are trying to make
    about dynamic scoring.
        I think probably one thing we would all agree on here, no
    matter what our view is, is that the burden of proof ought to
    fall on people that are arguing that we should use dynamic
    scoring. Let me talk very briefly about two cases.
        I want to talk about the Republican and President Clinton's
    bipartisan agreement to balance the budget, cut the capital
    gains tax rate, and increase the family tax credit.
        The argument here is that the evidence is overwhelming. You
    had an estimate by the Congressional Budget Office for the five
    years after the proposal went into effect. When the five years
    had ended, we had actually seen GDP go up by $2.4 trillion
    above the CBO projection. That would be $4.7 trillion today.
        It made up $8,609 over the five-year period for every man,
    woman, and child in America. This was a significant policy
    change. And revenues rose by over a trillion dollars during
    this period. And so I think the evidence is pretty strong that
    any effort to control spending as a means to balance the
    budget, especially if it entails long-term policy changes like
    entitlement reform, should be scored dynamically, and based on
    the evidence of the Clinton era the scoring should be
    substantial.
        Finally, I think there is strong evidence to substantiate
    the claim that a revenue-neutral tax reform proposal, if it
    lowers marginal rates and eliminates inefficiency in the system
    by the elimination of deductions and subsidies, that there is
    evidence that that has produced strong economic results.
        Everybody forgets that by 1988, when the full rate
    reductions of tax reform kicked in, we were deep into the
    recovery. It was already one of the longest recoveries of the
    post-war era, and a third longer than the average recovery had
    been in the post-war period. And yet, GDP grew by $1 trillion
    during the first two years after the full tax cut.
        GDP went up by over $1,100 per person, and taxes rose by
    what today would be about $80 billion a year. So I think there
    is evidence in these two bipartisan cases that dramatic action
    on the deficit, or a revenue-neutral tax reform if it
    substantially lowers rates and makes the system more efficient,
    that in those two cases that we should strongly look at dynamic
    scoring.
        [The prepared statement of Dr. Gramm appears in the
    Submissions for the Record on page 38.]
        Chairman Coats. Senator Gramm, thank you.
        Dr. Hassett.

    STATEMENT OF DR. KEVIN A. HASSETT, DIRECTOR OF ECONOMIC POLICY
         STUDIES, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC

        Dr. Hassett. Thank you, Mr. Chairman, and Members of the
    Committee.
        My written testimony, which I guess is perhaps way too
    long, discusses the likely scale of economic impact of a
    significant tax reform, and gives actually some mathematical
    analysis of how wrong a static score can be, and for a typical
    capital income tax reform I discuss evidence that we could
    expect the static score to be off by about a factor of two.
        And so then the question is: Should we adopt dynamic
    scoring as part of the budget and fiscal policy process? And in
    the rest of my testimony I discuss those issues, and that is
    what I will focus on in my oral remarks.
        Dynamic scoring is not an unprecedented move for the
    government. Many branches of government must make forecasts in
    order to fulfill their statutory mandates. Even those forecasts
    are by their nature uncertain.
        The Federal Reserve, for instance, must formulate monetary
    policy in the face of macro economic conditions that remain
    uncertain in perpetuity, albeit to varying degrees. Its members
    regularly document their own forecasts, and Federal Reserve
    policy is set with an eye toward the impact that interest rate
    changes would have on the economy.
        The reliance of the Federal Reserve on economic models to
    set monetary policy is not controversial, nor a partisan issue.
    The absence of controversy regarding that reliance reveals a
    logical problem facing those who would dispute the usefulness
    of dynamic scoring for fiscal policy. For example, many tax
    reforms influence the economy by changing the cost of capital,
    a variable that depends on expected tax rates, depreciation
    rates, inflation, and the interest rate.
        The Fed tracks the economic impact of interest rate changes
    in part through the model of the cost of capital which
    influences business investments and other decisions.
        An identical change in the cost of capital can be generated
    either through a change in the interest rate or through a
    change in tax rates. The argument that it is acceptable to
    model the effects of an interest rate change in one quarter of
    the government with such a model but not to model the effects
    of the tax rate change in another corner of the government
    strikes me as simply illogical.
        Though the context of dynamic scoring and the context of
    monetary policy certainly are very different, in both cases the
    proper responses for the forecast incorporate a nonpartisan
    staff's best judgment of what the economic analysis shows.
        The uncertainty economists face when evaluating fiscal
    policy is not greater than the uncertainty that they face when
    evaluating monetary policy. If we use models for one
    application, we can use models for both.
        As does the Fed in its analysis of economic conditions, so
    should the staff of the Joint Tax Committee and others tasked
    with dynamic scoring proposals incorporate sensitivity
    analysis, a range of perspectives, and the best thinking of the
    academic community.
        If there are many available models for a specific question,
    the staff should evaluate the broad range of them and then come
    to a considered judgment regarding the relative weights of the
    different results.
        It is worth underscoring that this leaves discretion in the
    hands of the Joint Tax Committee staff, rather than any one
    model, in recognition of the necessity of human judgment in
    formulating views based on economic models, rather than giving
    one specific model the final word.
        The last part of my testimony highlights a recent
    development that is at a pretty advanced stage at the American
    Enterprise Institute where we've thought very long and hard
    about what it will take for dynamic scoring to be widely
    accepted and also fully transparent.
        And we have set up something that we call the ``Open Source
    Policy Center'' where we have developed two types of models.
    One is the type of model that draws on individual income tax
    data and scores tax proposals on a static basis in a way that
    is very, very similar to the types of scores that you get from
    the Joint Tax Committee now.
        And second, in collaboration with the BYU Macroeconomics
    and Computational Laboratory and professors from BYU and MTSU,
    we have developed a dynamic model of the economy which we have
    bridged to the static model, and we have got a number of
    collaborators all around the country and data users that are
    already using these models.
        They are fully open source, and every single assumption
    that anyone could make can be tested and sensitivity analysis
    can be performed.
        It is our view that as we move toward dynamic scoring that
    what we need to do is think of ways that we can take the
    academic community and connect them to the policy community in
    a fully transparent way. And at AEI we have made a large
    commitment over the last few years to develop a fully open
    source model that can be accessed by Congressional staffers and
    even members themselves. We have got a Web interface to make it
    easy to use.
        We hope that the OSPC, the Open Source Policy Center,
    evinces a level of transparency and technical rigor that serves
    as an example for how dynamic scoring should proceed going
    forward.
        I think that it can be extremely productive to help us
    think about policy if we see what the Joint Tax Committee or
    the CBO's judgment about what the dynamic score is, and we know
    why they made the judgment that they did, and we can test our
    own judgment against it.
        Congress and the United States would benefit more generally
    from dynamic scoring. Much work remains to be done in fleshing
    out exactly how such a system of dynamic scoring is going to
    work in practice, but the obstacles to transitioning to a world
    where it is done are not insurmountable. In fact, there is no
    reason to delay the beginning of the implementation.
        Thank you, Senator.
        [The prepared statement of Dr. Hassett appears in the
    Submissions for the Record on page 40.]
        Chairman Coats. Dr. Hassett, thank you.
        Dr. Diamond.

    STATEMENT OF DR. JOHN W. DIAMOND, EDWARD A. AND HERMENA HANCOCK
       KELLY FELLOW IN PUBLIC FINANCE, BAKER INSTITUTE OF PUBLIC
                  POLICY, RICE UNIVERSITY, HOUSTON, TX

        Dr. Diamond. Chairman Coats, Ranking Member Maloney, and
    Members of the Committee, thank you for inviting me to present
    my views on the importance of dynamic analysis and dynamic
    scoring.
        Let me begin by reviewing the most recent budget
    projections. CBO projects that under the extended baseline by
    2040 revenues will be 19.4 percent of GDP, as opposed to 17.4
    percent over the last 40 years; while spending will increase to
    25.3 percent of GDP, as opposed to 20.1 percent over the last
    40 years.
        Clearly we have a spending problem. This implies that in
    2040 the deficit would be 5.9 percent of GDP, and the federal
    debt would be 103 percent of GDP. But this projection is far
    from certain.
        Under CBO's alternative fiscal scenario, the federal debt
    is projected to reach 175 percent of GDP by 2040. There is also
    uncertainty regarding behavioral parameters and the underlying
    economic variables used in the projections.
        In addition, there is uncertainty related to the economic
    effects of enacting new policies. For example, CBO estimates
    that including the macro economic effects of higher marginal
    tax rates, larger deficits, larger transfer payments, and
    increased federal investment would increase the projected
    deficits in 2040 from 5.9 to 6.6 percent.
        Currently, the economic effects of enacting new policies is
    not considered in the budget process, even though other
    assumptions in use create more uncertainty.
        Why should we use dynamic analysis? Let me propose an
    example. Consider two proposals. The first raises $200 billion
    in revenue by taxing capital gains and dividends and increases
    tax expenditures by $200 billion by expanding child credits.
        The second proposal would raise $200 billion in revenue by
    reducing child tax credits and reduce revenues by $200 billion
    by lowering the capital gains and dividend tax rates. The
    conventional estimates would view these two proposals as
    roughly equivalent. However, analyses by JCT, the Office of Tax
    Analysis, the OECD and myself and Alan Viard, clearly show that
    the first proposal would decrease economic growth and increase
    the deficits, while the second would increase economic growth
    and lead to deficit reduction.
        It is important that we account for these differences in
    the policymaking process. There are several important issues
    regarding how to implement dynamic analysis to improve the
    budget process.
        While providing a dynamic score is important, the primary
    goal of dynamic analysis should be to compare the macro
    economic effects of various provisions. And while examining
    every provision on its own would be impossible--we do not have
    enough time nor the resources on the staff--there are times
    when it makes sense to examine a single provision.
        For example, JCT recently provided a dynamic analysis of
    the effects of permanently extending 50 percent bonus
    depreciation and found that it would increase GDP by 0.2
    percent over the budget window.
        Another interesting study may be a look at a temporary
    extension of bonus depreciation and a comparison of those two
    policies. We must analyze proposals not only with positive
    effects, or ones that we expect to have positive effects, but
    we also need to analyze proposals that we expect to have
    negative economic effects.
        Identifying harmful proposals is just as important as
    identifying proposals that increase economic growth. Dynamic
    analysis should also examine the effects of related provisions
    separately for large policy reforms.
        For the BRT I examined the Tax Reform Act of 2014. It would
    have been very interesting to split that analysis into three
    separate analyses: one of corporate tax reform; one of a move
    to a territorial system; and one of the effects of the
    individual income tax reforms in that legislation.
        Finally, let me just say that we need to include the debt
    service cost in both the short and long run, that those effects
    must be considered when we're looking at analyses of tax and
    spending proposals.
        It is also important to note that the macro economic
    aggregates are not the only information that we should provide
    to policymakers. Some measure of welfare is also important, or
    a measure of the changes in distributional effects.
        Finally, public disclosure is imperative and as much
    information as possible should be released to the public. At a
    minimum, enough information should be released so that outside
    entities could replicate the work.
        While dynamic analysis will provide valuable information
    about the relative economic effects of alternative policies, it
    will not solve the fiscal crisis facing the United States.
    Policymakers will still face many tough decisions in the years
    ahead.
        Thank you.
        [The prepared statement of Dr. Diamond appears in the
    Submissions for the Record on page 49.]
        Chairman Coats. Thank you.
        And, Mr. Buckley.

      STATEMENT OF JOHN L. BUCKLEY, FORMER CHIEF OF STAFF TO THE
              JOINT COMMITTEE ON TAXATION, WASHINGTON, DC

        Mr. Buckley. Thank you, Mr. Chairman and Ranking Member
    Maloney for the opportunity to participate in your hearing
    today.
        I understand that the decision to use dynamic scoring has
    largely been made by the Congress, but I believe there are
    still issues remaining with respect to its implementation and
    the interpretation of its results.
        First, I think that the current state of the art when it
    comes to macro economic analysis of changes in federal fiscal
    policy simply does not provide the level of certainty or
    consistency that is required in an official budget score.
        For example, the Joint Committee on Taxation and the
    Congressional Budget Office do not have common approaches to
    the issue of dynamic scoring. Since both use different models
    and different sets of assumptions, the same proposal could
    receive dramatically different budget scores depending on which
    entity did the scoring.
        Also, it does not provide the consistency that Professor
    Diamond suggests is necessary to compare competing proposals
    because the difference in the score may only reflect which
    entity is scoring the proposal.
        Second, there are some models that I think are simply
    unacceptable for being used in dynamic scoring. Those models
    are called ``Forward-Looking Models.''
        They are also the models that typically produce the
    greatest growth effect. Those models have as an underlying
    assumption that the Congress will enact deficit reduction
    legislation in the future necessary to solve the budget problem
    that Professor Diamond so accurately described.
        I simply believe you cannot have the official budget score
    of a piece of legislation dependent on the assumption that
    Congress will do in the future what it is unwilling to do
    today--and that is, to enact major deficit reduction
    legislation.
        Also, you cannot have the Congressional staff making
    predictions of what you might do in the future on deficit
    reduction. So those types of models I think you just have to
    set aside and not use for dynamic scoring.
        Also, I think you need to understand that all of these
    macro economic models are mathematical formulas. They do not
    attempt to measure the impact of the tax policy on our actual
    economy, or based on actual human behavior. That would be far
    too complex to measure to reflect in a mathematical formula, no
    matter how complicated the formula would be.
        Therefore, they measure the impact against a hypothetical
    economy constructed through assumptions that are often counter-
    factual in the sense that they are contrary to observable
    facts.
        Also, the basic theory in the models assumes that increases
    in labor supply or capital, the factors of production, will
    automatically translate into greater economic growth.
        I think you have to question that theory. For example, I
    think a simple question is: What is the biggest economic
    challenge faced by this country?
        Is it lack of job opportunities that could support a
    middle-class family?
        Or is it the fact that we have too few people looking for
    work?
        Now I know what I think is the answer to that question. It
    is lack of job opportunities. Yet the models assume it is the
    lack of people looking for work which is the economic problem
    we are facing. They solve the issue of unemployment, or
    underemployment simply by assuming that it does not exist.
        Finally, Mr. Chairman, during the period after 1980 and
    before 2009, we essentially ran a series of experiments on the
    theories underlying the dynamic scoring models.
        With one exception, the rate increases enacted in 1993,
    almost all major tax legislation was consistent with the
    theories that underlie these economic models. Essentially,
    there was a real-life experiment whether those theories were
    correct. The results proved that they were not.
        The large marginal rate reductions were supposed to
    increase savings. The savings rate declined precipitously. The
    1993 tax increases were supposed to reduce labor supply. Labor
    supply grew after those tax increases and reached a record in
    2000.
        The 2001 rate reductions were supposed to increase labor
    supply. Labor supply began to decline.
        So there is a long history here that I think the Committee
    has to take into account and should discuss the basic
    underlying premises of these models.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Buckley appears in the
    Submissions for the Record on page 60.]
        Chairman Coats. Well thank you to our witnesses. A number
    of questions have been raised here that I look forward to
    having a discussion on.
        I deeply regret that I have a conflict with the
    Intelligence Committee briefing us on the Iranian Agreement
    that I need to go to. So I am going to turn over the gavel to
    Vice Chairman Brady in just a moment.
        I first want to recognize Chairwoman Maloney, the Ranking
    Member on the House side. I was hoping to delve into the
    relationship of monetary changes enacted by the Fed in terms of
    how that might affect the dynamic scoring model.
        As we know, that information in terms of what the Fed may
    be thinking and doing would not be available to us in terms of
    going forward. We can take some guesses, but I would hope
    someone would get into that answer. I wish I could be here. I
    apologize for having to do double duty here.
        But let me ask Congresswoman Maloney to give her opening
    statement, and then I will turn it over to Vice Chairman Brady
    for his statement, and then we will go to the questions.

    OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A
                   U.S. REPRESENTATIVE FROM NEW YORK

        Representative Maloney. Thank you so much, Mr. Chairman,
    and thank all of the panelists. Last month this committee held
    a hearing on so-called ``fair value'' accounting, a method of
    calculating the impact of federal lending programs that will
    make them appear more expensive.
        Today the Committee turns its attention to dynamic scoring,
    a method of analyzing and quantifying the budgetary impact of
    tax cuts that will make them appear less expensive.
        Both methods are very problematic and in both cases they
    change the rules of the game so my Republican colleagues can
    get the results that they want. Dynamic scoring has been
    conservatives' Holy Grail for many years. This is because if
    tax cuts appear to cost less, it will be easier for Congress to
    pass more of them.
        But there are serious problems with dynamic scoring. One
    problem is that it provides results that are highly uncertain,
    vary widely, and could be subject to manipulation. Let's take
    the example of former House Ways and Means Chair Dave Camp's
    tax reform legislation in the last Congress.
        The JCT performed a dynamic analysis to see how much
    additional revenue the tax plan could return to the Treasury.
    And it is up on the screen right now. They used eight different
    models, and they came up with eight different answers, varying
    from $50 billion to $700 billion. The largest estimate was 14
    times the size of the smallest estimate. And which estimate did
    Chairman Camp highlight? $700 billion, the highest one. This
    leads to two more serious problems with dynamic scoring.
        There is no consensus on which dynamic scoring model is the
    most appropriate. And the models rely on assumptions that are
    sometimes wildly unrealistic, as Mr. Buckley pointed out in his
    testimony.
        For example, one dynamic scoring model assumes that if the
    debt increases as a share of the economy future Congresses will
    deal with the problem. The model assumes that in the future
    there will be no unemployment. The fact is that with dynamic
    scoring budget analysts will be forced to choose between deeply
    flawed models.
        Former CBO Director Rudolph Penner has said that, and I
    quote, ``Dynamic scoring would force analysts to make more
    judgment calls than they do today. Quality control would be
    difficult, and that implies a high risk that ideological biases
    will pollute the analysis.'' End quote.
        There is yet another serious issue with dynamic scoring.
    New rules require a single estimate. Until now, the Joint
    Committee on Taxation and CBO have been required at the request
    of the Chairman of the Ways and Means Committee to provide a
    range of dynamic analysis estimates to reflect the different
    models and assumption choices. But the new rule passed by
    Congressional Republicans requires JCT and CBO to provide a
    single revenue projection, and the estimate is official, not
    advisory. The example of Dave Camp's bill shows that dynamic
    estimates for major tax bills can differ by hundreds of
    billions of dollars. If the Camp bill had become law and the
    $700 billion figure proved wrong, deficits would explode.
        Because the results are so unreliable, dynamic scoring will
    compromise the accuracy and integrity of the federal budgeting
    process. Former Federal Reserve Chairman Paul Volcker has said
    simply, and I quote, ``I won't believe the numbers.'' End
    quote.
        And what happens if the markets come to doubt the integrity
    of the scoring process? Former Federal Reserve Chairman Alan
    Greenspan has said that, and I quote, ``Should financial
    markets lose confidence in the integrity of our budget scoring
    procedures, the rise in inflation premiums and interest rates
    could more than offset any statistical difference between so-
    called static and more dynamic scoring.'' End quote.
        Republicans' decisions to use dynamic scoring, a highly
    unrealistic and deeply flawed method, may by itself have
    negative consequences that overwhelm whatever positive revenue
    effects that could be gained by cutting taxes.
        There is still another problem with dynamic scoring as
    implemented by this Congress. It strongly biases policy towards
    tax cuts. The new rule applies dynamic scoring only to tax
    cuts, not to discretionary spending.
        There is a broad consensus among mainstream economists that
    investments in infrastructure, education, and research and
    development can have a strong stimulative effect. But the new
    rules do not apply to discretionary spending.
        For this reason, these investments will seem very expensive
    relative to tax cuts, and Congress will be more likely to cut
    them. But does this mean that we should apply dynamic scoring
    to discretionary spending proposals as well?
        No. Because an accurate and impartial method of dynamic
    scoring remains far beyond the reach of economists and budget
    analysts. Until those models improve vastly, there is little
    justification for using dynamic scoring on either tax bills or
    spending bills.
        The dynamic scoring rule serves only one purpose. It helps
    Republicans reach their Holy Grail, rigging the rules so it is
    easier for Congress to cut taxes.
        Bruce Bartlett, former aide to President Reagan, put it
    this way: Dynamic scoring is, and I quote, ``is not about
    honest revenue estimating, it's about smoke and mirrors to
    institutionalize ideology.'' End quote.
        I look forward to our witnesses' testimony and answering of
    our questions. Thank you, and I yield back.
        [The prepared statement of Representative Maloney appears
    in the Submissions for the Record on page 33.]
        Vice Chairman Brady [presiding]. Thank you, Mrs. Maloney.
        I want to thank each of the witnesses for being here today.
    For the sake of time, I have an opening statement that is so
    compelling it will bring you to tears, but . . .
        [Laughter.]
        For the sake of the hearing, I will just submit it for the
    record.
        [The prepared statement of Vice Chairman Brady appears in
    the Submissions for the Record on page 32.]
        And I will point out that I was involved for the past three
    years in Former Chairman Camp's tax draft proposal.
        Now the reason there are a number of scoring elements is
    that the first five are the routine static scoring models that
    Joint Tax uses today, and in fact which our Democrat friends
    rely upon for all of their proposals and did so.
        The last two are dynamic scoring models which were used to
    score the economic impacts of the Comprehensive Immigration
    Bill, which our Democrat friends as well held as gospel. What
    Chairman Camp was seeking to do was really use the range of
    models available to Joint Tax today, but the newer, more real-
    life models to try to estimate Chairman Camp's tax proposal.
        Senator Gramm, you have obviously a key background in
    economics. You have sat where we've sat, a leader of key fiscal
    solutions on budget, on taxes, on financial services. We hope
    to move tax reform that is comprehensive, that creates lower
    corporate taxes, a territorial system, lowers the disincentives
    for work and savings and investing in the United States, and do
    so we hope over the next two years or so.
        Sitting in our seats, you know, what is the single greatest
    benefit you believe policymakers can gain from dynamic scoring?
    Just how valuable is it to both sides as we weigh major fiscal
    issues such as tax reform?
        Dr. Gramm. Well, Mr. Chairman, first of all I think it is
    unfortunate that the whole dynamic scoring debate is so focused
    just on tax cuts.
        Dynamic scoring is about trying to take into account the
    impact of economic policy adopted by Congress on the economy,
    and on revenues, and on spending.
        It is far more than just a debate about tax cuts. It is
    interesting, because Kevin made the point very convincingly to
    me that the Federal Reserve Bank relies on estimates every
    single day.
        All of their policies are based on dynamic scoring as to
    what they are trying to achieve. So whatever Paul Volcker said,
    or Alan Greenspan said--and I respect both of them--every day
    they worked at the Federal Reserve Bank they were dealing with
    dynamic scoring in trying to implement monetary policy.
        So the idea that we've got all these economists at the
    Fed--Kevin was there; they were better in those days----
        [Laughter.]
        And we have got all these economists that are scoring
    monetary policy that are looking at its impact on interest
    rates, and growth, and employment, all of which are estimates,
    all of which are imperfect, but they use it every single day
    and nobody says anything about it. Nobody seems to think it is
    unreasonable, but yet the idea that the Congress would do it
    when we are changing the policies of the country, I think that
    is an unreasonable position to take.
        I think there are two cases where the empirical evidence is
    pretty overwhelming that government policies have in the past
    had some predictable impact on the economy and on revenues. And
    I think one of them is dramatic reductions in the federal
    deficit through spending control.
        And I don't have any doubt whatsoever that a dramatic
    reform of entitlements that affected the long-term deficit
    position of the country would create incentives for people to
    invest because of enhanced confidence and to consume. So--and
    if you look at the Clinton-Republican Congress compromise, the
    five years that the program went into effect, it outperformed
    the economic impact estimated on a static basis by $2.4
    trillion in GDP, and $1.1 trillion in tax collection.
        I also think that the other case where the evidence is
    strong is on the bipartisan 1986 Tax Reform Act. We were way
    into the recovery. The economy was getting weaker. The
    Congressional Budget Office was projecting a decline in the
    growth rate. That tax reform gave a second wind to the economy
    and clearly its impact was positive and the country benefitted
    from it.
        I think in those two cases, both of them were bipartisan
    efforts, that the case is pretty strong empirically for the use
    of dynamic scoring.
        Vice Chairman Brady. Thank you, Senator. I am going to wrap
    up my time, except I want to, one, congratulate Dr. Hassett on
    the Open Source Model. I think it is critical for those who
    have ideas on how we become competitive and grow this economy
    to have models, to be able to plug those ideas in to look at
    what that impact could be.
        A quick question for both you and Dr. Diamond. You know,
    the biggest criticism is that dynamic scoring is simply not
    ready. That somehow the technology, economic knowhow simply are
    not there.
        Senator Gramm made the point, you know, in the 1980s and
    the 1990s, static scoring missed it by a mile. And so can you
    point out to us what advances have occurred over the past two
    decades that make this more accurate in real-life for us?
        Dr. Hassett. Thank you very much, Mr. Brady.
        And, you know, there have been, and there constantly are
    advances in our ability to model. But I think it is very, very
    important to emphasize that as policymakers what you need to do
    at a moment in time is set policy based on what the best
    knowledge that we have is. That if we had perfect knowledge,
    then all economists could retire and it might be a perfect
    world with no economists, but we are going to constantly be
    learning things.
        So the notion that we are going to learn more should not be
    an obstacle to using the best analysis that we have. And I can
    give an example. I actually agreed with a lot of your
    statement, Mrs. Maloney, and you raised some very important
    concerns.
        But let's think about the eight different models. And I
    unfortunately did not see your slide ahead of time, but it
    looked like all of the estimates of the impact of the plan were
    that--were positive.
        And so the notion that we have eight different models with
    lots of different assumptions that assume that this responds a
    lot, and that responds a little, and the other does the
    opposite, and no matter how you look at it if all the models
    are saying that there is a positive effect on growth, that the
    dynamic score is below the static score, then it just does not
    make sense to me to say that zero is the right answer.
        And I envision a world where people that I have the highest
    regard for, like Tom Bartol or Doug Elmendorf, look at a vast
    amount of output. They look at the broad range of knowledge
    that we have, and they make a considered judgment about what
    the best answer is.
        I absolutely share your concern that if a partisan person
    were to make that judgment, then people would stop trusting it.
    But I think that that is already a problem, right? So I think
    that we do trust what CBO and JCT do right now because they've
    got such a strong track record of hiring nonpartisan staff.
        I do not think that allowing them to use their own economic
    expertise to improve their judgments is going to change that.
        Vice Chairman Brady. Thank you.
        Dr. Diamond.
        Dr. Diamond. I am not sure there are really any
    advancements. What I would point to is just a fundamental
    misunderstanding of modeling by detractors of dynamic scoring,
    and Mr. Buckley just cited two of the most fundamental. Let's
    start with the forward looking assumption. Critics say, people
    cannot be forward looking, but I think we are all forward
    looking.
        Do you think about your future? Do you think about what is
    going to happen in the future? I think we all do. So when we
    are modeling, we have a choice. Do we want a model that assumes
    people are forward looking? Yes, we know they are going to make
    mistakes. But on average, their mistakes will cancel out. Some
    people will assume that wages will be higher, and some people
    will assume they will be lower, but on average the forward
    looking assumption implies that people do not make the same
    mistake. And they do not make the same mistake over and over
    and over.
        The models Mr. Buckley would like to use, called myopic
    models, not only assume that people make the same mistake every
    year, year after year, forever; it assumes that everybody makes
    exactly the same mistake.
        That is the worst model to use in many circumstances. And
    he claims that the reason we should not use the models is
    because the assumptions of forward looking models are
    unrealistic. But on the first day of Standard Principles of
    Economics, I always teach the same thing: Class, what we are
    going to learn is that simplifying assumptions are necessary,
    but they are not realistic.
        What we need is a model that has predictive power, not a
    model that looks exactly like the real world. What we want is
    to predict things accurately.
        Let's think about the most standard economic model. It
    assumes things such as perfect markets. Many buyers and sellers
    on both sides. Firms that sell perfectly identical products. No
    barriers to entry. These are unrealistic assumptions. Should we
    throw that model out? That model is the simple model of supply
    and demand. Basing arguments on assumptions you do not
    understand is not a good way to choose dynamic scoring models.
        Vice Chairman Brady. Thank you, Dr. Diamond.
        Vice Chairman Maloney, former Chairman.
        Representative Maloney. Thank you so much, and I thank all
    of you for your comments. But I would like to ask Mr. Buckley,
    I would like to read a statement to you by Former Federal
    Reserve Chair Alan Greenspan, and I quote, ``We should be
    especially cautious about adopting technical scoring procedures
    that might be susceptible to overly optimistic assessments of
    the budgetary consequences of fiscal actions.'' End quote.
        So if we applied dynamic scoring to tax cuts, is there a
    risk that we could overestimate the government revenues?
        Mr. Buckley.
        Mr. Buckley. I believe there is. But let me first take the
    opportunity to respond a little bit to what Professor Diamond
    said.
        My main objection to forward looking models is not
    assumptions of forward looking. It is that they require an
    assumption by the modeler that the Congress will enact deficit
    reduction legislation in the future.
        They don't score the bill before you. They score the bill
    before you assuming that you will take action that as of yet no
    one has been willing to put forward.
        But to answer your question, I think you should be
    conservative in budget estimates for the same reason that
    corporations are not permitted to take into account the
    benefits of their investments when reporting to shareholders.
    The temptation to be overly optimistic is a little too large.
        Even with independent auditors, no matter how certain the
    corporation is that its investment will be quite profitable, it
    has to record that investment at cost and take into account the
    benefits when they accrue. And I believe that is the
    conservative path that federal budgeting should also follow.
        Representative Maloney. Okay, Dr. Diamond, would you like
    to respond to Mr. Buckley's observations?
        Dr. Diamond. Yes, I would. The second argument is that the
    models are unreliable because they do not include rising debt
    levels that cause the economy to blow up. Let's start with one
    model that JCT uses. The MEG model assumes that Congress is
    going to do nothing and that you are going to let the U.S. turn
    into Greece.
        That model is making an assumption; however, it is not a
    very likely assumption. Forward looking models assume that
    there is not a problem like in some of the conventional
    estimates.
        But here's the key----
        Representative Maloney. But if----
        Dr. Diamond. If we use----
        Representative Maloney. If I could respond really briefly
    because I have other questions, Mr. Buckley's point was that
    you are assuming that you are going to do deficit reduction,
    which I have not seen since I have been here, and that there
    will be no unemployment, when of course there is unemployment.
        But I do have a question that I would like----
        Dr. Diamond. But let me--the deficit----
        Representative Maloney. May I ask a question about your
    report?
        Dr. Diamond. Sure.
        Representative Maloney. Your report on Chairman Camp's tax
    reform plan, and on page 14, in this report that you prepared
    for the Business Roundtable on the Camp Tax Reform Plan, you
    said something very important and something I think this
    Committee should listen to very carefully and very closely, and
    I would like your response to it.
        You noted that results of any one model are, and I am
    quoting from you, that the results from any one model are,
    quote, ``at best suggestive.'' End quote.
        And what is the risk of basing revenue estimates on models
    that are at best suggestive? Is there a consensus among
    economists about which of these ``at best suggestive'' models
    to use?
        Dr. Diamond. I still stand behind that statement. Dynamic
    analysis is at best suggestive. We can't produce a single
    number with perfect confidence. But, you know what,
    conventional analysis is at best suggestive.
        Those numbers, as I highlighted in my opening testimony,
    are extremely uncertain. Let's go back to the idea that the
    problem is not forward looking models, but instead that forward
    looking models don't include an exploding deficit. Let me tell
    you why I do not include exploding deficits in my models--if I
    include an exploding deficit in the model, so that we let tax
    rates go from 17.4 in the model to 19.4, and we let spending go
    from 20.1 to 25.3, and we continue to let the model explode
    into the out-years, do you know what the effect would be on the
    estimates of the growth effects of a tax cut if the model
    started with much higher tax rates?
        Standard economic theory says they would be much larger. If
    I start at a zero tax rate and I increased taxes by one dollar,
    the welfare effects are relatively small. If I started at a $10
    tax rate and increased taxes by $1, the growth effects could be
    a hundred times larger because it's the square of the tax rate
    that matters.
        My assumption moderates the results. It does not produce
    larger results. It is a moderating assumption, and I know I am
    right.
        Representative Maloney. Okay----
        Dr. Diamond. As far as my comment that dynamic analysis is
    ``at best suggestive,'' all estimates are at best suggestive.
    That is why they are called estimates.
        Representative Maloney. So, Mr. Buckley, what are your
    thoughts about using models that are, quote, ``at best
    suggestive''?
        Mr. Buckley. Well I think there is a real need for macro
    economic analysis in the development of legislation, and I
    would suggest both tax and spending legislation.
        The Congress should be informed on the consequences of what
    they do. However, the best numbers are the broad range. That is
    what the Congressional Budget Office has said, that the best we
    can produce are broad ranges of estimates and you can judge.
        But again, I think that for official budget scoring
    purposes you must score the bill before you and nothing else.
    You should not score the bill before you and the assumption
    that you will make major reductions in entitlement programs in
    the future. I like to think I have some political experience,
    as well. I doubt that many Members would want to endorse an
    economic plan the success of which was dependent on identified
    cuts in entitlement programs--otherwise known as Social
    Security and Medicare.
        Representative Maloney. And, Mr. Buckley, forward looking
    models like Professor Diamond's are built on the core
    assumption that future Congresses won't allow increases in the
    deficit as a share of the economy. Is this a realistic
    assumption? And what are the implications of this?
        Mr. Buckley. Well whether it is realistic or not, it is a
    tremendous breach from your current practices of scoring only
    the legislation in front of you. And I believe you should
    continue that.
        The range of models results from Chairman Camp's bill that
    $700 billion was the forward looking model, which assumed
    entitlement cuts.
        Representative Maloney. And, you know, how do these
    assumptions affect the likely accuracy of the models? For
    example, the unemployment one, that in the future there is,
    quote, ``no unemployment,'' or in the future that they're going
    to cut, you know, the entitlements which has not really
    happened?
        Mr. Buckley. You know, this is where I think the
    credibility of the numbers are at risk. And if the credibility
    is lost I think there are potential adverse consequences that
    could dwarf whatever the difference is between static and
    dynamic scoring.
        Representative Maloney. My time has expired. Thank you.
        Vice Chairman Brady. Thank you.
        Senator Cassidy.
        Senator Cassidy. Mr. Buckley, now Senator Gramm mentioned
    three criteria by which dynamic scoring should be judged: macro
    economic theory conforms--empirically it has previously worked;
    and that changes would accrue within the budget window of note.
        Now do you disagree that that would be a reasonable--and
    the burden of proof is upon those who desire the dynamic
    scoring to say that this is the case? Do you feel as if under
    that kind of guidelines dynamic scoring would not be helpful?
        Mr. Buckley. You know, I don't disagree with Senator
    Gramm's outline. I might disagree with ``empirical evidence.''
    As I stated in my oral testimony--during the period between
    1980 and 2009 there were a whole variety of tax bills enacted
    that were designed to increase savings and labor supply.
        Under the standard economic theory reflected in these
    models, the dramatic reduction in marginal tax rates that
    occurred during that period of time and the broad expansion of
    savings incentives should have resulted in an increase in the
    individual savings rate. It did not.
        The savings rate dropped precipitously from 1981 to 2007
    before the recession. Also, the thought is that labor supply
    responds to increases or decreases in tax rates, the 1993 tax
    increase in marginal rates was followed by a slow increase in
    labor force participation rates.
        Senator Cassidy. Now that--now, again, I feel like I am
    speaking in front of folks who have fought these battles
    personally, so, Senator Gramm, you had mentioned that in
    particular, I think 1993 actually did achieve some degree of
    entitlement reform with decreased deficit, and that was one of
    the preconditions that you labeled would lead to an expansion--
    i.e., a justification for dynamic scoring.
        Do I understand that correctly?
        Dr. Gramm. (Off microphone.)
        Senator Cassidy. Your microphone, please.
        Vice Chairman Brady. If you could get that microphone----
        Dr. Gramm. Maybe I will do that. I want to be heard.
        [Laughter.]
        The economic growth rate was soft in the first two Clinton
    years. Positive, but soft. The dramatic change came with the
    bipartisan budget agreement and a reduction in the capital
    gains tax and the child tax credit. And it was dramatic. Even
    Clinton's budget before the balanced budget agreement was
    projecting $100- to $200 billion deficit until Jesus came back.
    But what happened was that by actually taking action on a
    bipartisan basis that was credible--and people keep talking
    about, well, you can't score based on what Congress might do? I
    never heard of anybody propose that you do that.
        Anybody that would do that is a moron, because Congress
    talks and doesn't act. But when Congress did act, when you had
    an Administration and a Congress committed to a policy of
    controlling spending, you had dramatic economic results.
        And the boom of the Clinton years occurred after that
    program was adopted. And just to go back and make one other
    point. Dynamic scoring as we're calling it, which means using
    the best information available which may not be very good but
    it's the best available, is done everywhere except here.
        It is used in the private sector. It is used at the Federal
    Reserve Bank every single day. Everything they operate on is
    dynamic scoring. How can it make sense for them to do it and
    you not to do it?
        And finally, I believe there are some cases where you can
    make convincing arguments--and they're not all related to tax
    cuts. I think part of why everybody's talking past each other
    is that this subject has become a surrogate for tax changes.
    But dynamic scoring is not just about taxes. It is about
    spending. It is about policy. It is about regulation. And the
    idea that we ought to just completely write it off because we
    are not perfect at it just violates every principle we see in
    the world around us.
        Every day we do the best we can with what we have. It is
    not perfect, and probably never will be.
        Senator Cassidy. Okay, thank you all. I yield back.
        Vice Chairman Brady. Thank you.
        Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
    you to all of you. Especially welcome back, Senator Gramm. I
    never got to serve with you, but thank you for being here.
        I was focused on this just from some of the things that we
    are working on right now in the Senate. We are of course
    working--we are debating the Long Term Transportation Bill, the
    Drive Act. I have been a supporter of that nearly from the
    beginning because it is a six-year bill with three years paid
    for.
        And I was wondering how you see a bill like that, which is
    just set pay-fors. Dynamic scoring would change the way we
    would look at that bill.
        And then secondly, another thing that we've been looking
    for in the long haul, which is paying for infrastructure. And
    Congressman Delaney, who is a member of this Committee, has a
    similar proposal to Senator Warner's is looking at long-term
    tax reform with international tax reform, because we have a
    bunch of money, as you know, a trillion set overseas and we
    want to try to figure out a way to bring some of that back. And
    one thought is to link it into infrastructure.
        So those are two things we have been debating in the
    Senate, two different ways to handle transportation, one moving
    and one kind of sitting out there that a lot of people would
    like to do.
        And so I just wondered how dynamic scoring would change the
    way you would interpret those two different proposals. I guess
    I would start with you, Senator Gramm.
        Dr. Gramm. Well first of all, I think dynamic scoring would
    be looked at for every proposed change in legislation. And to
    the degree that you had a transportation bill that dramatically
    changed the quality of transportation in the country, I think
    that you could make an argument that it would have a macro
    economic effect.
        I think whether it would have an effect within the time
    period you're budgeting, you would have to look at. But the
    whole purpose of the transportation bill is to strengthen the
    economy, to expand the Gross Domestic Product. I think it is a
    perfect case of something that we would look at.
        And I think you would go back and try to, for example, look
    at evidence during the Eisenhower era when we built the
    interstate highway system. I think that there might be
    empirical evidence out there that could be used.
        Senator Klobuchar. Why don't we go to you, Mr. Buckley, and
    then work our way back.
        Mr. Buckley. I am in agreement with Senator Gramm. I think
    there is empirical evidence that infrastructure spending would
    be valuable, and I think that type of information should be
    part of the legislative process.
        However, the economic models that we are talking about
    today assume that infrastructure spending has an investment
    return half of what would be available if it were not done,
    compared to what the private sector would do.
        The CBO simply assumes that all government investments have
    a rate of return equal to half the rate of return realized by a
    private investment. So if you use these models, which I believe
    substitute assumptions for analysis, you would find that
    infrastructure spending is not a good idea, and it provides no
    benefit for the economy--which I think is just
    counterintuitive.
        Senator Klobuchar. Thank you. Dr. Hassett, do you agree
    with that?
        Dr. Hassett. Oh, thank you, Senator. You know, I think that
    you are correct that the argument in favor, that Senator Gramm
    and I and Mr. Diamond are making in favor of making the best
    evidence available, should apply to a wide range of things.
        The infrastructure literature is one of the strongest
    literatures, I think, where it is very clear that
    infrastructure investment on average has a very significant
    positive growth effect.
        But, you know, that gets back to my last point, and I
    certainly don't want to take all your time, but if you think
    about, we had the question of what is ``conservative scoring,''
    and I'm not talking about partisan conservative/liberal, I just
    say what is conservative scoring, it is an example.
        So if you are going to spend money on something where the
    estimated rates of return are in the double digits in the
    academic literature, then you ought to get rewarded for making
    such a good choice based on everything that economists know.
        Senator Klobuchar. And Mr. Buckley has a different view of
    that----
        Dr. Hassett. He basically said something that made no sense
    to me, frankly, that because if you are not going to do any
    analysis then how are we substituting assumptions for analysis
    by doing dynamic scoring? The whole point about not allowing a
    dynamic score is we just assume--let me give you an example--
        Senator Klobuchar. Do you have evidence with infrastructure
    of how it has been scored in the past, like international tax
    reform? And then Congressman Brady is going to ask----
        Dr. Hassett. I would be happy to correspond on this. I did
    not prepare an infrastructure----
        Senator Klobuchar. Okay----
        Dr. Hassett [continuing]. But as a conservative estimate,
    just to give an example, suppose that we were to increase the
    corporate tax rate to 90 percent. It is not something that
    anyone would propose, but suppose that we did.
        Well if we just do a static score of that, then we will get
    a lot of revenue. And that is not a conservative judgment,
    right? So the conservative should be like what is the actual
    revenue that we can expect to get? That is what conservative
    budgeting is. And not allowing a dynamic score I think is not
    conservative.
        Senator Klobuchar. Well I am out of time, but I might
    follow up with some of this in writing, if you guys could look
    at how these--I have just mentioned two separate proposals
    here. You know, one is the Drive Act, which is the pay-for
    model that Senators McConnell and Inhofe and Senator Boxer
    negotiated. And then the other one is more of an idea of using
    the taxes, the money that is sitting over there that we want to
    bring in. And of course we have not really defined how much of
    it would go to infrastructure, but it is just another way of
    paying for it.
        All right. Thank you.
        Vice Chairman Brady. Thank you, Senator. Without objection
    I will place in the record a report by Doug Holtz-Eakin, a good
    friend of the Committee, on dynamic scoring and infrastructure
    spending, how it is used in evaluating policy proposals.
        [The report titled ``Dynamic Scoring and Infrastructure
    Spending'' appears in the Submissions for the Record on page
    69.]
        Vice Chairman Brady. With that, Mr. Paulsen is recognized.
        Representative Paulsen. Thank you.
        It just seems to make sense that we should be using all the
    tools available as we make these important policy decisions
    that affect the lives of millions of Americans every day.
        Because we live in a very dynamic world where businesses
    and individuals make decisions in part based on what takes
    place here in Washington, lawmakers should have access to
    information that takes into account the real-world impact of
    these proposed policies on the people we serve.
        Congress does not have a good track record predicting the
    economic impact of its policies, because we have relied on
    these computer models that are unreliable. Everywhere else, as
    you mentioned, we are using the best information available. But
    for some reason we are not using it here, because we think we
    are in some alternative universe, and so we don't have to worry
    about that.
        Senator Gramm, I think you pointed out the historical
    concept of demonstrating how fiscal policy changes have either
    accelerated or decelerated real GDP growth over the last
    several decades, and how the resulting changes in economic
    growth have affected federal outlays, receipts, budget
    deficits, et cetera, with revenue being up, GDP being up after
    some of the changes in the 1980s for instance.
        I was actually encouraged just a couple of years ago when
    the Senate, under Democratic control then, took a vote to have
    dynamic scoring used as a part of their tax reform modeling,
    and now the House has put this formally into its rules. I
    strongly believe that we need to fix the broken tax code with
    comprehensive reform so it promotes investment, savings, and
    hard work.
        So let me just ask this, and maybe Senator Gramm, I will
    just start with you. Because you have been here as a former
    Member with a wide variety of background, what value does
    incorporating this real-world impact into a scoring model have
    for current lawmakers? And do you believe the use of an
    economic model that includes real-world or dynamic impacts
    could help grow consensus here in Washington around tough-to-
    tackle issues like tax reform or entitlement reform?
        Dr. Gramm. Well I think that we need to use the best tools
    that are available. And when dynamic scoring, as we're calling
    it, but using the feedback effect that policy changes have on
    the economy and on the Federal Government's fiscal position,
    that refusing to look at that simply guarantees that we are
    going to have poor results.
        And as I said in my opening statement, if you look at the
    budgets of the United States and what the predictions were and
    what has happened, the biggest errors always occur because of
    changes in the economy. And they just swamp policy changes that
    are scored on a static basis.
        So I can't understand why we would not try to undertake
    this. And you've got to undertake it for everything. Trying to
    look at feedback effects on the economy is not about tax cuts.
    It is not about changes in transportation. It is about all the
    above.
        Now you have got to meet criteria, it seems to me, to claim
    the scoring. You've got to have a theory that makes sense.
    You've got--it's got to have a feedback effect in the time
    period you are budgeting, and you've got to provide some
    empirical evidence.
        But where you can do all three, to just simply say that
    this makes no sense, I think again where these terms become
    proxies for policies that people differ from, if somebody could
    come up with an education reform program that honest-to-God
    dramatically affected education in America, and did it quickly,
    it would merit a huge dynamic scoring.
        Now there is a big difference between talking about it and
    doing it. But the point is, those are the kind of things we
    ought to be looking at. And if somebody has got a good idea,
    they ought to get credit for it in terms of what it is likely
    to produce. I think that is the point that we are making.
        And I don't see how you can be for dynamic scoring for
    transportation and not for dynamic scoring in tax reform. I
    mean, again it is obvious. You are just talking about what you
    are for, not for the tools you ought to use in trying to
    understand it.
        Representative Paulsen. Is there a downside to having the
    additional information that dynamic scoring can provide?
        Dr. Gramm. Well look. You can always be wrong, and we're
    almost certainly going to be wrong, but it seems to me in every
    area of life, from the practice of medicine to drilling for
    oil, to whatever, you operate with the best tools you've got
    until you get better tools, but you learn from the process. And
    I think that is what we need to undertake.
        And I like the idea of a range of options. I like the idea
    of giving outside people a chance to comment on it. I like the
    idea of trying to form a consensus. But I don't think you can
    begin: Well, I'm for dynamic scoring here because I am for this
    policy, but I am against it here because I am against that
    policy. It just does not make any sense.
        Vice Chairman Brady. Thank you. Representative Beyer, you
    are recognized.
        Representative Beyer. Thank you, Vice Chairman Brady. Thank
    all of you very much for coming to be with us.
        Senator Gramm, it is wonderful to see you again, and thank
    you for your humility as an economist. I am encouraged by--
    although I am hearing first that there seems to really be a
    consensus among the panel that if dynamic scoring makes sense
    on the revenue side, that it also makes sense on the investment
    side, at least for things that can be measured like
    infrastructure investment.
        I would also like to thank Dr. Diamond for his comment, ``I
    know I'm right.'' It's the first time I have ever heard an
    economist say something with such confidence. So, excellent.
        [Laughter.]
        Good work. In Senator Gramm's written statement, and I
    think also you said here there were three conditions. You said,
    first there must be a clear and established economic theory
    suggesting a causative link between specific policy changes and
    a substantial macro economic effect, et cetera.
        And Peter Orszag, in this thing that was handed out, said,
    on dynamic scoring, ``You're forced in the organization to pick
    one true model, when economic science hasn't produced a single
    model that works.''
        So I got to study economics for four years as an
    undergraduate and am completely confused. We weren't supposed
    to have stagflation ever, and Japan had it for 10 years. No
    growth and strong inflation.
        Our $800 billion stimulus bill put together with
    quantitative easing one, two, three, and four, was supposed to
    give us inflation, and we have not seen it.
        IMF and Europe imposed austerity on Greece to fix their
    economy. It clearly has not worked.
        Mr. Buckley, do you think that we have established, quote,
    ``a clear and established economic theory that gives us a basis
    for dynamic scoring''?
        Mr. Buckley. I don't believe that any member of the panel
    would say that there is a single model that comes up with the
    right, acceptable number. So the answer is: There's not.
        Now one thing I think, at least in my mind, there is a
    sharp distinction between providing more information for the
    debate and affecting official scores. I think the more
    information, the better. In that broad range of estimates, it
    is probably the best you can do.
        I think on transportation spending, there is real good
    evidence that it provides benefits that are dramatic to our
    economy. You cannot have a modern economy without a modern
    transportation system.
        I think that information should be part of the debate--but
    the question is: Would you reduce the cost of a transportation
    bill by those benefits?
        I think that would be inconsistent with cost accounting. At
    the end of the day when they announce the deficit, those dollar
    expenditures will be recorded, not reduced by anticipated
    benefits.
        So I think you have to be kind of consistent in the way you
    do it. Now don't interpret me as saying you shouldn't be
    provided that information to justify this.
        Representative Beyer. That is a great transition. Back to
    Senator Gramm, both in your questions and your written
    statement you say, quote, ``It is important to remember that
    dynamic scoring is not a replacement for traditional static
    scoring, but rather an enhancement of it.'' But the new rule
    passed by the Congressional Republicans in the House, as least,
    H.R. 1, requires the JTC and the CBO to provide a single
    revenue projection.
        I am sort of building on what Congressman Paulsen said.
    That estimate is official, not advisory. Wouldn't you agree
    that this new rule makes less information available to
    policymakers rather than more?
        Dr. Gramm. Well I can't imagine that they're not going to
    provide the building blocks they use to try to come up with the
    scoring. If I were doing it, I would want to set some broad
    parameters. And then I would want to try to see to what degree
    you might reach a consensus as to what the best estimate would
    be.
        So I might go about it that way. But do I believe we're
    better off in trying to look at the feedback effect of our
    policy on the economy and the government? I think we are better
    off trying to do it. I don't claim it's going to be perfect, or
    it's going to be a good estimate every time. But, you know, you
    look back at even static estimates we've made, often they've
    been very poor estimates.
        I could give you examples that would go on and on about how
    we projected something and then the economy just blew it away.
        Representative Beyer. Thank you, Senator Gramm.
        Mr. Chairman, I yield back.
        Vice Chairman Brady. Thank you.
        Representative Schweikert, you are recognized.
        Representative Schweikert. Thank you, Mr. Chairman.
        Dr. Hassett, if I came to you right now and said I want to
    design the optimum dynamic scoring model in a modern society,
    and you know, I'm a big fan of crowd sourcing information and
    today we all walk around with super computers in our pocket.
    The ability to grab lots and lots and lots and lots of data
    sources and capture them--because my understanding is you're
    the closest one right now to sort of doing that in a public,
    open forum. How far can we take that?
        Dr. Hassett. Thank you, Mr. Schweikert. It actually is a
    very relevant point for the previous conversation, too, because
    my belief is that there is no one correct model, that there are
    lots of models with lots of different characteristics. Some
    models allow for unemployment. Some of them don't. They assume
    that we're always at full employment.
        I think that, you know, Mr. Buckley said we shouldn't use
    the models, we shouldn't put any weight on the models that
    don't have unemployment. And, you know, the current CBO long-
    run forecast assumes that we're at full employment a couple of
    years from now. So it's a very standard thing.
        But what we have to do is let a professional staff look at
    all of the evidence and then make a considered judgment about
    what the right answer is. And that is the way to do it. And so
    I want to look at models like Mr. Diamond's model, which is a
    model I worked in graduate school, a predecessor model of that.
    But there are a lot of other models, too, and some of them have
    Keynesian effects, and----
        Representative Schweikert. But would you accept an open
    source model where different data sets could be put in? You
    know, if I had some data set from my region of the country----
        Dr. Hassett. Exactly.
        Mr. Schweikert [continuing]. I could plug it in and see the
    effect?
        Dr. Hassett. And what you have to do is look at basically
    the information set and construct estimates of what are the
    probabilities of the different things that might happen. And
    the way you do that is you look at lots of different people's
    approaches.
        And so what we have tried to do is, one of the obstacles
    for this is there are macro economists all over the world
    developing macro economic models that will allow you to change
    policy and see what happens. But they are not linked to the
    things that we use to score because they don't have the micro
    simulation model as the sort of first move.
        And so what we have done is that we have automated the
    bridge between the model that you get right now in the static
    score and the things you need to actually get a macro economic
    model to work so that people with macro economic models can
    link them to what we're doing, and then hopefully in a year or
    two we will have lots and lots of these models that we can look
    at.
        Representative Schweikert. Dr. Diamond, (a) is that the
    future of how you would do it, but also how do you design a
    model that reflects today compared to the data set we had a
    month ago? I am fixated on the Atlanta Fed's GDPNow because of
    its constant reacting to what happened that week of data.
        I mean, how dynamic can you make the model? And can you
    make it in a way where we are able to look at it today and
    understand what it is doing to our policies?
        Dr. Diamond. I think what Kevin is doing in open source
    modeling is invaluable, and it is an idea that I've kicked
    around and just never made it work, and I am really glad to
    hear that someone is taking the lead. I think it is going to be
    a brilliant advancement of modeling technology.
        It may--I don't think the model you are explaining really
    exists today. I mean, in some sense they do but the changes are
    hard, and they take a lot of time.
        Representative Schweikert. But my concern, where I was
    trying to take this is what happens today when we get
    information that says, hey, the decision we made six months
    ago, or five months ago, isn't working? Should we as a Congress
    also start to become much more dynamic in our policy? Instead
    of saying: This is our policy for all of 2016, and if it
    doesn't work, well be damned with it.
        Dr. Diamond. Absolutely. We should all be like that. And I
    think that when we get that evidence, we have to be willing to
    change course. And that is why I think dynamic analysis is so
    important, because it provides information about which course
    you want to take.
        Representative Schweikert. Well you could also start to
    design policy. It's as if the data you're getting does this,
    the law kicks in this, or takes this away, or adds this. So you
    could also actually start to be much more disciplined and
    creative in what we actually draft around here.
        Dr. Diamond. That's amazing.
        Representative Schweikert. Senator, okay, you were trying
    to make the point of how we've heard some fairly blatant
    partisan discussion on dynamic scoring, but I still remember
    many of my friends on the left just being almost evangelical
    about dynamic scoring when they were talking about the $831
    billion stimulus bill, and the multiplier effects it was going
    to have.
        Don't we have lots of examples around us where we seem to
    choose our poison?
        Dr. Gramm. Well I think, and God knows I don't want to be
    critical of the Congress, but what tends to happen----
        Representative Schweikert. Oh, please do.
        [Laughter.]
        Dr. Gramm [continuing]. Is that people pick and choose
    based on what they want, sort of to try to get the best
    argument they can make for their position. And it is easy to
    understand, and I'm sure that I have done it on many occasions.
        The point is, however, that this ought to be something we
    are looking at all the time. And in most cases a group of
    totally nonpartisan experts, if such a thing exists, would
    throw it out and say: Well, this just doesn't rise to the level
    that you would ever want to make a projection based on it. It's
    not big enough. It doesn't happen soon enough. There's not
    enough empirical evidence.
        But every once in awhile there will be a policy change that
    is big enough. And when it does happen, it ought to either get
    credit if it has a positive effect, or have cost attributed to
    it if it has a negative effect.
        And when you were saying about how, you know, if we had
    this evidence the policy was not working we'd quit doing it,
    actually most of the arguments would be it's not working
    because we're not doing enough.
        Representative Schweikert. And with that, Mr. Chairman,
    thank you.
        Vice Chairman Brady. Thank you. Representative Delaney is
    recognized for what will certainly be a discussion about
    infrastructure----
        Representative Delaney. Well, no, I feel like that was
    covered thoroughly. So I want to pivot to just a question.
    Because, look it, to me there is no argument against dynamic
    scoring. Right now the Congress has put itself in a position
    where it cannot make any judgment decisions, right?
        We assume that changes in revenues have no effect--or
    changes in tax policy have no effect on behavior; we know they
    do, sometimes dramatic, sometimes modest.
        We also assume that government spending and investments
    have no effect on economic activity, and we know they do.
    Sometimes dramatic. Sometimes modest. So to me there is no
    legitimate economic rational analytical argument against
    dynamic scoring. We should be doing it.
        But when I think about it from kind of a private sector
    context, when a private business changes its revenues, or it
    changes its pricing to hopefully encourage more revenues--which
    is kind of the analogy to tax policy--or when a private
    enterprise makes an investment because it thinks it will have a
    decent return on its investment instead of modeling it at a
    zero, which is basically what the government does, there's a
    governance model in place where people generally have the best
    intentions in terms of making good rational decisions. So a
    board of directors looks at a proposal to make an investment,
    or they look at a proposal to lower pricing, and they debate
    whether it will have the intended effect. Sometimes they're
    right. Sometimes they're wrong. But there's a good governance
    process where these decisions are made on a rational basis.
        The worry, obviously, with dynamic scoring, the only worry
    I have is it will obviously be manipulated for ideological
    benefit.
        So do you have any thoughts as to what other things should
    change from a governance perspective so that we could actually
    feel comfortable doing what we obviously should do, which is to
    get away from static scoring, which we know is wrong 100
    percent of the time? It's always wrong, right, because there
    are these behavioral changes. There are these economic effects.
    And move to dynamic scoring which has a much better chance of
    being accurate. It's not going to be 100 percent accurate, but
    it has a much better chance. How we can do that in a way with
    some kind of comfort that maybe we have a better governance?
        Dr. Hassett.
        Dr. Hassett. May I answer first, because--and thank you. I
    absolutely share that concern. And the first thing is that I
    think that a static score you would basically have the same
    concern, right, that they could call it a static score. And yet
    our scoring bodies are incredibly distinguished. I trust them,
    and I think you trust them to do the static score to very high
    professional standards.
        But the second thing, and this is the thing that's a little
    bit different from the current static scoring practice that
    we're trying to sort of insert ourselves into, is that we just
    need to see how they do it----
        Representative Delaney. Right.
        Dr. Hassett [continuing]. What they say, because, you know,
    to try go back and figure out whether scores were correct or
    not, on average it's almost impossible. It's a very, very
    difficult thing.
        But if we start being fully transparent, then we could
    evaluate how we do. We thought it was going to be this much
    revenue, it was that much revenue.
        Representative Delaney. So like a budget--you know, in the
    private sector you would normally have, when you're looking at
    financial performance, you have budget and actual. And you're
    actually looking at how your performance compared to what you
    thought it would be.
        You would recommend more of that kind of discipline?
        Dr. Hassett. Yes.
        Representative Delaney. You're right, because there is a
    bit of a man-behind-the-curtain thing here, which it's not
    clear how some of these scores are determined. That will be
    less transparent. Let's face it, static scoring is easier than
    dynamic scoring, right?
        Dr. Hassett. Um-hmm.
        Representative Delaney. So this will be a harder process I
    think. And we do need much more transparency of how they make
    the decisions, and actually how they're performing. Because if
    they're doing a bad job, we should get new scorers in, right?
    You know, just like in a company, if people do bad financial
    modeling, you get new modelers in to hopefully do a better job.
        Dr. Hassett. Can I even say one last thing, which I feel
    strongly about, that I'm not sure I would chose dynamic scoring
    that's not transparent for static scoring, because with dynamic
    scoring you have a lot more wiggle room to do stuff. And if
    there is somebody unethical doing that, then it is going to be
    much harder to discipline them. So I think it is very important
    for dynamic scoring to be done in a fully transparent way.
        Representative Delaney. So you would make them disclose all
    their assumptions.
        Dr. Hassett. Yes, and the model.
        Dr. Gramm. And all their data.
        Representative Delaney. Yes, that went behind it. So what
    we are talking here is dynamic scoring coupled with a much more
    robust level of transparency. Any other governance changes you
    might make, Senator Gramm?
        Dr. Gramm. I think because of partisanship, because of the
    difference in the sort of behavioral objectives in a private
    entity that at least everybody is trying to be successful
    versus a political entity where people have different
    objectives, I think you've got to have a pretty high standard
    that has to be met before you are going to employ the result of
    your model.
        I think there is a heavier burden of proof here. Sort of an
    effort to sanitize it where there is enough of a consensus that
    there----
        Representative Delaney. Right.
        Dr. Gramm [continuing]. That there is more than just a
    partisan push here. And I think again this open model where you
    could get input from anybody in the world who could send you
    their views on it, and, you know, a lot of them would be
    pretty--you wouldn't take seriously, but some of them might be
    very serious. And I think that's a good idea.
        Representative Delaney. Good. Good. Thank you, very much.
        Vice Chairman Brady. Thank you.
        Representative Grothman for the final question.
        Representative Grothman. I hate to question this love fest
    here, but I would like to respond. I personally believe in the
    Laffer curve. I do believe as you cut tax rates it has to
    affect behavior.
        I am very, very skeptical of studies that show that
    everything the government does is an investment and will pay
    for itself. You know, we need more preschool, more kids going
    to college even though people can't get jobs today. We need
    more prevention programs, more infrastructure.
        And when you combine the idea that tax cuts result in
    increased revenue collections, and that all these new spending
    programs result in--are actually investments which will more
    than pay for themselves, it seems to me, well, it seems to be
    pretty keynesian economics, almost making it part of the
    statutes. You know, the idea that the bigger and bigger
    deficits just keep paying for themselves, I think that's a
    little bit scary.
        Obviously I dislike the idea that bigger government leads
    to more prosperity, more than I do the idea that lower tax
    rates lead to prosperity. But just on the face of it, it seems
    where we're headed is, let's in the next budget cut taxes and
    spend more money on a variety of programs, and we're just going
    to be running surpluses soon.
        And I think that is kind of a scary thing. I would like you
    guys to respond to that fear that I have.
        Dr. Gramm. Well I think it can be a scary thing. I think
    that everybody argues that their pet program is the magic
    solution. And I think that is why you've got to have a very
    high standard before you would accept to use dynamic scoring.
        Now most of these arguments fall apart when you take a
    close look at them, but I think that setting up a procedure to
    evaluate them, where you have agreed in advance that unless the
    evidence is pretty overwhelming you are not going to do the
    dynamic scoring, I think that is the right way to go.
        But I think caution on both sides of the aisle is the right
    thing to do.
        Dr. Hassett. Could I just add one logical thing? It's very
    short. That if we spent the $100 billion burying $100 billion
    in the ground, the classic textbook Keynesian policy, we would
    get more GDP this year. But then we don't do it next year and
    government spending is going down by the $100 billion, so we've
    just located $100 billion this year, then there is an equal and
    opposite effect tomorrow and GDP is going down because we've
    got less government spending than we had this year, and so the
    growth rate will be lower. So we could spend more this year,
    but then we have to pay for it. And when we pay for it, there
    will be a net cost.
        And so if you look at the long run effect of Keynesian
    policies in a budgetary manner, then you find a negative
    cumulative effect because there's equal and opposite effects up
    front but then a long-run cost of paying for it. So I don't
    think that it would induce a lot--if we were to increase
    government spending, it would produce a lot of Keynesianism.
    What it might do, though, is make you spend things where we
    have a lot of evidence that it is a positive, like building
    wider bridges and things like that. There is a lot of evidence
    that that is a very high rate of return place.
        Representative Grothman. We would all be wealthier if we
    had wider bridges? Do you really believe that?
        Dr. Hassett. It depends on where you put them, but there
    are a lot of bottlenecks in the D.C. area where people are
    wasting a huge amount of time getting to work because you have
    to get across the river if you're in Virginia.
        So, yeah, I think that you could make Virginians wealthier
    and their property values would go up if it was easier to get
    into D.C.
        Representative Grothman. Would you describe yourself--I
    mean, I didn't know we had--I guess we're told on the thing
    here that, you know, the guys on the left are Republican, or my
    left. Would you describe yourself as a Keynesian?
        Dr. Hassett. No. Absolutely not.
        Representative Grothman. Okay, I will yield back my
    remaining 40 seconds.
        Vice Chairman Brady. Thank you.
        I want to thank the panel for being here today. Let me
    first submit for the record for Mrs. Maloney a report from the
    Center on Budget and Policy related to budget and tax plans, an
    outline on dynamic scoring.
        [The report titled ``House `Dynamic Scoring' Rule Likely
    Will Mean More Tax Cuts--Not More Information'' appears in the
    Submissions for the Record on page 87.]
        Vice Chairman Brady. You know, our goal was to have a
    discussion about how do you create the most accurate and
    complete assessment of the economic impact of policies.
        What I seemed to hear today was that dynamic scoring does
    not apply to everything, but where it does it should be applied
    and considered; that the impact has to be big enough; the cause
    and the evidence has to be accurate enough. And it is critical
    that all these models be open both in the data and the models
    and the assumptions for both parties to have confidence in the
    range that it is arriving at.
        So with that, let me thank all the panelists for being here
    today, and I want to give a special shout-out to my former
    Senior Senator from Texas who we work hard to try to follow in
    your footsteps every day. Thanks so much for coming back to the
    Senate today.
        With that, the hearing is adjourned.
        (Whereupon, at 3:38 p.m., Tuesday, July 28, 2015, the
    hearing was adjourned.)

                           SUBMISSIONS FOR THE RECORD

        Prepared Statement of Hon. Dan Coats, Chairman, Joint Economic
                                   Committee
        The committee will come to order.
        I would like to welcome our witnesses, including my former
    colleague and good friend Phil Gramm, who I am not used to seeing on
    the other side of the dais! I thank all of our witnesses for being here
    today to discuss the concept of ``dynamic scoring,'' a topic that has
    been much debated since the House passed a rule earlier this year
    requiring the Congressional Budget Office and the Joint Committee on
    Taxation to use dynamic scoring when evaluating ``major legislation.''
        The Joint Committee on Taxation and Congressional Budget Office
    have long provided lawmakers with estimates of spending and revenue
    changes that would occur should a bill become law. For decades,
    however, these ``scores,'' as they are known, have largely ignored the
    biggest driver of surpluses and deficits: economic growth.
        That's because the current method of estimation--known as ``static
    scoring''--does not reflect the reality that the economy can grow or
    contract as a result of public policy. Most notably, it does not
    account for the massive effects that policy can have on labor supply or
    private investment, two of the largest drivers of the U.S. economy.
    Ignoring these effects leaves lawmakers in the dark, unable to debate
    legislation with all available information at our disposal.
        While dynamic scoring has been debated for decades, it is no longer
    ``voodoo economics.'' In fact, advances in computer technology and
    economics have finally brought us from the question of, ``Can it be
    done?'' to the answer of, ``Yes, and here's how.''
        We have the rare opportunity today to hear from those who have been
    in the trenches of this debate as lawmakers, congressional staffers,
    and academics.
        I'd now like to recognize Ranking Member Maloney for her opening
    statement and then will turn to Vice Chairman Brady, who was
    instrumental in putting together this hearing.
                                   __________
     Prepared Statement of Hon. Kevin Brady, Vice Chairman, Joint Economic
                                   Committee
        Chairman Coats, Ranking Member Maloney, Members, and Distinguished
    Witnesses:
        Thank you, Chairman Coats, for convening a hearing on such an
    important topic.
        Let us begin with a common-sense proposition. To make fiscal policy
    decisions that will increase the prosperity of the American people,
    Congress needs to have the most accurate and complete assessment of the
    economic effects of any proposed entitlement spending and tax
    legislation.
        Until this year, the Congressional Budget Office (CBO) and the
    Joint Committee on Taxation (JCT) have ``scored'' proposed entitlement
    spending and tax bills, respectively, on a micro-dynamic, but macro-
    static basis. Under this treatment, the CBO and the JCT allow certain
    changes in the economic behavior of individuals and businesses in
    response to the enactment and implementation of proposed legislation,
    but hold the size of the U.S. economy (real GDP) unchanged. For
    example, the JCT would concede that a $5 per gallon increase in the
    federal tax on motor vehicle fuels would cause households to drive less
    and consume less gasoline. Counterintuitively, however, the JCT would
    deny that such a tax increase would affect the U.S. economy overall.
        This scoring convention is, of course, economic nonsense. In his
    testimony Senator Phil Gramm demonstrates how major fiscal policy
    changes accelerated or decelerated real GDP growth over the last three
    decades and, in turn, how the resulting changes in economic growth
    affected federal outlays, receipts, budget deficits (or surpluses), and
    debt held by the public over the last several decades. Rather than
    delivering realistic projections, the current scoring convention
    reflects the limitations of economic modeling and computing capacity in
    the 1970s.
        In contrast with conventional scoring, dynamic scoring requires the
    CBO and the JCT to assess not only whether proposed entitlement
    spending and tax legislation would affect the economic behavior of
    individuals and businesses at a micro level, but also whether the
    aggregation of all such behavioral changes would affect overall
    economic growth. In other words, dynamic scoring removes the
    artificial, arbitrary, and unrealistic supposition that major
    entitlement spending and tax changes will not affect the U.S. economy
    as a whole. Put simply, dynamic scoring is proven, real-life analysis
    that helps policymakers from both parties weigh the impact of proposed
    changes.
        The question before the Joint Economic Committee today is whether
    the implementation of dynamic scoring of major entitlement spending and
    tax bills would improve the quality of economic information available
    to Congress before making major fiscal policy decisions. The answer is
    an unqualified yes.
        Since being elected to the House of Representatives in 1996, I have
    been involved with tax and entitlement scoring issues on the Ways and
    Means Committee under Chairmen Bill Thomas, David Camp, and Paul Ryan.
    I have observed the great progress that economists from diverse
    political viewpoints have made in refining their macroeconomic models
    and developing a consensus around the estimates of key parameters over
    the last two decades.
        As Dr. John Diamond and Dr. Kevin Hassett will testify, economists
    now have the ability to make reliable forecasts of the macroeconomic
    effects of entitlement spending and tax bills on real GDP growth and
    the feedback of such growth on federal outlays, receipts, budget
    deficits (or surpluses), and debt held by the public. The limitations
    that led to conventional scoring in the 1970s no longer apply.
        Since 1997, the House of Representatives has allowed the Chairman
    of the Ways and Means Committee to request dynamic analysis of major
    tax legislation from the JCT, but for informational purposes only. In
    2015, the House adopted a new rule requiring any proposed entitlement
    spending or tax legislation that would create a gross budget change
    equal to or more than \1/4\ of one percent of GDP to be scored on a
    dynamic basis. Other legislation designated by either the Budget
    Committee Chair or the Ways and Means Committee Chair must also be
    scored on a dynamic basis.
        Technology has advanced. The economy has become more complex.
    Sticking blindly to the old ways robs policy makers in Congress of new,
    more accurate insights on key challenges facing our country.
        While dynamic scoring may involve multiple models and different
    estimates of key parameters, dynamic scoring provides Congress with a
    consistent, though not identical, view of how proposed entitlement and
    tax changes would actually affect the real world. Yes, there is some
    uncertainty, but that is part of the real world, too.
        Currently, dynamic scoring applies to major entitlement reform and
    tax legislation. One of the Members of this Committee, Representative
    John Delaney, suggested in a Washington Post op-ed in January of this
    year that dynamic scoring should also be applied to infrastructure
    spending. While there may be merit to scoring government spending if it
    significantly changes the overall economy, at this point Congress
    should focus the CBO and the JCT on major tax and entitlement proposals
    before expanding the scope of dynamic scoring.
        I look forward to today's discussion with our witnesses.
                                   __________
    Preparted Statement of Hon. Carolyn B. Maloney, Ranking Democrat, Joint
                               Economic Committee
        Last month, this committee held a hearing on so-called ``fair value
    accounting,'' a method of calculating the impact of federal lending
    programs that will make them appear more expensive.
        Today, the committee turns its attention to dynamic scoring, a
    method of analyzing and quantifying the budgetary impact of tax cuts
    that will make them appear less expensive.
        Both methods are very problematic.
        And in both cases, they change the rules of the game so my
    Republican colleagues can get the results they want.
        Dynamic scoring has been conservatives' Holy Grail for many years.
    This is because if tax cuts appear to cost less, it will be easier for
    Congress to pass more of them.
        Revenue estimates are based on projections of future behavior. For
    many decades, budget effects from legislation were estimated using what
    my Republican colleagues mistakenly called ``static'' models. These
    models are not ``static'' because they anticipate how individuals would
    react to the legislation, and the models are broadly-accepted by the
    experts in the field.
        Recently my Republican colleagues changed the scoring rule by
    requiring the estimates to include the effect of legislations on the
    whole economy, which is called ``dynamic scoring.''
        But there are serious problems with dynamic scoring. One problem is
    that it provides results that are highly uncertain, vary wildly, and
    could be subject to manipulation.
        Let's take the example of former House Ways and Means Chairman Dave
    Camp's tax reform legislation last Congress.
        The JCT performed a dynamic analysis to see how much additional
    revenue the tax plan could return to the Treasury.

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        They used eight different models. They came up with eight different
    answers--from $50 billion to $700 billion. The largest estimate was 14
    times the size of the smallest estimate.
        Which estimate did Chairman Camp highlight?
        $700 billion. The HIGHEST one.
        This leads to two more serious problems with dynamic scoring--there
    is no consensus on which dynamic scoring model is the most appropriate,
    and the models rely on assumptions that are sometimes wildly
    unrealistic.
        For example, one dynamic scoring model assumes that if the debt
    increases as a share of the economy future Congresses will deal with
    the problem.
        The model assumes that in the future there will be no unemployment.
        The fact is that with dynamic scoring, budget analysts will be
    forced to choose between deeply flawed, models.
        Former CBO Director Rudolph Penner has said that:

            `` . . . dynamic scoring would force analysts to make many more
            judgment calls than they do today. Quality control would be
            difficult, and that implies a high risk that ideological biases
            will pollute the analysis.''

        There is yet another serious issue with dynamic scoring--new rules
    require a single estimate.
        Until now, JCT and CBO have been required--at the request of the
    chairman of the Ways and Means Committee--to provide a range of dynamic
    analysis estimates to reflect the different models and assumptions
    choices.
        But the new rule passed by Congressional Republicans requires JCT
    and CBO to provide a single revenue projection, and the estimate is
    official, not advisory.
        The example of Dave Camp's bill shows that dynamic estimates for
    major tax bills can differ by hundreds of billions of dollars.
        If the Camp bill had become law and the $700 billion figure proved
    wrong, deficits would explode.
        Because the results are so unreliable, dynamic scoring will
    compromise the accuracy and integrity of the federal budgeting process.
        Former Federal Reserve Chairman Paul Volcker has said simply:

            ``I won't believe the numbers.''

        And what happens if the markets come to doubt the integrity of the
    scoring process?
        Former Federal Reserve Chairman Alan Greenspan has said that:

            ``Should financial markets lose confidence in the integrity of
            our budget scoring procedures, the rise in inflation premiums
            and interest rates could more than offset any statistical
            difference between so-called static and more dynamic scoring.''

        Republicans' decision to use dynamic scoring--a highly unrealistic
    and deeply flawed method--may by itself have negative consequences that
    overwhelm whatever positive revenue effects that could be gained by
    cutting taxes.
        There is still another problem with dynamic scoring as implemented
    by this Congress--it strongly biases policy toward tax cuts.
        The new rule applies dynamic scoring only to tax cuts, not to
    discretionary spending.
        There is a broad consensus among mainstream economists that
    investments in infrastructure, education, and research and development
    can have a strong stimulative effect, but the new rules do not apply to
    discretionary spending. For this reason, these investments will seem
    very expensive relative to tax cuts, and Congress will be more likely
    to cut them.
        But does that mean that we should apply dynamic scoring to
    discretionary spending proposals as well?
        No--because an accurate and impartial method of dynamic scoring
    remains far beyond the reach of economists and budget analysts.
        Until those models improve vastly, there is little justification
    for using dynamic scoring on either tax bills or spending bills.
        The dynamic scoring rule serves only one purpose--it helps
    Republicans reach their Holy Grail . . .
         . . . rigging the rules so it's easier for Congress to cut taxes.
        Bruce Bartlett, a former aide to President Reagan, put it this way:
    dynamic scoring

            `` . . . is not about honest revenue-estimating. It's about
            using smoke and mirrors to institutionalize Republican
            ideology.''

        I look forward to our witnesses' testimony.

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                    Prepared Statement of Senator Phil Gramm
        It is a great honor to be asked to testify before the Joint
    Economic Committee today, especially because I served with Chairman
    Coats for many years in the Senate, and Vice Chairman Brady is an old
    friend of mine from Texas.
        During my time in the House and Senate, I focused mostly on the
    economy and the budget. Anyone who spends any significant time studying
    the U.S. budget comes to realize that changes in America's economic
    performance have a profound impact on the budget of the country.
    Economic changes often overwhelm the expected static impact of even the
    largest policy changes.
        Until we learn how to incorporate the impact of our policy changes
    on the economy and the budget, we won't have a real understanding of
    the costs and benefits of our proposed policy changes. When we have a
    strong reason to believe that a policy change is likely to affect the
    economy, based upon a logically consistent theory, and good empirical
    evidence that similar policies have had significant effects on the
    economy in the past, we should always attempt to employ dynamic
    scoring.
        Dynamic scoring is about finding a way to gauge the full impact
    that policies might have in increasing or decreasing government
    revenues and government expenditures. It seems to me that there are
    three conditions that should be met before dynamic scoring can be used.
        First, there must be a clear and established economic theory
    suggesting a causative link between specific policy changes and a
    substantial macroeconomic effect of sufficient magnitude to alter
    revenues or outlays in the federal budget. Second, there should have to
    be a good reason to believe that the macroeconomic effects would alter
    government spending or revenues within the years that you are budgeting
    for, which is normally 10 years or less. Third, there must be
    convincing empirical evidence that the implementation of these policies
    in the past has produced both the economic and the budgetary effects
    that the theory would suggest. On all these points, the burden of proof
    should fall on those who want to use dynamic scoring.
        I'd like to discuss two compelling cases where the theory and
    evidence of macroeconomic effects and budgetary feedbacks are strongly
    supported. Both examples are bipartisan efforts and both relate
    directly to topics that are at the center of the public policy debate
    today.
        The Balanced Budget Act and the Taxpayer Relief Act of 1997 was an
    agreement between the Republican Congress and President Bill Clinton to
    balance the budget through spending restraint while cutting taxes.
    These bills had significant macroeconomic effects that benefited the
    American people and the federal treasury alike.
        In early 1995, CBO initially projected that balancing the budget by
    constraining spending would create a combined revenue and outlay
    dividend of $120 billion from 1995 to 2001, an estimate later increased
    to $222 billion. After two years passed in negotiating the details of a
    balanced budget deal, CBO reported in January of 1997 that much of the
    original dividend had been incorporated into their baseline so that any
    additional outlay and revenue dividend was just $43 billion for 1997 to
    2001.
        When we compare CBO's January 1997 GDP and revenue forecast prior
    to enactment of the Balanced Budget Act to the actual results achieved
    in the next five years, we find that both economic growth and revenue
    growth after the Balanced Budget Act became law far outperformed
    anything projected by CBO. Nominal GDP, from 1997 to 2001, surpassed
    CBO's projected GDP by an astonishing total of $2.4 trillion--
    equivalent to $4.7 trillion in today's economy (2014 GDP). That
    averaged out to $480 billion per year higher than CBO's original
    projections, providing an extra $8,609 in per capita GDP in those five
    years.
        Revenues also rose beyond expectations, even after Congress and the
    President cut the capital gains tax rate and established the child tax
    credit. From 1997 to 2001, cumulative federal revenues were $1.015
    trillion higher than projected before the enactment of these laws. A
    similar revenue surge today would deliver an additional $368 billion
    per year to the government. The CBO reported in July 2000 that
    ``projected revenues for [FY] 2000 are now $303 billion more than
    estimated in 1997 . . . The primary contributors to that unexpected
    growth stems from the strength of the economy and changes in the
    characteristics of income.''
        The Tax Reform Act of 1986 was designed to be revenue neutral under
    static scoring by closing loopholes and limiting deductions in exchange
    for lowering tax rates from a top rate of 50 percent in 1986 to 28
    percent starting in 1988. In comparison to CBO economic and revenue
    projections prior to the full marginal rate reductions, the Tax Reform
    Act produced a significant macroeconomic and budgetary impact. Its
    benefits are magnified by the fact that this occurred well into one of
    the strongest and longest postwar recoveries. By January 1988, the
    recovery was in its 62nd month, over a third longer than the average
    postwar recovery's length, with the economy averaging a scorching 4.6
    percent growth and never less than 3.5 percent in any year.
        Just prior to full implementation of the rate reductions, CBO's
    economic projections assumed much lower growth, with estimated real GDP
    growth of 2.3 percent and 2.6 percent, respectively, for 1988 and 1989,
    but actual growth rates hit 3.9 percent and 3 percent (subsequently
    revised to 4.2 percent and 3.7 percent).
        Nominal GDP for those years surpassed CBO's projected GDP by a
    total of $286 billion, equivalent to $1 trillion in today's economy
    (2014 GDP). By averaging $143 billion per year higher, that benefited
    every man woman and child in America on average by an extra $1,163 in
    GDP during those two years. The Tax Reform Act gave a very strong
    second wind to the recovery, helping to deliver a 38 percent increase
    in real GDP in the 1982-90 recovery.
        The stronger economy fed back into stronger revenues with Federal
    income in the first two years after the marginal rate reductions
    averaging $25 billion higher than expected. CBO reported that these
    higher revenues were due to stronger economic factors. As a share of
    2014 revenues, that $25 billion corresponds to $80 billion today.
        Based on the evidence of the bipartisan Balanced Budget Act of
    1997, we could expect that any dramatic change in budget policy that
    substantially reduces the long term deficit through spending control,
    such as spending restraint and entitlement reform, could reasonably be
    expected to deliver substantial macroeconomic effects coming from
    improved business and consumer confidence. I believe a very strong case
    can be made that a comprehensive entitlement reform package that
    dramatically reduced the long-term deficit should receive a large
    positive dynamic score.
        Similarly, based on our experience with the bipartisan Tax Reform
    Act of 1986, we should have confidence in believing that revenue-
    neutral tax reform that makes our tax system more economically
    efficient and lowers tax rates would have a substantially positive
    effect on GDP and, therefore, federal revenues. This is especially true
    today given that the recovery of 2009 has never taken off.
        The Joint Committee on Taxation (JCT) has already projected a
    potential dynamic score of up to $700 billion over 10 years from one
    version of pro-growth tax reform, which would correspond to an average
    annual revenue increase of $70 billion. With a dramatic tax
    simplification and rate reduction program, we could expect to achieve
    dramatically positive results.
        It is important to remember that dynamic scoring is not a
    replacement for traditional static scoring, but rather an enhancement
    of it. CBO and JCT have decades of experience estimating the direct
    impact of legislative changes on the budget, but the largest revisions
    to their projections and final figures have come from a failure to
    fully predict and incorporate macroeconomic effects in their estimates.
    Yet it is those very macroeconomic effects that have been so powerful
    as to swamp the static estimates of the largest legislative changes.

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       Questions for the Record for Dr. John Diamond from Representative
                       Carolyn B. Maloney, Ranking Member
        1. The Joint Committee on Taxation (JCT) used 8 different dynamic
    scoring models to estimate the possible revenue effects of Rep. Camp's
    tax reform proposals. These models predict that the proposal could
    generate $50, $100, $150, $200, $225, $275, $650 or $700 billion of
    additional revenue from macroeconomic feedbacks over 10 years.
        It has been suggested at the hearing that five of these are
    ``routine static scoring'' models. Is that correct?

        To begin with, JCT refers to its normal scoring method as a
    ``conventional'' revenue estimate not a static estimate. Given that, no
    it is not correct.
        JCX-22-14 states the following:

            ``The proposal is projected to result in increases in economic
            activity relative to that projected under present law, as
            measured by changes in real GDP. The increase in projected
            economic activity is projected to increase revenues relative to
            the conventional revenue estimate by $50 to $700 billion,
            depending on which modeling assumptions are used, over the 10-
            year budget period.''

        Thus, all of the estimates are from macroeconomic analysis of TRA
    2014. These estimates suggest that a conventional revenue estimate
    would be wrong by a minimum of $50 billion and by as much as $700
    billion. Taking one of the middle estimates of $200 to $225 billion
    would be a reasonable number to use for dynamic scoring purposes.
        Diamond and Zodrow (2014) also examined the effects of a proposal
    similar to TRA 2014, which was prepared for the Business Round Table.
    They found that the most important factor is the reduction in income
    shifting as the corporate income tax rate declines. In addition, other
    important factors include the move to territorial, the more efficient
    allocation of capital, and the reallocation of FSK. Diamond and Zodrow
    found that a proposal similar in structure to IRA 2014 would increase
    GDP by 1.2 percent after five years, by 2.2 percent after 10 years, and
    by 3.1 percent in the long run. The long-run increase in GDP is
    primarily driven by a 5.0 percent increase in the ordinary capital
    stock and a 0.3 percent increase labor supply. In the long run, a 57
    percent reduction in income shifting allows the corporate income tax
    rate to decline an extra 5 percentage points (relative to the Camp
    proposal) to 19.9 percent (which is the only difference in the proposal
    simulated and TRA 2014).

        2. Dynamic scoring yields widely different results depending on the
    model that is used and the assumptions on which the calculations are
    based. During the hearing, you conceded that ``We can't produce a
    single number.''
        This problem is especially clear in the case of the Camp proposal--
    the results of JCT models ranged from $50 billion to $700 billion. The
    larger estimate--the one Camp cited--is 14 times larger than the
    smallest one.
        Nevertheless, Congress has passed a rule that requires JCT to
    provide a single result. Policymakers will rely on this figure to make
    decisions that could have enormous impact on our economy and our
    budget.
        If you believe ``we can't produce a single number,'' what are the
    justifications for including these highly uncertain results in the
    official score as a single number, rather than as a range of estimates
    for advisory purpose in the conventional approach?

        I firmly believe that we can produce a single number, however this
    should not be the primary or sole goal of dynamic analysis. My
    statement in the hearing (``we can't produce a single number'') was
    simply a misstatement, which I have asked to be corrected for the final
    record. My belief is that we should not only produce a single estimate,
    but should examine a range of estimates to inform policymakers before
    arriving at a dynamic score (a single estimate). Note that conventional
    estimation also requires modelers to make assumptions and to pick a
    single number from a range of possible estimates. As I stated in my
    spoken and written testimony, there is substantial uncertainty in
    conventional estimates. CBO routinely shows the significant uncertainty
    that is contained in conventional estimates from policy uncertainty,
    economic uncertainty, parameter uncertainty, as well as uncertainty
    related to the economic effects of policy enactment. For TRA 2014,
    simply assuming that there is no economic effect of the policy, even
    though the estimated range is from $50 to $700 billion, is also
    precisely wrong. Note that zero is a single number estimate!
        The justification for including dynamic effects is to more
    accurately account for the cost of various proposals. This is
    especially important for policies that have negative economic effects,
    that are debt financed, or that create large distortions. In addition,
    dynamic analysis could play a critical role because budget gimmicks
    within the budget window can often obscure the long-run effects of
    policies, especially policies that are debt-financed, temporary, or
    delayed and introduced late in the budget window. Ignoring the dynamic
    effects would continue to allow the magnitude of the revenue effects of
    many policies to be overstated and thus likely to lead to additional
    debt. Note that huge deficits have occurred under a budget framework
    based on conventional estimates, at least in part because such a
    framework does not account for the true cost of competing policies.
        For example, consider two hypothetical proposals. The first
    proposal raises $200 billion in revenue by taxing capital gains and
    dividends and increases tax expenditures by $200 billion by expanding
    child tax credits. The second proposal would raise $200 billion by
    reducing child tax credits and reduce revenues by $200 billion by
    lowering capital gains and dividend tax rates. The conventional
    estimates would view these two proposals as equivalent from a budget
    perspective (with some small differences showing up to account for
    certain timing effects). However, the above analyses clearly show that
    the first proposal would decrease economic growth and cause an increase
    in deficits, while the second would increase economic growth and lead
    to deficit reduction if no other policy actions were taken. It is
    important that we account for such differences in the policymaking
    process.

        3. During the hearing, Senator Phil Gramm dismissed Mr. Buckley's
    assertion that one particular dynamic scoring model would force CBO and
    JCT to predict what a future Congress might do. Senator Gramm said that
    ``Anybody that would do that is a moron, because Congress talks and
    doesn't act.''
        Do you see any problems in using a dynamic scoring model that
    assumes how and when a future Congress will act to finance the deficit?

        As I stated in the hearing, this is an important but extremely
    misunderstood issue. It is widely recognized that under the current law
    baseline U.S. fiscal policy is unsustainable. Let's start by thinking
    about the effects of including various assumptions in dynamic models.
        Within the budget window (the next 10 years), the effects are not
    important. Current CBO projections show the debt to GDP ratio
    increasing from 74 to 78 percent over the next 10 years. Failing to
    account for such a difference in the baseline would not have a
    discernable impact on the economic effects of enacting various policy
    alternatives. The modelers can test this by running the policy change
    at both debt levels. In the end, modelers can choose to use an average
    level of debt in the model (e.g., 76 percent). In any case, the
    differences of such assumptions would almost certainly be no more than
    a rounding error in most cases.
        In the long run, this assumption is more important. If you use a
    model that allows for the enactment of an unsustainable fiscal policy,
    then you must be keenly aware of when the model starts to diverge and
    eventually it will fail to solve mathematically. During the divergence
    process, the model will likely produce spurious results. This is
    important to keep in mind when using such a model. In this case,
    assuming current law (note that many commentators argue this is NOT the
    most likely policy outcome, which is one reason CBO started producing
    an estimate of current policy) requires the modeler to model turning
    points in the economy (movements from booms to busts and busts to booms
    are much more uncertain than predicting trend level growth) and the
    effects of economic default. This is extremely difficult and would add
    needless uncertainty to the process.
        I do not see a significant issue with using a model that does not
    allow for unsustainable fiscal policies in the baseline. In fact, I
    believe this is a major advantage in one respect because it allows
    modelers to ignore the future actions of policymakers, which are likely
    unknowable, without having to model the effects of defaulting on
    government debt. More importantly, in terms of measuring the economic
    effects of policy changes, assuming away these large uncertainties
    leads to more moderate projections (note that most critics, and
    especially Mr. Buckley, are wildly confused on this issue). A basic
    tenant of economics is that the excess burden or deadweight loss of a
    tax increases with the square of the tax rate (that is, distortions
    increase exponentially with increases in the tax rate). So the positive
    economic effects from a tax rate reduction from an initially high tax
    rate (such as those predicted in the U.S. under the unsustainable
    current law baseline) would be much larger than a tax rate reduction
    from a lower tax rate (those used in models that ignore the
    unsustainable nature of current law). So assuming a baseline that
    assumes taxes and spending are maintained at current levels as a
    percentage of GDP are likely to moderate the predicted effects of tax
    policy changes. It is my expert opinion that this is a desirable
    feature of an economic model used to predict the effects of policy
    changes well into the future.
        There is another issue concerning the choice of fiscal offsets for
    policies that are being examined. This is an important issue, however
    the professional and knowledgeable staffs of the relevant committees
    are more than capable of managing these issues.

        Do you see any problems in using a dynamic scoring model that
    assumes that every American who wants a job will be able to find one?

        Absolutely not in the long run, and I do not think it is necessary
    to worry about this problem in the short run as policymakers are
    already incentivized to think about these issues in the short run. In
    general, prices adjust to clear markets in the long run. If there is
    excess demand for labor, then wages would be bid up. As wages rose
    labor demanded would fall and labor supplied would rise. If there is
    excess supply, then wages would be bid down. As wages fall labor
    demanded would increase and labor supplied would decrease. While there
    can be periods of disequilibrium (such as the period after the 2008
    financial crisis), I am confident policymakers will continue to respond
    with various short-term stabilizing policies during such periods (i.e.,
    policymakers are often overly incentivized to focus on short run
    issues). But such increases in unemployment are temporary and thus
    should not be the focus of trying to determine the long run effects of
    policies. This is a widely held view. For example, CBO (2014, p. 110)
    states in the 2014 Long Term Budget Outlook that

            ``In its economic benchmark, CBO projects that real gross
            domestic product will grow fairly quickly over the next few
            years, reflecting a recovery in aggregate demand. Thereafter,
            real GDP is projected to grow at a pace that reflects increases
            in the capital stock, productivity, and the supply of labor.''

        Thus, this states that in the long run CBO assumes that everyone
    that wants a job will find a job. In addition, note that the Board of
    Governors of the Federal Reserve is contemplating an interest rate
    increase this fall at least partly because they see the labor market
    returning to the full employment level (note that even in a fully
    employed labor market there is still unemployment as some unemployment
    is ``frictional'').
        I do not believe long-term tax and spending policies should be
    based on short run fluctuations in unemployment. Dynamic analysis
    should be geared to adopting policies that maximize long run economic
    growth. Thus, full employment models can and should be used to examine
    the effects of tax and spending policies that are being adopted to
    encourage long-run economic growth. There may be times when using
    short-run models capable of examining the economic effects of policy
    changes in markets that are not in equilibrium may be important, and at
    that time those models should be used. But I don't believe we should
    adopt long run policy on short run considerations.

        4. At the hearing, you argued that ``What we need is a model that
    has predictive power, not a model that looks like the real world. What
    we want is to predict things accurately.''
        What empirical evidence could you provide to substantiate your
    claim that these dynamic scoring models ``predict things accurately?''
    Can you please provide a list of peer-reviewed articles in reputable
    journals that prove that these dynamic scoring models accurately
    predict the revenue effects of tax cuts?

        These models have been widely used and accepted by many in the
    private sector, academics, and government. A great starting place to
    answer your question is the Handbook of Computable General Equilibrium
    Modeling, edited by Peter B. Dixon and Dale W. Jorgenson, published by
    Elsevier (the most prestigious handbook series). Of course, my favorite
    chapter is Chapter 11 by Diamond and Zodrow. The entire volume is a
    great starting place to learn about the value of computable general
    equilibrium modeling. Also, as stated in the hearing, economic models
    are widely used across a wide range of government and private
    institutions--it is well overdue for Congress to start using these
    resources to make better policy decisions.
                                   __________

    Question for the Record for Mr. Buckley from Representative Carolyn B.
                            Maloney, Ranking Member
        1. Given your analysis of the flaws of dynamic scoring models and
    also given the fact that Congress has already adopted rules that
    require a single dynamic score of large (tax) bills, would you
    recommend Members of Congress to advocate dynamic scoring of both tax
    cuts and discretionary spending? Are there any assumptions in the
    dynamic scoring models that would bias against spending bills? Are
    there any other potential pitfalls that policymakers should be aware
    of?

        If dynamic scoring is appropriate for large tax bills, I believe
    that it is also appropriate for scoring major legislation that involves
    spending on investments, such as infrastructure, research and
    development, and education. Those investments provide substantial
    benefits for our economy, benefits perhaps more certain than the often
    predicted, but never realized, supply-side benefits of marginal rate
    reductions. Without adequate infrastructure or an educated workforce,
    the United States will not remain competitive in the world economy.
        Also, if the scoring rules differ, there will be the temptation to
    move spending programs into the tax laws where dynamic scoring would be
    available. I assure you that spending through tax legislation is not
    difficult to accomplish.
        Unfortunately, current dynamic scoring models substitute
    assumptions for analysis, and those assumptions are biased against
    Federal spending, even needed spending such as investments on
    transportation and other infrastructure.
        For example, CBO assumes that the return on public investments will
    be 50 percent of the return on private investments. They cite no
    evidence for that assumption, but merely note that assumption is
    halfway between zero used by some modelers and 100 percent used by some
    others. Under their assumption, increased spending on public
    infrastructure could be seen as negative for economic growth, something
    that we know is not true.

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