[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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