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February 11, 2006
Thinking Dynamically In DC

Imagine that the federal government almost never took into account the market reactions to the economic and tax policies it proposed. Instead of calculating the changes to behavior due to the regulatory changes, imagine that Washington based its presumptions of revenue and economic impact on the notion that people would never change their habits to meet the new environment. Politicians might make those presumptions of change, but the bureaucracy responsible for analyzing the effects of the change never took them into account.

If you can imagine that, then you've just identified the way DC has conducted economic analysis -- until now. William Beach at the Heritage Foundation points out that the new Bush budget proposal contains funding for a new office in the Treasury for what the government calls "dynamic analysis", or what Beach calls "economics":

So why is this news? Hasn’t the government been studying the effects of tax policy on the economy all along? Aren’t Washington policymakers routinely advised about how tax changes will affect jobs and output and how those, in turn, will affect government revenues?

Surprisingly, the answer is often no. Until very recently, no official Washington agency produced estimates of the economic and tax-revenue effects of proposed tax policies. ...

Dynamic scoring might not prevent bad tax policy from becoming law, but it would help. Furthermore, reporting the economic consequences of tax proposals will be enormously helpful in redesigning the tax system. The President has called for fundamental tax reform, and he and Congress will find fundamental reform a much easier exercise if routine and sophisticated dynamic scoring is in place when that task is tackled.

Meaningful tax reform cannot take place unless people understand the true consequences of the policies they propose in relation to the policies they would replace. It's amazing that Treasury didn't have anyone responsible for this kind of analysis in the past, but at least the Bush administration recognizes its significance now. Instead of sitting around and inagining what tax incentives, increases, and cuts might do to the economy -- in other words, pulling numbers out of thin air -- Treasury will have solid analysis to help develop positive economic policy in the future.

Sounds like progress to me!

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at February 11, 2006 8:24 AM

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