Hearings of the
Committee on Rules
Subcommittee on Legislative & Budget Process
Thursday, May 9, 2002
The subcommittee met, pursuant to call, at 10:38 a.m. in Room H-313, The Capitol, Hon. Deborah Pryce [chairwoman of the subcommittee] presiding.
Present: Representatives Pryce, Hall, and Slaughter.
Ms. Pryce. The subcommittee will come to order. Let me extend a warm welcome to all of you, to ranking member Mrs. Slaughter and to our witnesses, CBO Director Dan Crippen and CEA Chairman Glenn Hubbard. We will also be hearing from Mr. Cox, Mr. Matsui, Mr. Stenholm, and Mr. Ryan. I want to thank you all very much for being here.
Last week, we heard from outside experts on the merits and potential problems of including macroeconomic feedback effects in the official estimating process. Today, we are pleased to hear from the custodians of those models who have the considerably weighty task of developing our Federal Government's budget estimates.
No one debates the fact that changes in tax policy will influence savings in investment decisions made by individuals and businesses and, thereby, Federal revenue collections. In fact, under current House rules the chairman of the Committee on Ways and Means may request dynamic forecasts, and the Joint Committee on Taxation must provide them in a timely manner. However, the real question is, can we insure that our expenditure and revenue estimates are as accurate as possible without thwarting good policymaking?
Our goal is to uncover any potentially misleading conclusions that result from our current estimating process. For example, do cuts in marginal tax rates simply mean lost revenue or do they have the opposite effect by reporting productive behavior? If the CBO baseline is intended, quote, to provide an objective foundation for assessing policy options, unquote, then that is what we should have.
Reflecting the assertion that the current estimating models do, in fact, leave room for improvement, the Ways and Means Committee recently announced the formation of a blue ribbon panel comprised of a wide range of economists with modeling experience. The purpose of the panel is to review and evaluate the model currently used by the Joint Committee on Taxation. Our hope is that the blue ribbon panel will not only set forth some solid recommendations for improving Federal revenue and expenditure estimates but that it will ultimately result in a much more open and transparent process.
I would be surprised to find anyone in this room or in the halls of Congress who would not readily support increased disclosure of the underlying assumptions used in the scoring process.
My sense is that until we let the genie out of its bottle we are letting many opportunities for better policymaking slip through our fingers and we cannot passively watch that happen.
I am thankful for the hard work that has been done over the years to advance this important issue, and I look forward to this being the year of action. I look forward to the wisdom that our witnesses will pass along to us today.
I will turn to Mrs. Slaughter for her opening statement.
Ms. Slaughter. I am only going to reiterate pretty much the caution that I expressed last week at the first hearing in placing what I think is unfounded faith in macroeconomic indicators that may or may not shed light on the budget projections.
As the past year has demonstrated, this Congress will be foolish to believe that the Nation can anticipate unlimited growth as far as the eye can see. We cannot fight an open-ended war and ensure the solvency of Social Security and Medicare and provide unlimited tax cuts without jeopardizing the economic health of this Nation.
I am still stunned that we have fallen so far and so fast in less than a year, from a surplus of $5.6 trillion that shrank by $4 trillion. This is the worst fiscal reversal in American history. If you set aside Social Security, the budget projection shifted from a surplus of $3.1 trillion to a deficit of more than $700 billion.
I would also note that markets have yet to respond with any confidence to this body's dynamic assessment of future revenue rejections. As I left my office this morning, the Dow was plummeting; and none of the talking heads was optimistic that good news was just around the corner.
How CBO realistically anticipated such financial loss estimates is a mystery to me, but as CBO has wisdom to impart on that, I am all ears. Thank you.
Ms. Pryce. We will call our first panel, Mr. Dan Crippen, Director of the Congressional Budget Office, and the Honorable R. Glenn Hubbard, Chairman of the President's Council of Economic Advisors.
Thank you very much. We appreciate your attendance today. You are the experts, and we are eager to hear from you.
STATEMENTS OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE; AND HONORABLE R. GLENN HUBBARD, CHAIRMAN, PRESIDENT'S COUNCIL OF ECONOMIC ADVISORS
Ms. Pryce. We will start with Mr. Crippen.
STATEMENT OF DAN L. CRIPPEN
Mr. Crippen. Thank you, Madam Chairman. Thank you for the opportunity to explain some of what we do and how we do it.
It is certainly not that we can do it better than you, but the more you understand about what we do, the easier it will be for you to evaluate what it is we do.
Before I begin, I would like to put some of the many numbers we will use today in perspective. Over the next 10 years, the U.S. economy will produce something like $140 trillion in goods and services -- $140 trillion. The Federal Government will collect and spend about $25 trillion, or 20 percent, roughly, of what the economy will produce.
So when we discuss a change in these 10-year projections of $1 trillion or even a tax cut of a trillion dollars, we are talking about roughly 1 percent of what the economy will produce between now and then; and we are talking about roughly 4 percent of what the total Federal budget will be.
Put another way, small changes in these very large numbers, especially when carried out over a long period of time like 10 years, can produce seemingly large changes. For example, a 1/10th of 1 percent change in real GDP would change surpluses and deficits by nearly $250 billion.
Madam Chairman, I want to say a few words, as you have and as our subsequent witnesses will, about the hearing's published topic, the accuracy in our forecast. Then I will turn more specifically to dynamic scoring. Our written submission includes considerably more material on the subject than I will speak to this morning.
In order to make budget projections, we must first forecast how we expect the economy to perform and then translate our economic forecasts into budget forecasts and projections. Both tasks obviously contain uncertainties, which may compound or offset each other.
The last several years, we have published a chapter in our January baseline report entitled “The Uncertainty of Budget Projections.” That chapter, chapter 5, makes it plain for all to see where we have missed in the past, some of the analysis we have undertaken to mitigate those errors and, importantly, how uncertain our projections are based on those past misses. As part of this analysis, we have tested the proposition that failure to incorporate dynamic scoring of legislation has contributed to forecast error; and I can tell you that it has not.
This first chart, Madam Chairman, which we have called the "fan" chart, has been part of our ongoing effort to reinforce the uncertainty in looking out even 5 years, let alone 10.
[Insert Figure 1.]
You will see from the bands in the next 5 years, how our most recent forecast may or may not come true. The further you get away from the center of the darker line, obviously the larger the error.
Looking back at our forecasts since 1997, for example, we compare them to actual outcomes; and that comparison starts to explain some of the uncertainty.
[Insert Figure 2.]
From this chart, Madam Chairman, which was the cover on our midyear report in 2000, we can see that legislation enacted after we made our projections in 1997 did not play a big role in the change in fiscal outlook. What happened was a dramatic and unanticipated increase in revenues over this period.
Contrasting that cover with our most recent baseline report shows that the dramatic reversal of fortune over the next year or two was caused primarily by the onset of a recession and the unusual decline in the largest tax bases, combined with the revision in historical data by the BEA.
[Insert Figure 3.]
One might say, What the economy gives, the economy can take away, at least in the short run.
Turning to the issue of dynamic scoring, Madam Chairman, let me say that neither Glenn nor I, I hope, nor our predecessors are obstreperous jerks that refuse to do something that seems to be so obvious. Rather, we and our predecessors, I would suggest -- and I don't pretend to speak for Glenn -- don't know how to do dynamic scoring, we simply don't, despite assertions to the contrary that it is a matter that is simple. Let me tell you why.
We think dynamic scoring is important. Much of the body of Federal law and regulation, along with any legislative changes to it, has effects on the performance of the economy and, often, particular sectors within it. In fact, changing how the economy works is often the objective of the laws you enact. So information about the macroeconomic effects of proposed legislation and the implications of the effects of those on the budget could often be useful in the legislative process. So as I am using the term, dynamic scoring reflects the effects of legislation on the economy and its potential feedback into the budget and fiscal outlook.
For scoring purposes -- by that, I mean for scoring legislation as it passes through the Congress, scoring a tax bill, recording the annual effects of a bill - CBO's and JCT's formal estimates do not and, I suggest, could not include those macroeconomic effects in a useful and credible way. Again, we don't know how to do it.
Why is that the case? Principally because the macroeconomic consequences of today's actions will be determined by policy decisions that have not yet been made. For example, a spending increase or tax cut now must be financed by either lower spending or higher taxes in the future. Those future decisions about that financing frequently determine the macroeconomic effects of today's policies. There is a fundamental difference between a tax cut financed by a roughly contemporaneous cut in spending and a tax cut financed by additional borrowing for some years and a tax increase in the future. That first may well increase GDP; the latter is likely to reduce it.
Let me reiterate in terms of today's debate. If you believe, as many of your colleagues do, that reducing taxes today would help hold down Federal spending in the future, then, in general, it is more likely the tax cut will help the economy grow. If, however, you believe, as many of your other colleagues do, that a tax cut today will need to be reversed in the near future, then future economic growth may be diminished.
There is no objective way to make the choice, and different assumptions produce not just different results but opposite results. So CBO could make an assumption about what the next five Congresses and at least two presidents will do, but it would be arbitrary at best. While the lines are not bright, the possible assumptions at the moment do tend to break along partisan lines.
In addition to the need to specify alternative futures, the assessment of legislative effects on the economy is often confounded by offsetting effects and, sometimes, offsetting provisions. In general, reducing taxes does result in increased after-tax income, but that alone would reduce the incentive to work. Cuts in marginal rates, however, will also increase the marginal payoff from work and increase labor participation.
We think, on balance, cuts in marginal rates will help the economy and increase labor participation. But the effect depends on whether the price effect overcomes the income effect.
More specifically, in last year's legislation the reductions in marginal rates should increase the labor supply over time, but by small amounts because the reductions were small, because the AMT will counteract the positive effects in later years, and because the tax may be viewed as temporary. On the other hand, the increase in the child tax credit, while perhaps perfectly good policy, will likely diminish labor participation by second-earners.
On balance, we don't know where that falls out.
Further, to attribute any short-run effects to legislation, monetary policy must be assumed to be constant: that is, the Fed will not react to a change in fiscal policy, an assumption that has not held and will likely not hold in the future.
Finally, and potentially most importantly, the reaction of taxpayers to specific policy changes may be based as much on their perceptions as on the reality. For example, will taxpayers assume that the scheduled sunset of last year's tax bill take place as scheduled? Or will some provisions sunset but not others? Without knowledge of how taxpayers will react, we can't predict what the outcome will be.
But while it is inappropriate in my view to incorporate information about macroeconomic impacts in a cost estimate, that information can still usefully be presented in other ways. CBO has frequently described the macroeconomic effects of both past and proposed legislation either in separate reports or in its description of the economic assumptions underlying a baseline. In such reports, we are not constrained by the conventions of baseline estimates but can explore the implications of alternative assumptions.
In practice, inaccuracies in our forecasting receipts appear largely to reflect difficulties in predicting turning points in the business cycle, shortcomings in the most recently available income measures that are used in our models, and inherently unpredictable events such as shifts in the income distribution and rapid changes in stock prices. Those sources of error do not seem to be related to any failure to predict the macroeconomic effects of legislative changes.
Madam Chairman, in conclusion, I do not believe that dynamic scoring by CBO and JCT that very explicitly incorporated the macroeconomic effects into the bill-costing process would improve analysis provided to Congress. There is no objective way that congressional staff can make assumptions about current let alone future congressional actions, public expectations of those actions, or future monetary policy. Such assumptions would drive the results and undermine their credibility. We can provide, however, useful information on the economy in other ways.
Thank you.
Ms. Pryce. Thank you very much.
[The statement of Mr. Crippen follows:]
******** INSERT 1-1 ********
Ms. Pryce. Alright. Now we turn to Mr. Hubbard. Thank you for being here.
STATEMENT OF HON. R. GLENN HUBBARD
Mr. Hubbard. Thank you very much Madam Chairman, Mrs. Slaughter.
I had turned in testimony, so I will be brief and hit the high points for you. I figured Dan would go into CBO procedures, so I will focus my remarks principally on your questions about dynamic scoring.
As you know well, and Dan has just indicated in his remarks, both we and the administration through the Treasury Department and on the Hill through the Joint Committee take into account a number of behavioral effects into revenue estimates. There is some discrepancy over approaches and disagreements here and there, but basically that is done.
What is at issue are really effects of the overall economy, which I guess popularly goes under the term dynamic scoring. Under this dynamic scoring alternative to what we do now, a revenue estimate might explicitly incorporate what we believe the effect is on the overall economy and the feedback of that into receipts. That is, we would try to guess or estimate what the effect is on GDP or on tax bases like wages or interest, profits, dividends and so on.
In thinking about dynamic scoring, I really wanted to make five observations for you; and I will start with the simplest.
At the most basic level, it is hard to argue with the notion of dynamic scoring. Surely it is the case that we would want to look at all potential effects of tax policy on the economy and on revenues in giving you advice and giving the administration officials advice. To do that would require evaluating what you think the effects of the policies are on economic activity, redoing calculations when you change the Tax Code, and comparing the effects on a year-by-year basis.
Just to make an example for you, suppose we decided to rip up the current Tax Code and move to a broad-based consumption tax. I think most economists would believe that output of the economy would be higher once and for all for that change.
Let's assume that change was a 4 percent increase in GDP. To do a dynamic scoring of that would require going through and estimating what the effects on the economy would be and likely effects on revenue. Again, at the most basic level, were there no other concerns, it is hard to argue with throwing away information.
A second point, though, is the way I think of dynamic scoring, and I think I heard Dan correctly in the same way, is that it is really additional information about the tax policy process.
As you know, one of the costs of a tax system inevitably is distortions. Taxes -- almost all taxes will distort some subset of incentives and have some effects on the economy, providing policymakers with information about those distortions. Surely this is good policy. I would argue that you have the right and also humbly I submit that you have the responsibility to know what those effects are.
What I believe would be useful in that regard is to, for lack of a better term, supplement the existing estimates you get with an impact statement that discusses first qualitatively the likely effects on the economy and then provides you a range from models that are deemed respectable in the profession and used by the staff on the Hill and in the administration.
So, point one, dynamic scoring surely is a good idea in theory. Point two is an impact statement for you.
The third observation I would offer is that dynamic scoring doesn't make sense for every tax proposal. My guess is, if memory serves me right, the Joint Committee probably does something like 4,000 revenue estimates a year and my colleagues in the Treasury, let's say, do the same thing, give or take. It would neither be prudent nor informative to give you a dynamic scoring for all of those.
When should you do an impact statement? As an economist, I would think this is a cost benefit problem. Doing dynamic scoring is costly to do the models correctly. When are the benefits high? When there are big policy changes.
For example, the very large tax change that you enacted in 2001 or if you were to talk about fundamental tax reform, these are precisely the times in which knowing about dynamic scoring would help you make a policy call.
The fourth observation I would make really is just a corollary of the previous two, because I don't think every proposal deserves dynamic scoring. I don't think it would be useful for you. Because I think of the macroeconomic consequences as real, a supplement to the information you are already getting, I concur with Dan, I would not imbed dynamic scoring in the existing budget process. I think that you get the information you need to know from impact statements, and I will give you are an example.
Suppose you were considering two tax changes that cost the same amount, one we say giving rebates to households every year, the other is the cut in marginal rates. Those may have the same, quote, static costs. I think virtually all economists would tell you that the economic growth effects of marginal tax rate cuts are greater. That is information you should have in making your decision.
Dan went through some of the provisions of the 2001 legislation that arguably could have benefited from such an analysis.
The final observation I would leave you with is the dynamic scoring of tax proposals is difficult. Now, this cuts both ways. It clearly is the case that it says the hurdle is high on when to use it. I don't mean difficult in the sense of just taking a lot of staff time, although it is that. I mean there is disagreement in the profession on some aspects of these things. So I think that you only want to use it where you think the benefits are greater than the cost, and I will illustrate that side of the double-edged sword.
Suppose you were to consider a proposal that would eliminate the double taxation of equity income, something that I would suggest would be good tax policy, and suppose that you were going to enact the policy this year but it is not going to become effective for 2 years. Well, gosh, how do you model that?
A theorist would say, well, if you expect this change in the future, stock prices are going to go up today, and that is going to effect the economy. Somebody else may have a different view. This is a very difficult thing to do in practice.
Having said that, the fact that something is difficult does not mean you should not do it. I would argue that many of the microeconomic behavioral effects that are already done are just as difficult and, frankly, just as controversial; and they are done. So, yes, it is difficult, but, yes, I believe it is worth the struggle for large changes.
So I salute you and the subcommittee for holding hearings like these. I think it is important also to go back and look at the history here. The Joint Committee, of course, had an exercise in the mid-1990s that culminated in a 1997 symposium. The Ways and Means Committee, as you know, continues to work on the development of a model. In the administration we do the same.
So, again, thank you, Madam Chairman. I look forward to answering your questions.
[The statement of Mr. Hubbard follows:]
******** INSERT 1-2 ********
Ms. Pryce. Well, thank you both for your statements. We learn a lot every time we sit down to talk about this.
I have two short questions that I would like you both to consider, if you could.
First of all, can we make the scoring process open to the public? Would that help alleviate some of the concerns of political impropriety if we were able to do that? Is there any reason we shouldn't make public our analyses?
And the second question is, talk to me a little bit about dynamic scoring in terms of spending changes. I know all the emphasis that goes on revenue, but I think that from my legislative perspective I would much more see dynamic spending applied to the spending side so we can get a truer estimate of actual cost, and the savings that spending can give us.
So, with that, Mr. Crippen.
Mr. Crippen. Let me start. I will answer the first question, and we will go back and forth.
Yes, we should make our modeling and our assumptions and our estimates as open as possible. We have been trying to do more of that, frankly. As I said, in chapter 5 of our annual reports, we publish how we did and why we think we didn't do as well as we might have. But when it comes to individual cost estimates of legislation, we are including very clearly what we assume in order to get to the result.
We are trying to increase the openness, the transparency, in all of our estimation. We are developing some longer-term models for Social Security and Medicare, and that process has been very open. We publish papers about it. We meet with congressional staff, with other interested parties from the Social Security Administration on down. So there are ways to make this a much more open process. We are trying to do that now.
I agree with you. If you know someone's assumptions, how he or she gets to a result, it is less likely that you can be concerned about potential biases. I mean, if they are there, you will see them. But it is not a matter of hiding the ball. If you know what the assumptions are, you can assess for yourself what the potential biases are.
Ms. Pryce. Okay.
Mr. Hubbard. On the question of openness, I have two points. One, as you say, I want some look at how aggregate revenues are forecast. Dan referred to that as CBO. CBO has actually been a model. There are have been outside academic evaluations of the accuracy of CBO estimates. I think this is the kind of thing that is very healthy for CBO and OMB to do.
Your question which has to do with dynamic scoring or evaluation of individual proposals of generic type, suppose we have investments, suppose you want to cut marginal tax rates or cut the marriage capital gains tax. I am not sure you want to necessarily have every individual review estimate vetted. Again, with 4,000 of these a year, you probably want to have generic categories discussed.
CBO has a panel of academic advisors, the Treasury is beginning to consult groups of academics on individual topic areas, and that is the kind of openness that I think where people build coverage in models.
I am not sure openness is promoted by having a microscopic evaluation of each revenue estimate, as opposed to examination of the categories like investment centers or marginal rate cuts.
On your question about spending, I think here most of the big errors in spending estimates probably have little to do with dynamic scoring so much as misunderstanding participation rates, demographic changes and so on.
When I think of dynamic scoring conflicts for spending, I would argue they make the exercise all the more difficult than for taxes. For example, suppose we believe intuitively that promoting early childhood education is a good thing. It would raise some intellectual achievement, participation, attachment, all those things. How do I go from that to a dynamic score over a 10-year period that would you look at or 5-year period here? I am not so sure. While there may be conflicts on the tax side of elasticities or technical effects, those conflicts are surely smaller than the effects of big spending changes.
So, again, in principle, yes, it is something you should look at. But I think it is going to be devilishly difficult to do in practice.
Mr. Crippen. As I think you know, Madam Chairman, we do a lot of dynamic kinds of scoring, but not of the macroeconomic feedback that we generally refer to. But certainly, in terms of program participants and their reaction, whether the topic is welfare reform or Medicare expenses or other things, we try to anticipate fully the behavior of doctors, hospitals, participants, pharmacists, pharmaceutical companies, all of them, to reach a conclusion about what the likely impact on the Federal budget will be. So there is a lot that is dynamic, if you will, already in everybody's estimates.
Spending's effect on the macroeconomy is perhaps less clear than taxes' -- the economics profession might say. We have done a couple of studies over time, I think the most recent was 1995, on spending for infrastructure, highways primarily but also other kinds of infrastructure, and couldn't find a relationship between that spending and helping the economy grow, which was the common assertion. It doesn't mean it isn't there, but we couldn't find it.
You will find similar kinds of things, I think, in other programs that may well help the economy ultimately, whether they are for education or other things. For example, for Head Start, there is evidence that, in the first years, it does help a lot on a variety of measures but that those effects dissipate over time. So some years after participation in the Head Start program, the differences between those kids who were and weren't in Head Start disappears, largely. But then, later on in life, there are some positive effects on behavior and the propensity to break laws and things like that that may well be very good.
Such an illustration doesn't question the policy, only our ability to assess its impact on the macroeconomy and how we would insert that into any of our models.
Again, the assumption about the alternative is critical. If we increase spending for something, even if we thought that on its face it might help the economy grow, the impact depends on how we finance it. If you were to cut spending in other areas, then it would be much easier to assess the effect and maybe assert that the effect would be positive. If you don't, if you have to raise taxes or debt to finance it, then the effect is much less certain.
Ms. Pryce. Wouldn't you agree that many spending changes we make save money in many other areas, and is that -- is there any way -- that would seem to me like a simple factor to factor in?
Mr. Crippen. An example might help me.
Ms. Pryce. For instance, here is one I am working on. It just comes to mind. Oral cancer therapy. You take a pill instead of going to the hospital to have chemotherapy. That is an obvious cost saver, right? The fact that you don't have to have the intravenous application of the drug, the fact that you don't to go anywhere to receive it, the fact that there is much less complication and risk for infection and that type of thing. So that would save our medical system a lot of money in the long run. Are those kinds of things factored in?
Mr. Crippen. We do. Wherever there is evidence of that, we factor it in.
Now there are often things that folks think would help that are not so clear -- let me give you an example. giving a pharmaceutical benefit to all elderly. The assertion is made that that will reduce other medical costs. It is not clear. It is not as clear as common sense would appear to tell you, for a couple of reasons. One, all of the elderly now get some pharmaceuticals. Seventy-five percent are insured some way or another. Those who are not fill 19 prescriptions a year, compared to 26 or 27 by those who are insured. So virtually all the elderly are getting some pharmaceuticals.
That is not to say that there is no hardship here. But the point is that most elderly are getting some pharmaceuticals now. So the benefit won't change by much how many pharmaceuticals, how many pills are going to the elderly. So whatever effect there is would be small to begin with.
Ms. Pryce. Clearly, it is a lot cheaper to stay home and take a pill than go to the hospital.
Mr. Crippen. But the more people take pharmaceuticals, the more emergency room episodes there are for drug interactions and accidents and inappropriate taking of the pills. So it is not as clear as it would appear on its face.
Ms. Pryce. But it is factored in.
Mr. Crippen. Yes. Wherever there is evidence of that happening, we take account of it.
Ms. Pryce. Thank you.
Mrs. Slaughter.
Ms. Slaughter. Thank you.
I want to thank both of you for coming. You are extraordinarily highly regarded. We appreciate your taking all the time to come and talk to the three of us. The panel we had last week -- I am pretty much in agreement that dynamic scoring may sound good on the surface, but it is hard to do.
I am struck by your assessment that nobody really knows how to do it and there is no objective way to incorporate these factors. But if Congress mandated something on CBO, are you concerned that the ramifications for CBO's estimates will suffer?
Mr. Crippen. It depends on what the mandate was. If you just said, go away and give us dynamic scores in the way that we think of them, marking down for each year how much revenues would be, that could cause us to be involved in what is essentially a political debate, about what you think the alternative fiscal outlook is. If, on the other hand, you said, make whatever assumptions you need to, we could give you both various assumptions and the corresponding results. If you said, “This is the assumption we want you to use,” and specified it, that would be easier.
But, even having said that, I need to point out that there is a whole range of uncertainty here. It includes future fiscal policy, which is impossible for anyone to know; the interaction of different effects, different provisions even within the same tax bill; and, equally importantly, how taxpayers are going to react. In that, frankly, there isn't nearly as much empirical evidence as some of the proponents would have you believe. It's not clear how taxpayers will react.
Ms. Slaughter. Would you mind putting up the chart again on this January, 2002, budget economic outlook and why the projections change? Go through that a little bit slower for me, please.
Mr. Crippen. The top line is our projection for last January, the $5.6 trillion surplus. As you said, $4 trillion has disappeared from that in some sense. That is the bottom line. What we have tried to do is show you from our estimates where that $4 trillion went or what the changes were. The top line is -- the top blue slice reflects the tax bill; the darker blue slice reflects spending. Spending is up over what we expected last January. The next slice reflects debt.
Ms. Slaughter. So that is the effect of legislation.
Mr. Crippen. The top three slices show the effects of legislation.
So you can see in the first couple of years, the effects of legislation are small relative to what the changes in the economy essentially have created. Over time, those effects of legislation, of course, grow, and the immediate impact of a recession is mitigated over the long run. In the short run, the effects are mostly attributable to the economy or changes in our projections of the economy; in the long run, to legislation.
Ms. Slaughter. What is your projection for the economy now?
Mr. Crippen. For the moment, our projection is a little low in these first couple of quarters relative to what we are seeing being reported. But let me give you an example of why these things are not as clear as they might seem.
We are currently experiencing what appears to be fairly rapid growth in GDP. Some of that is bounce-back on inventories. But, at the same time, we are seeing, we are collecting, and we will report this morning -- or did at 10:30 in our monthly statement -- that the federal government is collecting a lot less revenue than we expected, even though we thought the economy would be growing more slowly than it is. So we are getting faster economic growth right now but lower revenue.
The reason for that seems to be the tax base, corporate profits and personal income are not growing at the same rate the economy is. In fact, they may have fallen off some.
Now, is that permanent? It may well not be. We don't know. We don't have enough information to know exactly the sources of the falloff in revenue. But we are getting less revenue than expected from the economy.
So the point is that we were wrong about the economy for these next couple of quarters, but if we had been right, it would have been further off in projecting revenue because the relationship between economic growth and revenue is far from perfect. And taxpayers change their behavior. So we don't know exactly why revenue is falling off, but it is falling off.
I can show you in this chart. Again, this is tying together what we had forecast for the tax base last January and our current forecast.
[See Figure 4.]
The tax base is corporate profits and personal income, largely. You can see the divergence from our March 2002 forecast of diminished revenue. We have actual data today, and we expect fully that BEA will be making revisions in July, something like we are showing here. That is a very common element in our estimates' being wrong as well: the historical data changes. In fact, last July, BEA reduced its estimate of the growth in 2000, calendar year 2000, by one full percentage point. So the historical data changes as well. So that is another source of error.
Ms. Slaughter. You don't see any parallel here to anything, say, like 1929.
Mr. Crippen. No. No. As I said, we don't know enough to know where this falloff is actually coming from.
Ms. Slaughter. Job loss. Let me speak from my district. We were blessed with Global Crossing and a few other corporations that are all doing fairly poorly, and even the people who are working there are afraid they won't be working in the future.
Let me ask you a question, please, Dr. Hubbard, about Congress's responsibility to incorporate the impact of our actions by using an impact statement, which certainly makes a lot of sense, but you say that there is so much disagreement with the economist people in the profession over what the impacts are. That puts those of us who are not economists in the Congress who do have a responsibility at a terrible disadvantage, and we want to fulfill our responsibility to try to do this budget. Do you have any advice for us trying to perform this duty? If there is no consensus anywhere on this dynamic scoring --
Mr. Hubbard. Let me go back to a slight disagreement that I had with Dan. You should not believe that there is no disagreement when you get behavioral estimates and microestimates when you get them from JCT or from us. In fact, in many areas I would argue that the uncertainty is actually greater than some of these microeconomist estimates. You already have that. I think it is a question of giving you reasonable answers and income statements.
The idea of uncertainty about future policy, of course, holds in microestimates, too. If you are asking me about cuts in the capital gains tax, why can't we raise it tomorrow or leave it lower forever, that enters into every kind of estimate. So don't be misled by that. You still need these impact statements, even if they are uncertain.
Ms. Slaughter. What kind of impact statement would you have given us on the tax cut?
Mr. Hubbard. I think what I would have done is walked through provision by provision, as Dan did in his testimony. He said that some of these provisions have predictable effects on economic growth. The profession says they are between this and this. Others may be good tax policy in some way but perhaps have only very modest effects on economic growth, and you should know that as you decide to put them together as a package.
I think, while there is always disagreement among economists, it is the nature of the beast, perhaps. There is still a group of reasonable estimates that one would use to frame the debate. I think the JCT and CBO support you, and Treasury and OMB for us are perfectly capable of doing that.
Ms. Slaughter. Thank you very much.
Ms. Pryce. Thank you very much, gentlemen. The Rules Committee is most appreciative of your presence here today and your enlightening remarks. I am sure we have not heard the end of this.
Now we will have our next panel, which consists of Chris Cox, Charlie Stenholm, Bob Matsui and Paul Ryan.
Ms. Pryce. Mr. Stenholm -- Charlie, we will allow you to go first. Thank you for taking the time to be with us today.
STATEMENT OF THE HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Stenholm. Thank you, Madam Chairman. Thank you for the opportunity to be here and to testify, to give you a few of our views.
The establishment of a consistent benchmark based on the nonpartisan estimates of CBO has proven beneficial in that it has prohibited either party from manipulating the numbers in an effort to present its proposed policies in a more favorable light.
The policy of relying on the projections of the nonpartisan experts at CBO has served us well. We should not abandon that practice by requiring or pressuring them to change their methods to suit our political purposes.
The suggestion that budget estimates of legislation use static estimates that don't take into consideration the changes in behavior caused by tax or spending policies is not accurate. All revenue estimates used in the policy process include estimates of the effect on the tax base of changes in tax rates.
Estimates of the budgetary impact of spending and tax proposals incorporate a wide variety of behavioral changes in response to economic incentives. Those changes are often called dynamic effects. For example, revenue estimators would take account of the effects of the change in gasoline taxes on the demand for gasoline when they make the revenue estimate that appears in the report on the legislation.
CBO has frequently described the macroeconomic effects of both past and proposed legislation either in separate reports or in its description of economic assumptions underlying the baseline. There is nothing to prevent CBO from doing studies to inform the Congress of the findings of academics and others as to the complete dynamic effects of specific policy changes.
However, requiring congressional estimators to use dynamic scoring is very dangerous. The experts in making budget estimates have told us that it is extremely difficult to estimate precisely the full dynamic effects of legislation on program costs or on revenues even after enactment. To forecast the effect of such policy changes on the economy, CBO would not only have to forecast the implications for future government policy decisions but also need to guess what individuals and business leaders believe those implications will be.
Changes in government tax and spending policies are only one variable in a large and complex economy. Suggesting that we can predict the impact of the change in taxes or spending of even 50 or $100 billion would have on a $10 trillion economy is very difficult to do.
It is also important to remember that fiscal policy has implications for monetary policy that we can't predict. In addition, a tax cut or spending increase that would be expected to provide economic stimulus in isolation may also cause increased deficits which place a drag on economic growth by keeping interest rates higher than they otherwise would be.
Under the logic of those advocating dynamic scoring, the tax cut we passed last year should have resulted in surpluses greater than was being projected last spring. In fact, many of the advocates of dynamic scoring predicted that we would be able to afford the tax cut and still have substantial surpluses remaining because of the stimulus effect of the tax cut.
Some of us who supported the tax cuts in 1981 based on the supply side theory and lived to see the consequences were very skeptical when they heard the same promises last year. As we all know, the promises of the tax cut producing surpluses even greater than projected turned out to be very wrong. The Congressional Budget Office will be issuing a revised budget estimate for the current fiscal year this week, which will show a much higher deficit of greater concern. It has become apparent that we have returned to chronic deficits as far as the eye can see.
The dramatic increase in the deficit projections cannot be completely explained by the economic downturn. Analysts are finding that much of the unexplained surge in revenues that produced the surpluses in the past few years has disappeared. We can disagree about the extent the tax cut contributed to the return to deficits, but it clearly did not have a dynamic effect of producing higher surpluses and revenues than was projected under additional scoring procedures.
There is no objective way that CBO can make assumptions about the actions of current and future Congresses, about public expectations of those actions or about future monetary policy. Such assumptions would drive results and undermine their credibility. If CBO and Joint Tax were required to implement dynamic scoring, they would come under intense pressure to provide favorable estimates for spending programs as well as for tax provisions.
The conservative approach is to be conservative in budget projections. If we err on the side of being conservative and cautious, Congress can easily deal with the problem of having more money than was projected. But when we err on the side of being too optimistic, we have a much greater challenge in dealing with fiscal problems such as those before us now. The recent deteriorations in budget projection serve as a striking reminder of the danger in relying on projections of large budget surpluses as if they were real.
It would be even more dangerous to use dynamic scoring to make tax and spending policies seem more affordable. We are now paying the price for ignoring the warnings of experts who cautioned us that they could not fully explain the surge in revenues that produced the growing surpluses. We should not compound that mistake by ignoring the experts who warn us about risk and in requiring dynamic scoring. The current process may be far from perfect, but it is also far better than one that would require dynamic scoring.
Ms. Pryce. Thank you, Mr. Stenholm.
[The statement of Mr. Stenholm follows:]
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Ms. Pryce. Mr. Ryan.
STATEMENT OF THE HON. PAUL RYAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
Mr. Ryan. Thank you, Madam Chair, for having me here.
I would like to ask that my testimony be included in the record. I won't read my testimony because it is a little long and fairly thick.
I also would like to ask to include in the record a special report from the Tax Foundation which is a pretty interesting article fairly recently written on the fiscal forecasting of the CBO and Joint Tax.
Ms. Pryce. Without objection.
[The information follows:]
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RPTS O'ROURKE
DCMN ROSEN
Mr. Ryan. I look like I am a rose between two thorns here on the issue of dynamic versus static scoring. Here is the problem, and here is the reason why we talk about this over and over and over. The goal of dynamic scoring is not to try and fudge the books, cook the books, put a racy scenario on something so we can get our version of the perfect world and to get legislation passed. The goal of dynamic scoring is to better get at the truth. What we are trying to accomplish here is getting at the reality. I prefer to call dynamic scoring reality-based scoring. And when you look at the history of the way we scorekeep around here, it is not a very good history.
The track record of both the Joint Tax and CBO is not a very good track record, especially when you look at revenue issues, tax policy. Spending issues is a little bit better, but not much better and the problem is this: We end up exacerbating misinformed policies. When we look at the revenue effects, the costs of, say, a tax cut or something like that, we miss out on the positive economic growth that would be derived from these policies, and therefore, because of these static analysis which do not properly take into account reality, what will actually happen in the real world, we miss out on putting good policy together. That means we don't reach our true economy's potential.
Let me give you a couple quick examples, and I won't go into the grudging details of the numbers, but it is important to say that not all tax cuts are the same. A tax cut that is something that isn't occurring on the margin, like a tax credit, that is one where static analysis is pretty much more on the mark. It is more or less a direct revenue cost. But a tax cut that occurs on the margins, marginal income tax rate deduction, expensing, the capital gains tax, those are tax cuts that have proven over and over that if they are reduced or raised, produce predictable economic results such as the case with the capital gains tax.
Every time we have cut the capital gains tax or increased it in the last century, we have, through our scorekeeping methodologies here, always been wrong in the wrong direction of how they will end up. For instance, in the 1970s and the 80s when we cut or raised capital gains taxes, Joint Tax and CBO together combined always determined that if you cut the capital gains tax, it is going to cost money. The opposite occurred. And they have always determined if you raise the capital gains tax, you are going to raise more money, the opposite occurred in 1986. And the problem with that is this, and this is our dilemma: We have two scorekeeping entities, we have Joint Tax, which is supposed to do revenue matters; CBO which is supposed to do spending matters, but CBO does the baseline.
They did an macroeconomic baseline. So Joint Tax has to use CBO baseline economic estimates to produce their macroeconomic estimates. CBO doesn't do a job of estimating macroeconomic feedbacks, meaning changes in personal behavior due to changes in tax policy like in search of realizations when you cut capital gains taxes as has occurred in the past. The problem with that is this, the two sides in the revenue estimating equation here in Congress don't integrate their models. They don't talk to each other. They don't change each other's baseline assumptions based on changes in estimates.
So, for example, with capital gains tax cuts where we have improved on microeconomic estimating, we have done nothing on macroeconomic estimating. And the consequence of that is this: We know that positive economic growth has always been derived by reducing the capital gains tax cut. There are many different econometric models that have borne that out. Yet we ignore the fact that as you, say, for example, cut the capital gains tax, stock prices are lower, liquidity is improved and the economy by itself is improved and we have higher economic growth which means income taxes bring in more revenue.
So we put the blinders on it and we don't see the fact that out there is a reduction of capital of its costs, the increase in the value of equities, and we have more people paying income taxes, not capital gains taxes, so we wash out the revenue effects. But we don't see that. That is what happens in reality, but we don't see that when we estimate these tax policies. That is just one example.
Take a look at expensing. When we just passed the stimulus package earlier this year. We have a 3-year, 30 percent expense provision, meaning businesses can write off in the next three years 30 percent immediately off of their depreciation schedules. That is a pretty good incentive. The problem with revenue estimating of that is because of the CBO's baseline, the Joint Task is forced to assume no change in behavior under that expensing regime. They have to assume that the amount of plant and equipment that was purchased around the country last year will be the same next year, regardless of the fact that there is a 3-year incentive out there for businesses that can write off 30 percent of their depreciation, their purchases right away.
Now that is just devoid of reality. And so as a consequence of that, good pro-economic growth policies that have a potential of helping us reach our true economy's true potential in growing jobs, in growing the quality of life and actually increasing revenues are tougher to pass in Congress because they carry with them a bigger price tag that don't turn out to be true.
And so the question then is well, gosh, should we be liberal and avoid conservative scorekeeping, and you know, play it fast and free -- I think he is calling me -- but the answer is no. The field of econometrics -- I used to work in this field -- the field of econometrics has progressed so much in the last number of years that I think there is a chance we can put together an econometrics model that could be fairly widely agreed upon that would take into account these macroeconomic feedback effects.
And the problem is this: We don't really know what the models look like here. I think that we are seeing progress made in that Joint Tax is convening this blue ribbon panel coming up this summer that Chairman Thomas has instigated, along with the ranking member of the Ways and Means Committee, Mr. Rangel. But the issue is we are finally looking at discussing opening up the modeling procedures, getting feedback from the private sector, looking at academics who are out there in the economy who have done a better job in predicting tax policy and spending policy than we have here in Congress. That is a good start. Hopefully what will come from that will be a better reflection of the truth, of reality.
This happened in 1977. We had a blue ribbon panel that discussed these issues, but nothing really changed from that. I hope that this time, this panel, more change will occur and that change will be in the form of two things, more transparency so that the academia in economics can look and see what we are doing, see how we base our conclusions, see what our assumptions are and see how we justify or don't justify macroeconomic feedback effects.
There is nothing better than sunshine. Let us let academics look at what we do and through that process of transparency, I think we can better get better to closer estimating the truth. The other thing that should come out of this, you just can't tweak a computer. You just can't say to the Joint Tax people who are hard-working people, who are pulling all-nighters all the time because we send them all these requests, the problem is they can't trip a switch in a computer and change a couple of assumptions in their models. It has to be integrated.
The CBO has to go along with the Joint Tax in changing base estimates, because what we are not capturing here are these macroeconomic feedback effects. We are doing a better job on the macroeconomics. And the consequence of that is we exacerbate misinformed public policy making. That is the problem.
You know, Charlie mentioned the problem with the tax bill. The tax bill is a good example of how bad estimating or inaccurate estimating messes up tax policy. And what we did in the Ways and Means Committee is we put together this 10-year tax cut and we looked at scoring as the policy determinator of how the tax bill was assembled. We had big goals, paying off debt, not going into the Social Security surplus. This was before the recession. And making sure that all the numbers added up right. The problem is we threw out good economic growth in the meantime because we are not able to show the positive economic effects that would have occurred had we reduced marginal income tax rates much faster across the board. If we threw a capital gains tax rate cut in that tax bill, we could have, in my own personal opinion, which is definitely not shared by these two guys -- we could have done more to grow the economy, prevent a recession, or better yet, produced a better upswing coming out of the recession.
But because of revenue estimating, we have this alphabet soup of a tax bill where you have different years of phase-ins, complicated schedules, difficult times to tell when the marginal rate is up or it is down or the estate tax. We have a really complicated phase-in of the law because of revenue scoring. So we don't think there are real consequences. To not score accurately around here, that is wrong. There are real consequences. The real consequence is this. More money is being taken out of our constituents' pockets because of the slower phase-in of this tax cut. Good economic growth-producing tax policy is withheld, and therefore we don't see the true potential of our economy and its growth potential by holding back good tax policy.
That is solely because of the scoring and the fact that it doesn't properly reflect reality. The technology, the science, the field of econometrics has grown, it has matured; we should be able to reflect some of that maturity into our modeling procedures. Let us have a good transparency. Let us have a good discussion on how to do it, and let us try and seek the truth because if we have the truth in estimating our tax policies and spending policies, we are going to be better legislators.
Ms. Pryce. Thank you very much, Mr. Ryan.
[The statement of Mr. Ryan follows:]
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Ms. Pryce. Mr. Matsui.
STATEMENT OF THE HON. ROBERT T. MATSUI, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Matsui. Thank you. I am going to submit my statement for the record if I may.
Ms. Pryce. Without objection.
Mr. Matsui. Let me take off where Mr. Ryan made his observation. He said actually, we would not have had the problem we had in terms of the budget projections were it not for the recession. This shows you what the problem is with the whole issue with income forecasting. 2001 January, CBO estimate over the next 10 years where they said we were going to have $5.6 trillion surplus would have taken into consideration, had it taken into consideration the ups and downs of the economy.
And so one would have to anticipate that in a 10-year period, there would be a recession. And that being the case, it should have had no impact on those overall numbers. They should have had no impact on those overall numbers. And that is what we are talking about here, how you translate a microeconomic action, a government action or an action in discovery by the private sector or a spending program and making it into a macroeconomic judgment.
And you just cannot do that. There is no model, I would guarantee you there is no model that can make that determination. Let us just talk about tax policy. Mr. Ryan talks about capital gains. Well, if the capital gains would have increased substantially, the budget deficit, that would have had one impact. If, in fact, it would have cut additional programs, that would have had another completely different impact. Depends upon what other action is involved besides the tax cut that ultimately decides some of the long-term implications. I can't even say those two actions would have a macroeconomic effect, but certainly a tax cut alone without knowing where that money was going to come from where it would increase the deficit, cut spending or find it some other way would make the determination in terms of where we go long-term.
Secondly, assuming you have a capital gains tax cut and you increase the size of the deficit over a 3-year projection, the Federal Reserve board might say well, gee, Federal deficit is so large now we are going to increase short-term interest rates in order to accommodate that deficit because we want to make sure that inflationary expectations are down. That would have a totally different macroeconomic impact in terms of what the consequences of that tax cut was all about.
So you really can't make a judgment based upon a microeconomic decision and make it a macroeconomic conclusion. And let me say this and what Mr. Stenholm said, and I believe it was either -- the CBO director, or perhaps with Mr. Hubbard, there is no question once you get into the tax side of it and suggest this could have a significant impact on GDP, you are going to have to do it on the spending side because one can make the same case if you put more money into education, you are going to increase obviously peoples' ability to productivity, and therefore, you are going to have a macroeconomic impact, or if you want to increase infrastructure expenditures, you are going to have a macroeconomic impact. And there is a real danger there because you put subjectivity into your equation and it will get out of control, whether it is Democrats or Republicans in charge of the House, Senate or executive branch.
And I will conclude and be open to questions with this observation. This just isn't an exercise among accountants and among policymakers and among statisticians. This is a big issue, because I think there is doubt right now in the financial markets domestically and internationally on our ability to forecast. I mean, the recent deficit numbers indicate that. If we begin a process of dynamic modeling in terms of our scoring system, we could create a calamity out there in terms of what the financial markets might think of the Congress and what we are doing. And since we are almost a $2 trillion agency in terms of what we spend on an annual basis, it will have a significant international impact and certainly domestic impact as well.
So this matter should not be taken lightly. This is a very, very serious matter. And I still think that the 97 conclusions that were reached still make a lot of sense. And I think maybe there will be some improvement, but you are not going to see the kind of improvements that will, say, lead us with some degree of certainty that we can move over and talk about macroeconomic policies and conclusions, with macroeconomic conclusions here. It just won't work. We have talked about it through my 22 years on the Ways and Means Committee, and no one has come up with a good solution on that.
[The statement of Mr. Matsui follows:]
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Ms. Pryce. Mr. Cox, would you like to step up to the table and offer your testimony? You may offer your statement for the record.
STATEMENT OF THE HON. CHRISTOPHER COX, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Cox. What I have, in fact, is a statement which I would be prepared to submit in writing and summarize for you. As you know, the Congressional Budget Office was created in 1974 in conjunction with Joint Tax. It provides estimates to help us make sound fiscal policy choices. In order for the information that we receive to help us make sound choices, it has to be accurate. So having listened just now to the discussion, I would offer this observation that instead of arguing about dynamic versus static, we should be arguing about whether we have accurate versus inaccurate scoring. We ought to be talking about ways to make our scoring better. And I don't think that we are capturing in what we are discussing here, the simplicity of it. For example, I have heard that if we use dynamic scoring -- and "dynamic" just strikes me as sort of an odd word that suggests that we are very creative in our accounting.
That we use dynamic scoring and start taking into account all sorts of things. For tax revenues we have to do the same thing for education spending, as an example. All we are talking about with tax revenue estimating is the effect of the rate on the collection. That is it. We are not talking about anything more or less than that. It is simply price theory, which, you know, the economists call a theory that is put into use everyday by retailers in America operating in the fiscal policy realm. We have to make the same choices that the guy who runs the hardware makes, how much do I charge for this screwdriver? If I add an extra dollar, will I sell more of them? And if I do, could I maybe add an extra two dollars?
There is such a thing called prestige pricing, in fact. You can sell Cadillacs at some prices and not at other prices. On the other hand, if I reduce the price of this, will I significantly sell more units if I go that way? And if I do, can I make it up on volume?
And one of the great jokes in business schools everywhere is that when you are below cost price, you can't make it up in volume. That is all we are talking about here. If you set tax rates at a certain level, how much revenue are we going to collect, and we also have to ask what kind of a tax are we talking about because a tax is not a tax is not a tax is not a tax. There are different kinds of taxes. So to add to what my colleague from California just said, some taxes will actually produce more revenue at lower rates and other taxes are going to produce less revenue at lower rates. It depends on what kind of a tax it is, where you are starting from and what else is going on.
But to suggest that always there will be lost revenue from a tax rate reduction and thus the outside variable of interest rates has to be dragged in and on and on because where are we going to fill the hole from the lost revenue is to miss the main point. All we are talking about here is being accurate in determining how much revenue taxes are going to bring in. I think the main problem in the way we do it right now is that we have this facade of neutrality when we assign a number to the economic effect of tax law changes, and that number is zero. It is as if zero is not a number. But while that was the view of people up until the middle ages, that zero wasn't and couldn't be a number, mathematicians are having to tell us now that zero is as good a number as any other.
So when we assign zero for the rate of growth of the economy that will result from any particular tax law change and then pretend to neutrality, we are masking grave errors. Built into our system is not an assumption, not a presumption, but it an irrefutable presumption, a fixed article of religious faith that no matter what we do to taxes in America, nothing will change in the economy, and that we know to be false.
So proceeding from a bedrock assumption that we know is false produces necessary errors that we can eliminate if we improve our system. Let us take a look at the record and see what kind of accuracy we are getting from the current system. In 1989 -- and I am just going back to when I first served on the Budget Committee, when I started compiling this information for my own benefit. In 1989, CBO projected a 1990 deficit of $140 billion. The real number that same year was $221.4 billion, so the 1-year error was 58 percent.
In 1990, CBO estimated a 91 deficit of $138 billion. The actual number was $269.4 billion, an error of 95 percent in a single year. In March 1992, halfway through the fiscal year, CBO predicted for that very same year, $368 billion deficit, and they missed the mark by $178 billion. In January, 1993 CBO estimated a deficit of more $300 billion for the same year, they were already in and they were off by more than $50 billion. In mid 1996, CBO predicted a $150 billion deficit, an overestimate of nearly 50 percent in the same year.
In mid 1997, CBO predicted a deficit $124 billion for that same year, an overestimate of more than 500 percent. In 1998, CBO's 1-year forecast was off by 123 billion, a 98 percent error. In 1999, CBO predicted a surplus of $142 billion for the year 2000, off by $96 billion or 68 percent. CBO's same-year surplus prediction for 2001 was off by $70 billion or 55 percent. And I could keep going into 2003, 2004 and so on, because I know that if we keep doing the same thing the same way, we will get the same bad results.
The average annual error since I have been in Congress is more than 80 percent estimating for the same year that we are already in. The long-term forecasts had been more erratic and less reliable. CBO's estimate for the current fiscal year has ranged from a $579 billion deficit -- I am saying their estimate for the year we are in right now has ranged from a $579 billion deficit, which they forecasted back in 1993 for the current year, to $188 billion deficit which they forecast in 1997, to $176 billion surplus which they forecasted in 2001, now back to $100 billion deficit which they forecast this year.
All of these forecasts are for the very same year. If we plotted them, you would see the wild gyrations. This is numerology, Tarot cards or what have you, but it is not science. It may be the best forecasting science available, but it is not useful in any predicted sense when we compare it to reality. The most important number for the scoring of tax bills is, in fact, what happens to the economy. The biggest variable, the biggest predictor of tax revenue to the Federal Government is what is going on in the economy. CBO's forecast of economic growth are A, not particularly Nastrodamus-like, but B, not particularly different from the blue chip or other forecasts that you can get for free without spending tax dollars to acquire the information.
I think CBO prides itself on the fact that they are about the same as everybody else, and that being the case, one wonders why we pay for the function. CBO recently published an overview of their forecasting record. They included a review of their real output growth projections. It is called real output because in the old days it was GNP now it is GDP from. From 1982 to 1999, it revealed that their mean error was approximately 22 percent. CBO's mean absolute error was approximately 31 percent. What this means that in any given year, their prediction differed from the actual by an average of 1 percent of the whole economy or $100 billion.
Now just to demonstrate what this means, I carried out a simple experiment and I urge you to repeat it if you are skeptical. I substituted Yatzee dice for CBO's complex computer simulation. I rolled one die three times for each year and took the average to produce my estimate for real output growth in that year. The dice produced an average growth rate prediction of 3.43 percent. Compared to the real value of 3.22 percent, this gave me a mean error of 6.5 percent, a significant improvement over the CBO effort. The dice had a mean absolute error of 28 percent, also better than CBO. So perhaps we should turn over the responsibility for forecasting of GDP growth to Parker Brothers.
The point of this exercise is not to insult CBO's economists, but rather to point out that we are gaining little over what we can acquire for free in the private sector, whether we use the blue chip economic indicators and other sources. We are spending 30 million to produce these figures and we are not beating the system. I want to wrap up by reminding us of something that Laura Tyson said when she was chairman of the Council of Economic Advisors, because we do have a political debate here in addition to simply striving for objective accuracy. She said "there is no relationship between the levels of taxes a Nation pays and its economic performance."
I don't know how many people working at Joint Tax today agree with Ms. Tyson's sentiment, but the important thing is that our system continues to function today not only as if most people at Joint Tax and CBO agree with that, but as if it is a religion and an article of faith. According to the current system, no matter what we do to taxes, there will absolutely be no effect on jobs, no effect on inflation, no effect on interest rates, no effect on economic growth. They must all remain unchanged in all circumstance and we know the world isn't like that and we should fix it. Thank you.
[The statement of Mr. Cox follows:]
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Ms. Pryce. Well, thank you all very, very much. This has been very enlightening. Since I am the only member present, I am going to forego questioning and allow us to get on. We are already a half-hour over our time. And so with that, we will continue debate and thank you very much for your input.
[Whereupon, at 12:00 p.m., the subcommittee was adjourned.]
