Judging from the feedback, including a call from Fox Business, last week’s column struck some kind of cord. Everywhere I was asked about it, the same questions kept coming up. So this week, I want to acknowledge those queries and give answers.
As a reminder, the column called for creation of a shadow Congressional Budget Office, a Team B for budget estimates. I called it a Citizen’s Budget Office. The idea was to establish a truly independent estimating body outside the government. It would produce parallel projections of the changes in tax rates on economic growth and government revenues. I suggested supply-siders Kurt Hauser, Arthur Laffer, and Lawrence Kudlow for a council of budget advisors that would run it.
But what about bi-partisanship, I have been asked. Aren’t Hauser, Laffer, and Kudlow all cut from the same political cloth? How can you put out estimates without bipartisanship?
Perhaps it shouldn’t have, but the question surprised me. The idea behind the column was that in estimating the impact of tax rates on revenues, bipartisanship has failed us. It has led the official CBO to making bad assumptions that have produced bad results. Over and over, promised revenues from rate increases have not materialized, while instead of revenue losses, rate cuts have been followed by revenue boosts.
I noted the Hauser Rule, product of San Francisco financier Kurt Hauser, one of my nominees for the council of budget advisors. Some years ago and repeatedly since, Hauser asked what has been the historic impact of changes in tax rates on the overall federal tax receipts as a proportion of GDP? Analyzing tax collections from 1950 to the last year of available data, he has repeatedly found the answer was zero.
High tax rates or low tax rates, government receipts have always consistently fallen in a narrow band around 19 percent of GDP. So Hauser asked, which would we rather have: 19 percent of the larger economy that low tax rates foster or of the smaller GDP that high tax rates produce? The official CBO never has asked that question, as it has never acknowledged the Hauser Rule. The shadow CBO I envision would incorporate the Hauser Rule into its projections and, through those projections, into the debate over tax rates?
Today, thanks to bipartisanship, tax debates revolve around Fantasyland numbers that always seem to work to the same purpose. They debunk the long-observed fact that tax rates have an impact on economic growth and so ignore the impact of rate changes on revenues. For example, suggesting that Republicans have distorted the tax debate, Politico last week reported the official-CBO finding that only two or three percent of small business owners would be affected by tax cuts on people making over $200,000 annually. Job creation is a key economic reason for the GOP’s tax stance. It is well documented that the bulk of small business jobs are created by two or three percent of small businesses, presumably the greater part of them in that same two or three percent that CBO fingered. By making that link, a shadow CBO could change the tax debate entirely.
The point of a shadow CBO is not to produce estimates that are bi-partisan but estimates that are right. It could help shift the burden of proof from those who call for taking account of the impact of rates on economic activity to those who, fantastically, resist.
An essential part of my proposal is that the shadow CBO would post its estimates, placing the official CBO’s results along side, and then post the actual results of policy changes as they come out. In other words, it would provide a tool for making the official CBO accountable for its accuracy, not just for achieving a political consensus. After all, if the shadow CBO repeatedly proves more accurate, the official CBO will have to change its methods or become irrelevant.
An old joke has it that an economist is one who sees something in practice and asks if it works in theory. In a period of economic crisis, we cannot afford to work from political numbers that are right only in theory. Bipartisanship is one thing, when it leads to policies that are grounded in reality. It is very different when it becomes a vehicle for willful delusion.
We are in a deep recession. How do we get out of it? That is the question of the day. A shadow CBO – a Citizen’s Budget Office – could help to lead the way.