Making the United States More Like Greece

By Simon Johnson

One of the big problems in Greece over the past decade or so is that the government was not honest with its data.  Various people assisted in the matter – including Goldman Sachs with respect to some debt issues – but ultimately this was a political decision at the highest level.  The people running the country decided to conceal the true nature of their budget and their debt.  This deception ended up costing the country dearly – completely undermining its credibility under pressure and making it much harder to turn the fiscal and economic situation around.

House Republicans are now proposing something similar for the United States.

Because this concerns deficits and debt, the details may seem arcane – and that is how similar details escaped attention by almost everyone in Greece.  Fortunately, in the United States we have an excellent guide – an article in Tax Notes by John Buckley.  (“Dynamic Scoring: Will S&P Have Company?,” February 28, 2012; at the moment this is available only behind their paywall but in the public interest I would strongly encourage Tax Notes to make this piece freely available – as they have in the past for other important articles.)

The key issue here is a concept known as “dynamic scoring.”  This may sound like boring jargon but in fact it cuts to the heart of the most important political issue of the day – the effect of tax cuts.

Republicans want to cut taxes – there is no secret about that.  All four remaining presidential candidates have fiscal proposals with major tax cutting elements.  The problem for them and for their congressional colleagues is that we have an honest broker in the fiscal arena – the nonpartisan Congressional Budget Office (CBO) – that “scores” fiscal proposals according to their likely impact.  (The CBO scores official proposals; it does not score candidates – but its approach to scoring is influential and largely followed by others, such as the Committee for a Responsible Federal Budget, CRFB.)

In the modern United States, cutting taxes leads to lower revenue and larger budget deficits.  There are no two ways about this – as Ronald Reagan discovered in the early 1980s.  (In our new book, White House Burning, we go through the evidence on this point in detail, including important work by Greg Mankiw, former top economic adviser to George W. Bush and now working with Mitt Romney, which confirms that cutting taxes in the U.S. will lower revenue.)

But many Republicans feel that this is not true – in my conversations with them, for example in congressional hearings over the past year, the conviction seems to be that the research on this topic is bad science, even when done by Republicans.  But convincing the CBO to abandon its proven and sensible approach to budget scoring has been difficult.

The solution currently under consideration is simple in its elegance – and downright frightening in its implications.

The CBO was created by Congress and receives its instructions directly from the House and Senate Budget Committees.  If the Republicans controlled both committees, it would be a simple matter to convey to the CBO director that instead of using established scoring practices, it should switch to “dynamic scoring.”  (If Doug Elmendorf, the highly respected current CBO director, were to resist, he could be replaced – his four year term of office will be up for renewal next year.)

What’s wrong with “dynamic scoring” – a procedure that would attach magical growth implications to tax cutting?  Mr. Buckley’s article contains all the details, but his basic point is simple.

The macroeconomic models used to claim big growth effects for tax cuts are simply wrong – and completely at odds with the empirical evidence.  A smart modeler can assume something different and show you that with a great deal of math, but this is just an assumption dressed up in a complicated fashion.

Put more bluntly – there is no magic in the real world, just very large budget deficits.  As Mr. Buckley puts it, “One cannot find in the economic data for the last 30 years any evidence that supply-side-based tax policy has delivered its promised benefits.”

If you cut taxes, revenues will fall and deficits will increase.  If you change the CBO’s scoring process to hide this fact – as is under consideration by leading Republicans on the House Budget Committee and the House Ways and Means Committee – you are engaging in exactly the same sort of deception that brought down Greece.

Alan Greenspan – a leading Republican in his day – got this right in congressional testimony back in 1995 (quoted by Mr. Buckley),

“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.”

10 responses to “Making the United States More Like Greece

  1. It has yet to bring down Greece, which is just another reason to follow in their foot steps. And who cares what system is used to score what when the numbers are constantly being juggled. This reminds me of the sloppy drug dealer always juggling the to keep the money straight, and in the end always short about the same amount as they spend. Drug test your candidates and see how many justify running for office then!

  2. Another nail in the coffin of the Efficient Market Hypothesis–which assumes rational actors cum “all available information”–to this day taught as respectable doctrine by US departments of economics. Of course, the US government has a long history of cooking the books on its statistics, ranging from the inhumane (1 slave = 3/5 human) to the merely greedy (the Boskin Commission, which under Bill What-Is-”Is” Clinton rigged the inflation statistics to screw pensioners et al. out of their full COLA adjustments). And we all have fond memories of the Reagan years, when it was discovered that ketchup was a vegetable when it came to nutrition for the poor.

  3. Simon Johnson makes a very good point here. But why so verbose? What happened to brevity?

  4. “One cannot find in the economic data for the last 30 years any evidence that supply-side-based tax policy has delivered its promised benefits.”

    The benefits were never meant to go to the economy as a whole…they were meant to go to the political elite who sold them
    and to the financial elite who enjoyed the benefit of policy tailored to their wants alone.

  5. There is not the lease chance any party will do what is best for our country. We will default on our debt as will most other counrties. I just hope all my savings will be in gold by then. Maybe there is a world leader plot to just let everybody default and start all over with a different money system. “This time is different” is well researched.

  6. Simon, among economists, you are head and shoulders above most, if not all of them by my calculations. Thanks again for a great effort at analysis of this core economic issue.

    Regarding the supply siders (primarily Freidman/Hayak followers called neo-liberal or neo-conservative at various times), it is impossible to even express the level of massive damage that their theories, policies and practices have wrought world-wide, over the past 50 years. (anyone wishing to gain a better insight into this fact need only read Naomi Klein’s book The Shock Doctrine, a political, but also intellectual work of massive proportion and validity). Understand that I am not particularly Keynsian, feeling that that school has its own set of limitations and flaws. I am, or try to be, an independent and rational thinker on these issues. Extreme positions are useful for argument and discussion, and even analysis, but useless for establishing rational solutions except in such academic ways.

    What truly amazes me it that these supply siders essentially throw out all of what I think of as common sense in favor of insane arguments espousing mathematical calculations intended to evince the “magic” of their theories. These economic theories will never work, and, from my perspective are all about funneling money to the wealthy and powerful, and never intended to be useful in creating fair distribution of wealth, and, in fact purely the opposite (as may be seen in the vast and growing chasm between the 1% and the 99%). There is no potential for anything resembling a level playing field so long as these theories and the practices based upon them continue to proliferate. Sad that they have been able to somehow gain support from the portion of the American population which must be viewed as either elitist or wannabes.

    Sure, no one wants to pay taxes (duh!!), but taxation is a fact in our modern world, and the only answer to supporting necessary governance, Tax “fairness” is central to the operation of any effective modern society. American taxation has seemingly reached the zenith of essential unfairness by almost any measure (I don’t even need to cite examples, since we are almost all knowledgeable of the vast inequities contained in the US Tax Code). It’s time for rational discussion and analysis, not what has been taking place, which is nearly all polarizing and hyperbolic rhetoric, lies and distortions. Time for brass tacks. Time to get back to basics. Unless and until we engage in rational reasoned discussion and debate, there’s not much hope of overcoming our economic malaise and national debt issues.

    Let’s face it, once economics is introduced into political discussions and decision making, it becomes broadly tainted by the effects of the imbalances of the effect of wealth and its persuasive effects, and is almost, at that point, beyond the possibility for rational discussion. But, that’s a different subject for another day.

  7. Having run a business (small security guard agency) I will point out that what creates jobs is “customers” who can afford to purchase whatever you are selling. So the actual “job creator” is your customer, not you the businessman. Someone has to “buy” what you are selling. If there aren’t enough “buyers”, you won’t make enough money to stay in business very long. Our problem right now is that there is a lack of “demand” in the sense of people with money being willing to buy what is for sale. Without customers your employees will quickly be laid off for lack of work. Is there ever a shortage of “suppliers”? The last time there was such was during World War 2 when we had to ration consumer goods. So since 1945 there has never been a shortage of “supply”. But we’ve had a shortage of “demand” a number of times. These shortages of “demand” means that there is more production of goods and services than what people are willing to buy. The consequence is unemployment that continues until “demand” picks up enough that employers are willing to start hiring workers again. This is really “Economics 101″, but a lot of people don’t understand it.

  8. Ha Simon, I honestly happy to hear that sounds making the USA like Greece. But I kinda worry today is it possible? By reading that content and it’s all important response I believe today tomorrow it’s possible. Anyway I like that impression whatever you expressed in this article. Thanks my dear. Wish you all the best. :)

  9. Gerald Childs

    It’s pretty interesting that some commenting here feel they need to explain concepts like supply and demand to the former chief economist of the IMF.

    As always, a powerful and interesting read, Simon. Got here through Michael Winship’s piece at Salon and wonder why I ever stopped reading this blog in the first place . . .