The federal budget is fairly simple. I can explain it to you in fewer than 30 words: Most of the money comes in through taxes and borrowing. The vast majority of it is then spent on programs for the old, programs for the poor and defense. That’s pretty much it.
Romney is also promising that he will balance the budget and reduce total federal spending by more than $6 trillion over the next 10 years. But the only big pot of money left to him poor-people programs. So by simple process of elimination, poor-people programs will have to be cut dramatically under a Romney presidency. Around 40 percent of projected spending, according to the Center on Budget and Policy Priorities.
Actually, that was 123 words. But I was close.
What’s not simple is imagining how that would work in practice. The Occam’s Razor explanation, of course, is that it wouldn’t. Peter Suderman, an associate editor at the libertarian magazine Reason, writes that “Romney has no real plan or interest in actually making the numbers work.”
Perhaps that’s true. But Romney says otherwise. He promises that there’s another major component, one that can make all his numbers work without savage cuts or soaring deficits: “Stronger economic growth.” And in this, he’s both right and wrong.
As a matter of theory, stronger economic growth could make Romney’s plan work. When growth is faster, revenues rise and social spending falls. That’s why, historically, America’s deficits fall when growth is quick and rise during recessions. So if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up.
This is a strategy that Tim Pawlenty tried early in the Republican primary, when he made his plan work by assuming it would lead to an extended period of five percent growth. He was roundly mocked. Romney, presumably, won’t attempt anything so crude. But he’ll have to attempt something, or his plan will score as a massive deficit-creator.
The technical term for the secret sauce that Romney is using in his budget projections is “dynamic scoring.” The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don’t cost as much as a “static analysis” — one that didn’t take into account all these effects —would suggest.
That’s true, so far as it goes. But it doesn’t go very far. Over the years, conservatives have clamored for Congress to use more dynamic scoring when it evaluates tax cuts. But each time the Joint Committee on Taxation or the Congressional Budget Office have looked into it, they’ve backed away. They incorporate some dynamic elements in their analyses, but they don’t assume the faster economic growth that some conservatives predict. And for good reason.
The problem is that the equation isn’t so simple as tax cuts = growth. It depends on whether and how the tax cuts are paid for. It depends on what the Federal Reserve does in response to the new policy. It depends on whether people decide to work more because they can make more money or work less because they have more money. If the taxes are offset, it depends on whether the spending cuts fall on programs that accelerate economic growth, like infrastructure investment, or programs that don’t.
For that reason, the size of estimates can vary substantially. A tax cut that isn’t paid for, or isn’t well designed or persuades the Federal Reserve to tighten policy can shrink the economy. A tax cut that’s paid for by cutting wasteful spending, and that doesn’t get blocked by monetary policy or architectural flaws can boost the economy. Either way, the effect is rarely dramatic.
In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn’t lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, “it is unlikely to change the bottom line very much over the budget window.”
But many Republicans want it to do much more than that. They want dynamic scoring to resolve the central tension in their policy agenda: the conflict between tax cuts and deficit reduction. That’s a political objective, not an economic one — a facet of this conversation that’s underscored by the fact that it’s focused on Republican priorities, like tax cuts, rather than all federal policies. “You didn’t hear the Republicans clamoring for dynamic scoring of the stimulus plan,” says William Gale, co-director of the Tax Policy Center. “But it’s the same point.”
Which brings us back to Romney. There are good reasons to wish economists were better at predicting the effect that policies will have on economic growth. But there are even better reasons to mistrust politicians who predict their policies will have huge effects on economic growth, and whose numbers don’t add up in the absence of those assumptions. If dynamic scoring is how Romney makes his numbers work, then his numbers don’t work.