How the government makes a $3.8 trillion educated guess

Rather than justify sticker shock at the trillions of dollars President Donald Trump’s tax bill would add to deficits and the national debt, some Republican lawmakers and conservative economists are trying out some mind tricks. This isn’t REALLY $3.8 trillion in deficit spending. “Dramatically overestimated,” House Speaker Mike Johnson told CNN’s Jake Tapper on “State of the Union” Sunday, days after the proposal squeaked through the House. Johnson hopes budget-conscious senators don’t tinker with the legislation too much. Any changes will lead to new projections. “A Ouija board could turn out more accurate prognostications,” wrote Stephen Moore, a Trump ally at the Heritage Foundation, in an op-ed for the Wall Street Journal: “Save us from the CBO.” He was talking about the budget scoring process, which involves both the Congressional Budget Office and the Joint Committee on Taxation. These types of complaints about CBO and JCT appear whenever there is a big bill likely to add to the national debt. Former House Speaker Newt Gingrich has long criticized the CBO. He called for it to be abolished back in 2019, arguing in a Fox News op-ed that its math does not appropriately assume tax cuts will spur economic growth. “The CBO consistently underestimates the positive impact from supply-side, market-oriented reforms while giving Keynesian, big government policies the benefit of the doubt,” Gingrich wrote. The CBO, however, is definitely nonpartisan. Both Republicans and Democrats on Capitol Hill have a say in who leads the organization. The CBO has also evolved its calculations in recent years to account for economic activity, something known as “dynamic scoring.” Importantly, there are plenty of lawmakers on both sides of the aisle who agree to accept CBO’s scores. The fiscal hawk Sen. Ron Johnson, a Wisconsin Republican, told Tapper he opposes the House bill because it adds so much deficit spending. “You have these independent analysts saying it’s $3.3 trillion to $4 trillion. I agree with that,” Johnson said. “We have to reduce the deficit. And so we need to focus on spending, spending, spending.” Complaining about the CBO and its scoring may be part of the political argument. If you don’t like the numbers, attack the numbers. But it’s interesting to consider how CBO runs the numbers to predict how a trillion-dollar tax cut might affect the deficit. I went to Douglas Holtz-Eakin, a former CBO director who also worked on the Council of Economic Advisers during both Bush presidencies. Today he’s president of the American Action Forum, an independent organization that classifies itself as center-right on economic policy. Our conversation, conducted by phone and edited for length, is below. How, briefly, does CBO work? Holtz-Eakin: CBO’s primary job is to score pieces of legislation. Scoring is calculating the change in the amount of money flowing into the Treasury, the amount of money flowing out of the Treasury in response to a piece of legislation. The Joint Committee on Taxation does the tax piece of it. CBO does the rest. They both operate the same way to do that. To do that — and this is sort of nerdy, but very important — the first thing CBO does — and the Joint Committee shares it — is CBO calculates a projection for the economy in January, and then layers on top of that the current tax and spending laws to show what would happen to the federal budget if left on autopilot. And that’s known as the baseline. Then it starts scoring various bills by looking at how they would change the money coming in and going out versus that baseline. It’s important they use the same baseline for all the scores so that you can compare them. Importantly, CBO is still scoring against the outlook for the economy they saw when they put out the January baseline. Nobody thinks the economy looks the same now as it did in January. If you were just interested in predicting the right number, then you would update your jumping-off point. But CBO doesn’t get to do that. They have to provide Congress with consistent scores, and they will do that throughout the year, regardless of what happens to the economy. It’s trying to give Congress good information about the decisions it’s making. How is CBO kept nonpartisan? Holtz-Eakin: It is nonpartisan by law and, more importantly, by DNA. I was the first, and to this day, the only CBO director to come directly from the White House, which most people think was a fairly partisan organization. Many Democrats were extraordinarily skeptical of my ability to lead CBO in a nonpartisan fashion, and I was able to do so successfully because the organization is nonpartisan. I just had to give a good direction and it took care of itself. People don’t like CBO because they don’t get the answer they want, and they blame it on partisan grounds, but that’s not what’s going on. They’re just disappointed. The other thing that’s worth mentioning here, because it’s really, really wrong, and (Moore) has said it now for 20 years: CBO regularly updates its models. It is not using the same models it used back in 1978. It builds its estimates off the consensus of the research literature. There’s a lot of economic research every year. A lot of empirical evidence gives you guidance on tax and spending programs, on environmental programs, health programs, all of that. CBO is a regular participant in research conferences. It is using the latest estimates from the literature. So the models aren’t the same, because the research keeps progressing. What should people know about dynamic scoring? Holtz-Eakin: The difference between a dynamic score and a traditional score is that in a dynamic score, you allow the size of the economy to change. And for some policies, that’s appropriate, like certainly the 2017 (Tax Cuts and Jobs Act) … a whole point was to make the economy grow better, so the size of the economy would change from the baseline. CBO regularly incorporates behavioral responses to tax incentives. If you put a draconian tax on stock buybacks, you’re going to see changes in firms’ financial behavior. CBO will capture that. In (the case of this bill), if you don’t tax tips, you’re going to see more tipped income. It might not be dramatic, but they’ll take all those things into account. Does CBO usually get things about right? Holtz-Eakin: CBO usually gets it wrong because of two things. You can’t predict the future, and the economy is always different than one would have been able to forecast. They can’t change their forecast every month, so the jumping-off points are often not what they would prefer. There’s going to be changes in the environment around them. And more importantly, administrations do executive actions, Congress passes laws — they change everything in the budget around CBO, and they turn out to be off. The right question is, had those things not changed, how close would they have been? And that’s a much harder question to answer. You’d have to rerun history with a counterfactual where the executive didn’t take actions, Congress sat on its hands, and the economy progressed as we thought. Then you’d have a real answer. How did budget battles of the 1960s and ’70s lead to the CBO? Holtz-Eakin: The roots of the CBO are in a fight between then-President Richard Nixon and the Congress on Nixon impounding funds. There was a lawsuit that went to the Supreme Court. But Congress came to the realization that they could not rely on the budgetary information that was solely available from the Bureau of the Budget, now the Office of Management and Budget, the executive branch. Congress wanted their own. So with the 1974 Budget Act, they created the Congressional Budget Office and also the entire apparatus for budgeting — House Budget Committee, Senate Budget Committee, budget resolutions — all of that came out of the ‘74 act. CBO’s role in that was twofold. You see a lot of CBO studies at the request of members of Congress, but their bread and butter is using what they’ve learned from those studies to do the scoring. If CBO’s predictions are imperfect, what can we take away from its report that a bill adds $3.8 trillion to deficits over a decade? Holtz-Eakin: It’s important in two ways. What should change at CBO? Holtz-Eakin: I think CBO still could write more clearly about the key parts of important scores. When I was director, we did a score of the Medicare Modernization Act, which created the Part D program. I had them write up the score as a separate CBO study — a complete, finished book, almost: How did we do it? How did we think about it? What judgments had to be made? Models inform that judgment. Models can be very useful. But when you’re doing something that involves judgment, you should explain how you made your judgments, and they’re often not clear enough about that.