Senators John Thune (R–SD) and Tim Kaine (D–VA) have introduced legislation to require the Congressional Budget Office (CBO) to conduct long-term fiscal scoring and annual measurement of the fiscal gap. Their effort is timely.
Today, the largest fiscal questions facing Congress concern policies that will determine the health of America’s finances decades in the future. Whether the topic is Obamacare, immigration, or Social Security reform, the largest fiscal effects of federal legislation are felt outside the traditional 10-year budget window.
Know the Score
The CBO publishes one of the most important and influential charts in American polity: Federal Debt Held by the Public (under the alternative fiscal scenario). However, the CBO does not consistently give Congress guidance on how the debt explosion will be attenuated or exacerbated by policies currently under consideration.
Lawmakers routinely hide costs outside the 10-year window to receive a favorable CBO score. A favorite tactic is to authorize some form of spending for one year only, scheduling it to disappear the next year. But each year, the spending is predictably re-authorized.
When Obamacare was introduced, its costly provisions were implemented with a delay so that its true cost was hidden.
Thwart Future Gimmicks
As Thune and Kaine suggest, a long-term budget score can help lawmakers by providing them with better information—and thwarting their shenanigans. But Congress should be wary of its own ability to abuse long-term scoring in the future.
If lawmakers are not careful about design, budgeting tools they intend for greater honesty could easily be used for meretricious legislating. By exploiting inflation, interest accumulation, demographic change, and the other complexities of the long run, politicians could easily hide unrealistic savings in the distant years of a long-run score.
Thus, long-term scores should be issued with a detailed discussion of the impact of specific assumptions included in the proposed legislation and a year-by-year accounting of the estimated fiscal impact.
There are a variety of methods for measuring the long-term budgetary impact of a policy. Congress and the CBO should follow a few guiding principles as they consider various proposals:
- The model that the CBO uses to create long-run scores should be transparent. Every economic model is the direct result of its assumptions. Knowing the assumptions and mechanics of the model would allow economists to evaluate when the CBO’s model is valuable and when it is too simple.
- The model should be dynamic. Economic dynamics are important even in the short run, because people change their behavior when prices and laws change. But in the long run, dynamics are everything. The substantial differences in living standards that persist between the U.S. and most European countries are a direct result of the different incentives and policies that countries put in place during the 1970s and ‘80s. Economists found a “large increase in the income tax rate in Europe compared with a much smaller increase in the United States” as well as politically powerful unions that “in Germany and France managed to impose lower hours with equal or increasing pay, leading to an increase in salary per hour [and a] reduction in employment.” A tax increase that raises revenue in the short run may shrink revenues in the long run if it dampens productivity growth or labor force participation.
- The model should use time discounting. There is broad agreement among academic economists from every school of thought that time discounting is a basic feature of decision making by households and businesses. Discounting puts less weight on the more distant future, which reflects the myriad uncertainties that accompany the passage of time as well as the innate impatience that underlies capital markets.
Fully Informed Decisions
Economics offers powerful tools to lawmakers who want to avoid harming economic growth and to budget beyond their brief terms of public service. Rather than relying on short-term, static scores, and rough guesses about the future, Congress should avail itself of fully dynamic long-term budget scoring to be fully informed before making fiscal decisions.
—Salim Furth, PhD, is Senior Policy Analyst in Macroeconomics in the Center for Data Analysis at The Heritage Foundation.