OMB Director Shaun Donovan criticized House Republicans today for their rule change on dynamic scoring. I’ll skip the preliminaries and offer responses to his main critiques.

OMB Director Shaun Donovan: “Using dynamic scoring for official cost estimates would risk injecting bias into a broadly accepted, non-partisan scoring process that has has existed for decades.”

KBH:

No, the new rule attempts to eliminate an oversimplifying assumption that we know is incorrect and biased in a limited number of cases where that bias is large enough to matter. We know that some policy changes can increase (or reduce) the size of the economy, and that to assume otherwise is wrong. The longstanding scoring process is biased against policies that would increase economic growth, and biased for policies that would shrink the economy. The size of the effect of large and broad-based reductions in tax rates is uncertain, but we’re pretty darn sure it’s not zero. Certain immigration reforms would increase domestic labor supply and increase economic growth. More accurate scoring would incorporate both types of effects.

Donovan: “[D]ynamic scoring requires CBO and JCT to make assumptions in areas with unusually great uncertainty.”

KBH:

1. Yes, these assumptions are uncertain. So were CBO’s estimates of short-term fiscal multipliers from the 2009 stimulus law. CBO assumed (guessed) that the effect on short-term GDP of increasing government of purchasing goods and services by $1 could range from 50 cents of increased GDP on the low end, to $2.50 of increased GDP on the high end. (See Table 2 here and this paper.) That’s a big range that didn’t dissuade Team Obama from arguing that fiscal stimulus would increase GDP growth.
2. Is it better to be precisely wrong or imprecisely right? I’m generally for the latter, which is what this rule change would encourage. We know that assuming zero GDP effect from large fiscal policy changes is incorrect. I think it’s an improvement to move to a new non-zero point estimate even if that means we have to accept wider error bounds.
3. The way you get better at narrowing these uncertainties is to do more estimates and to learn by doing.

Donovan: “Dynamic scoring would require CBO and JCT to make assumptions about policies that go beyond the scope of the legislation itself.”

KBH:

• Yes, just like they had to do on fiscal stimulus in early 2009. They had to make an assumption then about how the $800+ B of increased debt would be financed in the future. They also had to make an assumption about whether the […]