Transcripts For CSPAN2 Key Capitol Hill Hearings 20150126

90s the republicans have been trying to get dynamic scoring in after the one to 94 elections. Its always been an option to have it in addition to the projections that are already provided by cbo, right . The article use dynamic scoring for literally every bill instead of the magnitude we discussed instead of the regular scoring . Or are they going to be cases where were still going to also use the regular scoring as well . I think on the basic question ill say what i know and then we can ask the jcp people later. Basically, the rule says if the bill is large enough, jcp and cbo should dynamically score it in the official score to the extent practical. And i dont think anybody knows exactly how thats going to work in practice. But its required for those big bills in the house. And i would supplement that with i think the suggestion that you provide the dynamic score, but also the information what it will look like is perfectly sensible so youll know. On the issue of debt, this is the issue of what do you do with um, offsets to increasing policies, big spending increases or tax cuts that dont balance over the long term. It does have to balance over the long term, and were proving as a country we have no interest in balancing over the long term, so im interested in at least doing it in the models. Thats not quote easy. The point is there are lots of things that are going to have to be decided on operational things like what do you do with the fed . Well put a taylor rule in and have them use the same taylor rule no matter what. What do you do with your deficits . Your 20 that you always trigger do it the same with every piece of legislation. These are things that i think are genuinely real and have to be dealt with but they dont disqualify dynamic scoring from providing some Information Congress could use. Anyone have a Quick Response before we turn it over to the next panel . I agree with doug, except i would do the deficit offset in year five. Okay. Bills going to introduce the next panel, and were going to hear there jcp, so thank you very much, guys. [applause] all right, thank you. We are delighted to have members of the jct staff here as well as the director of the jct. But in any case were going to hear from pam [inaudible] and nick ball on how what is that tom hanks movie how you do the best thing you do . [laughter] anyway, im not sure whos speaking first, but pam and nick pams speaking first for 15 minutes and then nick will speak for 15 minutes. Without further ado, let me introduce pam. Hi. Well, thank you all for coming out in this awful weather. I was a little worried. It just occurred to me at the last minute that i didnt have a joke to start with, but then len put me in mind of an oldie but goody. What would happen if all the economists and all the weather forecasters switched places . Nothing. [laughter] so i think thats where ive learned kind of the philosophy that appears to be underlying a lot of the questions that are going on here today. What nick and i are going to do and this goes to dades introduction davids introduction is were not going to talk about the same things that we usually talk about because weve all heard it a million times. Im going to be providing some history to remind people of where we are in terms of modeling and modeling research, and then nick is going to provide a lot of informationing about the detail that goes into characterizing policies. And we are going to talk about those two rules and what the differences are between them, so with respect to the discussion that just happened, that will happen at the end when nick talks. So just a reminder a model is a very simplified view of the world, and thats where a lot of the concern comes from. The modeler has to make choices about what aspects of the economy they need to make sure to model carefully and what aspects they can simplify away from, because no model can solve if youre going to try to include everything about the economy. So jct started working on deciding about modeling, on deciding what type of models to use with this symposium, and there are people in the room people on the panel that were part of symposium in 1996. And you can find that pamphlet on our web site to get. I still think it kind of sets the table for all the discussion that came later so if you want to get really in the weeds, read the pamphlet. What that symposium did was it invited nine groups of modelers to analyze same sets of proposals and to the extent possible analyze the same sets of proposals assuming the same things about the current economy. We had three overlapping generation models, three infinitely live agent models and three macroeconomic models. And the policies, this was driven by what was the interest in tax reform at the time, consumptionbased reform. So we had a unified income tax. Some people think of it as corporate inte graduation. And is we had a vat tax, and then we had variations on them with various transition relays. And these are just things from the pamphlet, i dont expect you to absorb them completely but we had a whole big range of results. We also tried to summarize parameters that went into the different models, and the takeaway we had from these was there was a huge difference between the results of the models even though they were in theory analyzing the same proposal and in theory starting with the same start ising assumption about the economy starting assumption about the economy. So in the short run in the vat it was predicted that gdp would decrease by 4. 2 all the way up to increasing by 6. 4 . 16. 4 . A lot of the models were more geared toward longer run analysis. The ones that could produce long run kind of settled down to a narrow range of 1. 77. 5 . Its kind of going back to thinking about the concern about camp macro which results in 1. 6 and 1. 5. And not all models could model the short run. Also not all models could model the long unrun. And the thing about the other side on the parameters, there was less variation in parameters per model than there was in the gdp results. So what did we take from that Going Forward for developing our models . Well, a modeling framework meaning is it an overlapping generations model is it an econometric model matters. So the choice of parameters the choice of how sensitive you assume labor and capital and various other things are to the tax matters. Some models model Monetary Policy. That matters. It was a bug deal in the con a big deal in the consumption tax. And this was more of a surprise i think academicians knew all those other things. Characterization of present law matters. A lot of we discovered this symposium met for three or four meetings before the final result, and the results were more broadly skewed. In the early meetings than they were in the end. And part of that was because of everybody not even having the same understanding what perfect law is. And the details of the proposal matter. Some modelers were very surprised to find that when they put Transition Relief in the results changed a lot. So after that initial bit of learning that we did, the jct staff went out and selected a couple models to work with and then we started working with them and presenting analysis that we did with them to a lot of different groups. The criteria that we ended up with for our models was that they should reflect, first of all to the extent possible, the state of the art of macro modeling and the academic literature. However, we had to take into account several practical considerations. First, there are time constraints for producing estimate thes. So the real estimates. So the real state of the art in the economic literature then and even today is very fancy, compute bl general equilibrium models. And the fancier they are the longer they take to solve. So the model that is the technical wizards have out there today and earlier ones had back then would take two weeks to run through one simulation. Obviously, when, you know and then, if you get weird results you have to start over for another two weeks before you even get your first result. So we cant quite be at the cutting edge because we dont have that kind of time. We also wanted to be able to produce a range of results because there is this divergence in the literature. So we had several models. And most importantly given where we are, we need to be able to make sure we have the tax sector characterized correct. So i emphasize that again models should have as much tax detail as possible. Academic models dont have to. Lets talk about house rule that weve been operating under since 2003. Its required that we provide a macroeconomic analysis of the effects of the proposal on gdp, labor, capital and revenues, basically, of any bill that comes up that is reported by the ways and Means Committee to the house floor. And so weve done that. Now, as it turns out, the vast majority of bills that get reported out of the ways and Means Committee to the house floor are very small. Theyre so small that showing gdb effects within reasonable gdp effects within reasonable rounding you get zero. So for those bills we have a statement that says results are too small to report. Now, there have been ore other proposals that we suspect would have a measurable effect but our models havent been configured to take them into account. For example, there have been some models that had a lot of attempts to reform International Tax laws. In those cases we had a Qualitative Analysis. Informed to the best we can with our models, but we dont since our models we dont think, or the we dont think the academic literature has enough research to tell us quantity we dont try to give quantities. And then finally, we have full scale [inaudible] so currently, the models that we use for macro analysis are something we call structural macro ally rib equilibrium models which we refer to as meg, and weve been working on and off with a dynamic general equilibrium model, and you can see descriptions of these models on our web site. We have a tab or a link to macroeconomic documents. The models that we use to an lose representative Tax Reform Act of 2014 were the meg model and the olg model. Im going to tell you a little more about them. They both have basic neoclassical foundations with mainstream, that comes from the mainstream of economic literature; consumption follows a life cycle pattern labor supply responds to marginal and average changes and aftertax wages, saving and consumption respond to aftertax return savings and aftertax income, Business Investment responds to the effective return on investment and to something called the aftertax cost of capital which is, um, taking taxation of capital into account. And that in part depends on the vault of savings. Both models do have Crossborder Capital flows so that net exports affect the domestic economy. There are Exchange Rate equations in them. So lets talk about the difference between the two models. In the meg model, we do have in the long run equilibrium demandadjusted supply but in the short run welcome we can allow unemployment. And that turned out to be very important because weve had to analyze bills that were short run bills. Our behavioral equations are structural meaning we use elasticities that come from empirical measurements. We divide our labor supply into four categories; high and low primary earners high and low secondary earners. The purpose is they tend to have different responses to tax changes and often different proposals affect them differently. And we, one of the things we discovered with all our experimentation is when you separate that out, you can get a very different answer relative to if you just use one tax rate. The other key thing about the meg model is that people are myopic meaning they know what the economy looks like today when theyre making their decisions, they dont know what its going to look like telephone years from now. Ten years from now. Now, what this does is it enables us to model policy changes that have a growing deficit. So the discussion we had before about what do you do about assuming the debt, fortunately in this model with we dont have to submit. One thing it can tell us because it does solve out to the future is where the economy blows up, and thats a piece of information as well. In contrast, our olg model is more kind of coming directly from the whats going on in academic departments. So its constructed on microeconomic foundation cans, it uses deep parameters, supply always has to equal demand. It models instead of income groups, age cohorts. And the people in the model have [inaudible] so they can look today and see a huge deficit in the future, and this is what youre always hearing about these models. Theres no rational thing for them to do, so is they dont and the model doesnt solve. And thats why there is a lot of discussion about needing some kind of fiscal closing assumption. So recently weve also added a specific Multinational Corporation sector in the olg model. Actually, we leased this from someone whos been working with that and the good thing about that is it gives us a better handle on those proposals that are designed to affect that. Ongoing Model Development we work all the time to keep up the literature, do the best we can to reflect changes. Right now were double checking some of the program fors in the olg multinational sector. Were doing our own e common metric work, see what we think of that. And were still building in house, our own inhouse olg model and a [inaudible] model. So the rest of the presentation is going to tell you why the development of your macro model is only half the story. Because getting both present law tax and tax policy right is a lot more complicated than anyone who hasnt tried to do it in the detail that we have to do it for jct where conventional estimates can understand, and were going to use the reform patch. So im showing you a couple pictures from my revenue page. Every one of those items we have to decide how to add together to put into our model. There are a lot of different deductions and credits and we have to decide how to treat each one, and that is what nick is going to talk about. [applause] we were already on the right page. Many people talk about dynamic analysis as though its impossible to do. Dynamic analysis is what weve been doing for a decade, and you can argue about whether you like the results we have or not but we think what weve been doing is fairly reasonable although we dont think were perfect and we welcome comments and discussion. Many others talk about dynamic analysis as though its a magical thing you just press a button, you could use this as realtime advice about somebodys proposed amendments. Well it doesnt work that way, but one speculative guess as to why people think it does is because its an example of clarks law. Clark is arthur c. Clark of 2001 a space odyssey, and his law says any advanced technology is indistinguishable from magic. Well, what were hoping is that after a few minutes of looking inside the hat, youll realize there is no magic button. Its hard work and thats what we do. So pams talked about a little bit about initial using models to choosing models, initializing to parameter values consistent with the economic literature, etc. We had a paper almost a decade ago where we looked at what is the impact of putting in really simple tax assumptions like one average tax rate for the whole economy or just an average and just a mar juneal or break marginal or breaking it into components that address different aspects of income. And we found that its really important to get it right for multiple sources of income. So in particular for individuals we compute average and marginal tax rate for wage and salaries in total and for the labor supply groups that pam mentioned, high and low, primary and secondary we compute average and marginal for interest dividends, Capital Gains, business income, individual return. So thats schedules c e and f. And then other. For corporations we compute average and marginal tax rates. If you ask our corporate estimator whats the average rate or the marginal rate, you spend two or three hours in a discussion about what that is. That we combine the individual rates and the corporate rate to get a weighted average business read that gets fed into the macro are models. And finally, both of the main models that we work with olg and meg, handle depreciation separately. So we talk with the conventional estimator about present value effects, liability evicts and then you have to effects and then you have to back out whats the applied change in capital consumption consistent with the way that the models set up. Okay. So pam showed you a little bit of the 15 pages of the camp table. This is just picking one provision almost at random can the Domestic Production reduction, and the columns are itm, im, bm. So utm is itm is if this provision is on the individual tax model, then youd have an indicator there. Individual marginal, im, Domestic Production deduction obviously has an individual effect through passthrough income thats reported on individual returns. Similarly, it has a corporate effect. So that one is sort of obvious. For each provision, you know, there are four macro estimators and 15 or so conventional estimators, so we cant know the details of every possible provision. So what i or somebody else ends up doing is Walking Around the floor and talking with the estimators about any provisions that are significant enough in terms of their score that you really want to find out how does this provision work and whats it doing. For a lot of provisions its obvious whether it has just average effects or some marginal effect. But for other provisions like lastin, firstout met of invenn tour, it gets more complicated. That has large average effects, but also its has marginal effects, and you can sort of take a look at the slide and think about it a little bit more later. So at this stage we have a good idea about the details of the proposal ideally and then the question is can the existing models handle those details or do we need to figure out how we can modify the model so that it will handle it correctly . So is, for instance the first time that we modeled repeal of the home interest reduction in meg, we had to go and tweak the cost of capital equations a little bit to make sure we were modeling that correctly. Now, some provisions you might just decide you cant model it in any reasonable way and then youre sort of stuck. But you cant have, you cant make models that can handle every possible strange thing that people come up with. Okay. So for provisions that are modeled using the individual tax model, we need to compute the effect on average and marginal rates by source of income. And so we have an atr ntr calculator thats about 3,000 lines of code, and that modifies the existing roughly 52,000 lines that represent the individual model which is a model that, you know, you can put in a proposal and find out how that changes liewbility. Liability. For marginal tax rates by income source, you have roughly 40 iterations for each year because youve got nine sources of income, you need to figure out the marginal rate in the present law, thats a couple iterations, you need to figure it out in proposed law, thats another couple iterations. And then for each iteration you have to make sure that youre not leaving accidentally effects, you know with your income you havent b left that increment embedded in the data. So you have to back that out again. Its important for proposals that include base broadening that the average and effective mar juneal rates are calculated marginal rates are calculated with a broad base rather than something thats narrow so we can represent both present law and a proposal. Simple changes can be unexpectedly difficult to debug. So in particular, some things that the devil does for a bedeviled us for a while was the switch from Capital Gains were tax at a separate rate so the proposal to exclude but tax what remains at a rate. Seems like it should be easy, but it takes a while to get that right. Even having got all of this right, some people would argue gee that we havent quite got it right. We have done a little bit of experimentation to check to see quantitatively is janes critique really significant or something that for the purpose of trying to get things done we can ignore as a rounding erro are . And in at least the preliminary experiments and maybe we havent fully grasped what youre saying what weve looked at sort of suggest its down [inaudible] so this is now weve got the individual tax model the atr and ntr effects. We have to look at the rest of the provision. So i think weve taken care of maybe one or one and a half pages out of the 15 with provisions that are on the utm. The rest are not on the itm, and you have to figure out and average and marginal rate effects. So assuming that youve got all that the next step is to run macro models. So pick a macro model, youre going to compute the current macroeconomic baseline. You need to read in a proposed law change and then the a step i think many people sort of dont think about and are not aware of its importance is checking to see does the liability change that youre getting at this stage were not even talking about running the macro effects of the policy just calculating something that rough liquor responds to roughly corresponds to a conventional score and then checking the models produce the same conventional score that the 15 pages of table show. And if it doesnt then youve got to do some debugging. Typically, that means it rating back and fort between the individual tax model spread sheet inputs in the macro model until youve got the conventional estimate matching. So now if youre convinced that the conventional estimate is being correctly computed you start working on running alternate macro runs. And the first question that we ask ourselves when we look at those is does the macro effect on the revenue estimate correspond roughly with the macro effect on big aggregates like gdp, consumption, labor supply . Because it make does it make sense in that context . And then we look at the changes in the macro aggregate for the different models, and we think about whether those are behaving in a way thats consistent with what we and most people understand about how those models work. Ultimately sometimes we find there are aspects where we dont understand, and so well go back and perform debugging runs. So often that consists of doing stacking series. So you look at just the effects of the individual tax model average and marginal rate changes, just the effects of the offmodel pieces, just the effects of depreciation, then you start putting them together and youre trying to understand have you modeled this correctly or is there a step at which youve got some error in your inputs . And then typically we do sensitivity runs. So we look at the effects of different Monetary Policy assumptions for models that can handle that, we look at the effects of different labor supply e lasties elasticities model to consume, etc. Meanwhile, while one person has implemented this in one of the models somebody else has been implementing it in the other models, and youre going to cop sol taut results into a spread sheet. I dont mean youre going to add together results or take away the average youre just looking at results all in one place so you can compare them between the models. And your trying to figure out youre trying to figure out whether what youre looking at makes sense in the context of what you know about these models. Meanwhile, by this time someones typically written the shell of a report, so theyve provided background on the proposal described it in detail talked about its effects on tax rates. Sometimes those get put in earlier on and you discover errors, so you have to go back and fix them. But as macro results become available, then youre putting those into the report and that give cans another gives another stage at which people can think deeply about whether these results are consistent with the models and whether theyre consistent with the proposal. So we have lots of these reports already posted on the web site, and this just sort of lists the most recent five or six. Moving forward theres the new house rule. So the new house rule as was discussed before, has a sort of trigger for when you have to score something. But also something that wasnt sort of pointed out that theres a need for it but wasnt mentioned that its already in the rule the rule required a Qualitative Analysis for the 20 years after the budget window. So if there are, if you have a proposal that is running, you know causing huge deficits, then what happens outside the budget window is going to, you know obviously not be the same as something thats a revenue neutral proposal thats not only revenue neutral inside the hughesen, but after. And what can horizon, but after. And what we are going to say in the Qualitative Analysis is still not certain. So moving forward, you know, weve done dynamic analysis for a long time. Dynamic scoring is not something that weve done so far, so thats going to be a new challenge. I think there was one other thing i was going to say, but i cant remember what it is, so im going to finish up there. I think that we are planning at this stage to move right on to the five minutes from several people on the panel so thats jane gravell and then questions that you have can come along afterwards. [applause] all right thanks. I want to mention again our thanks to jct staff for coming here and presenting the details of the models. I have many reactions one of which is thank goodness i dont have to do this. [laughter] but we will talk about all of that and more. We have three discussants jane from the Congressional Research service, alan from aei and chai from the center on budget and policy priorities. So each of them will speak for five minutes, and then well all come up here and have a joint talk. Thanks. There we go. Thank you very much. Im jane gravell from the Congressional Research service. And i want to say that the views i present here are not the views of the Congressional Research service other than there may be some similarity to papers that ive written for the Congressional Research [laughter] so, and i also want to say to our jct folks here, i have great admiration for the work you do. I know you are all dedicated Public Servants so i hope you take any questions i would raise about your analysis in the context of helping to prove it. So and this is really can i think there are a lot of lessons we could learn from the dynamic proposal of the camp proposal which is a very dynamic proposal and had a lot of moving parts. First is theres a big difference between individual rate cuts across the board and individual tax reform. You know the effects are very different. So for a tax cut, a really important issue is the short run stimulus effect and the meg model, and the jcts model. Its not allowed in the olg model. And there are a lot of reasons i think for excluding this effect including the offsetting actions of the fed, but also the lack of dynamic scoring for appropriations. For revenue neutral tax reform, stimulus effects may be less important, but it is important that to incorporate base changes that are marginal in nature and this is the question nick referred to earlier i dont think that was done in some circumstances, for example. The introduction for state and local taxes, and i think its important to find out if that is important. So i want to then talk about the reasons for the differences and the results in the camp simulation. So the top three lines of this graph show the meg thats their inhouse econ met rubbing model with high and low substitution model elasticity. These are without stimulus effects, ask you see this enormous range of effects between the two models. You can actually see stimulus in the meg is a little bigger in the supplyside effects in the top. Why did that happen . Well i think one is the labor supply effect in the olg model is a lot bigger than in the, than in the meg model. It cant a little bit of it is because of the embedded, deep parameters i mentioned. Its only about 20 higher while the labor supply change is 160 high or. Higher. Theres a little bit of difference possibly from changes in capital that cant be imported. So im really not sure what happened there but i suspect that the fiscal adjustments that need to be made in the olg model to make it solve have probably washed out income effects from the labor response. Thats my guess, but i dont really know for sure. I just know theyre different, okay . The other reason is intangibles. You can sort of do a back of the envelope calculation of their results and see that the labor and capital, changes in labor and capital dont account for the total increase this output. About. 6 are about half of the difference between the two models seems to be due to the shifting of intellectual property and treating it as an input into the production function. Sort of like physical capital. Now, this has been done in a model by a couple of very respectable european economist so its not completely new, but it is kind of novel. And i think this is not the appropriate, an appropriate thing to include because intellectual capital is not located physically. Once it exists, it can be used everywhere. When a firm discovers lipitor for example that knowledge can be used to lead to production everywhere. So the fact that the patent moves to the United States instead of abroad doesnt change output because that effect is already there in output. So i think that probably should be reconsidered in this modeling. So i just want to sum up quick hi what i what i think the main points of what im saying here and the things i suggested jct think about in the future. First, theres a need for more transparency. Now, jct already applies provides a lot of information but not enough in this case for me to understand, and ive studied these models for a long time why the results are the way they are. So i just have to speculate, and its better not to have to do that. And i have to answer a lot of questions from my clients on this. So second, for base broadening it is important to account for changes in the shares of income that are taxed and measuring marginal effective tax rates. We believe those were significant. We have the crs report that looked at itemized deductions. Third, should stimulus effects be included i think theres a very strong case for excluding them. And finally, the olg model is problematic not just for the things ive already mentioned, but in general, it depicts individual workers as perfectly informed and with perfect foresight. It cant measure our economy, so the question is should it continue to be used and contributing to [inaudible] thank you. [applause] thanks. Im al with the american alan with the American Enterprise institute. I first of all want to thank brookings for organizing this really excellent conference, especially nick and pam for the amazingly informative exposition on what jct has done and is doing which i found extremely insightful. I only have five minutes, so im just going to mainly comment about two features of the estimate of the camp bill, and i think each of them probably has some implications for evaluating the camp bill but they also have implications for thinking about what dynamic analysis and dynamic scoring and should do. And, of course that will be my focus. So the first feature of the jct estimate of the camp bill, i think, is that the business tax reforms made in that bill do not increase the Capital Stock or do so to a very slight extent. And, again, there is that variation in estimates, but the majority of the estimates are actually negative that the bill would have reduced the Capital Stock. I think thats informative from the standpoint of Economic Policy. The economic intuition behind it, i think is relatively clear, and it pertains to the nature of rate reduction offset by base broadening in the business tax context. That the rate reduction benefits existing capital as well as new dam while the brunt of the base broadening almost falls on [inaudible] so ma mixture tends to increase the burdens on new investment. It gives a windfall to the existing capital but weve already got it so theres no incentive effects on that score and, therefore we would expect that there probably is a reduction in capital, and the estimates do show that. Marty and bruin brian in politico have written about this feature of the estimate. I think it has some policy implications, but i think what i want to just emphasize here for a moment is the implications for what were going to get as we do more dynamic analysis or as we start to do dynamic scoring which is were going to see different kinds of tax measures, different kinds of tax cuts different kinds of tax increases actually do have different effects. And i think thats one of the important contributions dynamic analysis can make. not to make all tax cuts look good or look bad, but really its most valuable function is to sort out which types of tax cuts have the biggest effect on growth. Taxes that apply to new investment youre distinguishing those as really important. So the other feature that drew my attention also pertains to the reduction and thats the labor supply effect. Jane has already talked about this some, i but some of the estimates that jct found in some of the models do show what i would view as a very large labor supply effect, the 1 is. 31. 5 increase in the olg model. Of course as we know jct did provide quite a lot of information about this estimate, but i think i would have to echo janes comment that in this case its maybe not quite as much as is ultimately needed. This proposal reduces effective marginal tax rates on labor, and i guess as a first cut i wouldnt expect that to be the case because this is revenue neutral, distributionallyneutral rate cut, basebroadening indication and with standard assumptions you expect that to leave the marginal tax rate of labor roughly unchanged. If you had an economy with a 40 statutory tax rate, people spent half their wages on apples and half on oranges and apples were exempt, you could lower the rate 20 and tax both apples and oranges. The effective tax rate the effective tradeoff at the margin between leisure and consumption would still be 20 and so you would expect a zero labor supply effect. Now, many reasons why the effect would not be exactly zero. Theres what economists call transition effects, so the fact that the effect isnt exactly zero is not, not necessarily an indication anything is wrong. But an effect this large, i think, really does cry out for explanation. So i guess i draw the need for Greater Transparency to really break down what was the e change in the marginal tax rate. Showing the effect of the statutory rate change and then how the base broadening marginal effects, how how much of that was taken back from that channel. So those are the two main features of the camp estimate. Let me just close with a few seconds mentioning something that nick actually touched on. I do think that section 8c1 of the new rule is really important where it calls for Qualitative Analysis going out an extra 20 years. I do think its a mistake if we start obsessing too much about trying to nail down these macroare economic effects within the macroeconomic effects within the tenyear window and ignore what is really important about the long run. And i though the long run is harder to estimate, and thats why the rule says go out only 20 years beyond the 10 and why it says in qualitative terms instead of quantitative terms, but i think thats an overlooked part of the recall that actually may be, ultimately, as important as the rest of the rule. Thank you. [applause] hi, im [inaudible] from the center on budget. So again, these dynamic scores in the house and i think the question is going to be how do we avoid misinterpreting them. And i i think as the dynamic score of a policy looks better than a traditional score in some way, that the temptation is going to be to say simply that means the policy must be good for the economy. But the heroic assumptionings, uncertainty and large gaps in the model i think means we have to treat the scores with much more [inaudible] and the camp chairman camps media releases his tax plan had a really big growth pack that would have led to 700 billion in extra revenues over a decade. But, of course, that was the high end of jcts range of estimates, and the low end of the range was a much more model 50 billion. And the 700 billion came from one run of this olg model thats been mentioned. And to get that 700 billion, jct had to pretend that there would be large tax increases and transfer cuts baked into the baseline. So those are things that are in addition to the camp plan itself. And its because as you heard olg simply doesnt work if you dont assume that lawmakers enact additional reduction to stabilize share to gdp over the long run. So that muchtouted p 700 billion number didnt tell us much about the camp plan. Finish so when we get a singing day namic score, its going to be incredibly important to understand whether and how the olg model, for example, contributes to that score and the predictions about future congressional lawmaking that are driving that result. Now, the house rule requires a single point estimate, and to make any sense of that score at all, its going to be really critical to lower the outputs from the different models and the assumptions that went into those models to produce that single score. And in addition, i think just ec ecoing what some of my other panelists have said, thats going to be crucial for jct to show us results from a range of models and assumptions in addition to these scores so that we can understand how that score is different from the assumptions and models. So, for example, if o to lg does end up being used, its going to be really important to understand what would happen if you made different assumptions about how future lawmakers deal with deficits and when they deal with deficits. Another pitfall that the camp analysis highlights in interpreting dynamic estimates is that we need to know not just how tax reform affects the budget and the economy, we also need to understand how it affects people at different parts of the income distribution. Jcts distributional analysis of the plan showed that there were effective tax rates faced by people at different parts of the income scale both before and after the plan. And camp relied on those tables to support his claim that the plan was distributionally neutral. But unlike the 700 billion in revenues from the growth estimates that he [inaudible] both distributional tables didnt bake in future deficit reduction from future congresses. So if you had put that deficit reduction into those distribution tables, they would have looked very different. So when we get a dynamic score and a distributional estimate its going to be pretty important to understand whether or not they show the very same postreform set of policies. I think a final potential pitfall in interpreting these scores is, you know, the current estimates, the current models have some put big gaps and jct can do some things off model to try and deal with them. But, for example theres no explicit modeling of Human Capital. If you had a plan that really boosted incentives in skills and training the higher productivity from increased Human Capital wouldnt necessarily show up in the score from the base models. So thats despite the evidence that doing such investment is associated with productivity growth and increased investment. Likewise, theres a bunch of factors that respect currently explicitly model. You might want to talk about that a little more on the panel. And, again, jcts doing the very best with the models it has available, but we have to watch out for that, particularly if reform hits particular sectors. So while lawmakers, some lawmakers will simply want to treat a dynamic score as proof that something is good or bad for the economy and the people in it i think we have to keep in mind the uncertainty, the flaws, the heroic assumptions that go into these models and that may mean that conclusion is simply not sound. [applause] okay. While were getting set up, let me thank the speakers again and just say that you all normally are frequently the moderator starts a discussion among the panelists, but you all have been very patient, and i know there are a lot of questions out there, so were going to turn directly to questions. Exercise my moderator prerogatives as [inaudible] so questions. Ernie sullivan. And i too, want to commend Brookings Tax Policy Center for having this excellent conference on this timely topic. And i want to thank jct for coming out and being so open about whats inside the black box, giving us a view under the hood. I want to reiterate a point that jane brought up because perhaps not as much as jane i have been studying these results, and i cannot figure out what is going on. So im going to take advantage of this opportunity to ask jct about the multinational sector. If i have it correct, in their analysis of the camp proposal intellectual property migrates because we lower the tax on the United States on intellectual property and raised the tax on the foreign side intellectual property migrates back to United States. And as i understand it in the model, this increases productivity and Economic Growth in the United States isnt it . Is that right, pam . Okay. Lets have pam or nick address it. I just want to [inaudible] just put this in the context of the issues weve been discussing in elasticity that we really dont have great evidence on but that nonetheless is critical to the growth effects. Let me just put it into terms i think everybody can understand. If you have a multinational which is, which has Domestic Production and a foreign factory, and i think what the model is saying because of the tax changes in the camp plan, some of knowhow for example, one type of intellectual property is knowhow or expertise, that expertise is going to move from foreign location and reduce output there and then come into United States and increase output here just because of a legal recharacterization of where this property is located. And i just find this totally unrealistic, but i could be missing something. So i just want to ask for some clarification. So i think one thing that could have been improved in our report was describing what we meant by ip a little better because it isnt just intellectual property, its really intangible property. And the Multinational Corporation sector, where that shifting is based on the paper that was cited earlier and, yes, it does have that effect. We are, as we mentioned, always trying to look for whether or not models need to be altered and we are researching right now what we think should be done about that. Yes. Just to keep the tax [inaudible] going, im a capitol Hill Reporter for tax notes. This is also for nick and pam, and im not sure if this question is too vague, too complicated or something you already covered but how do you think about the issue of crowding out . Because, obviously the way that a tax cut is financed canfect its economic can effect its economic impact. And ive found so far being in the tax world that thats a big factor that people kind of dance around or dont fully acknowledge when theyre talking about how they view the economic effects of tax cuts. Okay. So particularly in the meg model where we dont have to make any kind of closing assumption whatever crowding out is happening because of the proposal is going to have the normal sort of effects that crowding out has. It drives up Interest Rates and is therefore going to depress Capital Formation as you move out down the horizon. For olg we try to make there are two things. First of all the closing assumption because we are trying to model tax policy we try not to use a counterfactual change to to tax policy to make the closing assumption. Second of all, so what we have been doing is looking at transfers, but another possibility is to change Government Spending. And so well, you know thats something that can be reviewed as to exactly how to split that up. But the second thing that we do is the closing assumptions we try to make those happen after the end of the budget horizon. Now, that means that crowding out can happen inside the horizon and have its normal crowding out effect. But because olg is forward looking, people do anticipate for instance either that there is a change in transfers after the end of the horizon or a change in spending, whichever one your using and that can have insight on the horizon effects because of anticipation. Yes sir. So this is a question to the panelists or the two of you from jct, kind of a bottom line question which is so given what weve learned over the last 30 minutes which has been very helpful and very as marty said, under the hood in ways that i think most of us arent nearly as ensconced as we might be do you think that the accuracy of the budget process is legitimately enhanced improved by a rule that, um, forces estimators and i would argue nudged by partisans to make one choice, to choose one . In other words, tie name bic analysis yeah dynamic analysis yeah thats different than dynamic scoring. And i guess my sense just sitting here is id like to hear your views on whether this, whether the fact that were talking about choosing one score, given what weve just heard, would actually improve the accuracy of our process. Lets have our panel address that. Want me to start . Okay. Im actually on the record as saying that i dont think were ready for dynamic scoring when i testified before the Budget Committee because of the variation that we have seen here and all of the moving parts. I think its certainly possible that the camp proposal had a zero effect on growth and possibly a negative effect depending on how these sort of things that i find questionable. If youve got an estimate for one, one estimates 16 times the other or 15 times the other i mean, i dont know what kind of answer you have there. And i think when you go back to for many things going back to what doug was saying i think for many things the static scoring is very clear. I mean, if youre going to do rate cuts, you have a very clear set of data for doing a lot of these things. But until we can get some kind of consensus about macro effects, you know were kind of forcing these guys to do or pam and nick is a guy [laughter] to sorry. [laughter] if i was in the south, id say yall, but im trying to get over saying that. You know, youre kind of forcing them to do something thats almost impossible to do. So thats how i see it. Alan . So it is an excellent question. I think it is a judgment call because weve certainly seen how difficult and uncertain this process is, and i think it has certainly increased our respect for the people who have been doing the dynamic analysis. I realize were putting another layer on them if we go with the dynamic scoring i but i do think its important to keep in mind just how model this rule change in. And after all the years of doing dynamic analysis, it should be useful to be doing one or two dynamic scores a year for the next congress, the next two years and see how that process plays out and improve that. We ultimately do want to get to a point where we are taking these effects into account and this seems like a very modest step towards doing that. The chairman of the committee to designate any bill any bill to which dynamic score must be produced. So this rule weve been focusing on a lot so far can be blown away by the chairs of the Budget Committee. Alternatively if they dont want something to be done, they think it might not get a favorable result, just stood up the bills. So i think, i think i agree with jane on the substance and i think i disagree on the fact the process is due to protect jct innocence there will only be two or three bills a year. I want to add i think the process issue is really important. I think its important to note we may do a quote stat score unquote we are really doing a static analysis. We are averaging the effects of a bunch of static scores. So without opining at all on the substance of what everyone has just said, just a little clarifying comment is that we anticipate that for something still have exactly the same 15 pages that were already published but not there will be an extra line at the bottom that just has a dynamic score. While you have the mic can you clarify im not speaking on behalf of the joint committee. Just my comment. Did you clarify whether it is net or gross . The first discussion we thought it was a gross tax we understand it should be gross. The text of the bill says a gross. The bill does is a gross. We know what it says but we dont know what it means. I am the policy director for Climate Energy economics project here at brookings. My question is about the scoring of a bill thats got a lot of complicated elements in it that are not simply just fiscal policy or tax policy. So for example, lets suppose we had a bill that imposed the excise tax on carbon content of fossil fuel, for example, and some of the revenue bites down business tax rates for example. So youve got the kind of questions are you going to dynamically score a tax loss maybe with additional elements in there. But then what if also theres a Regulatory Reform in the air that says we are going to suspend Clean Air Act regulations on stationary sources . How do you come or do you deal with that . And also in the context would there be a change in how cbo would score an excise tax . Because they had the standard 25 haircut on the gross revenues of excise taxes. With the dynamic score change that . Lets get an answer to that the does anyone wants biggest i would hate to be confronted with the issue but excise tax has allocation will affect and liver. An excise tax is like a labor tax. I would treat it as a labor tax and also change the allocation. Im already clueless. Im sorry for whoever would have to do that but im not sure that have to do that. Thatsthat. Thats essentially a change in the baseline. Eric. Spent thank you. I had a question about how these results get presented. I just heard nick say that to close the model, they cut transfer payments. So what we had in the dynamic score was not an estimate of the camp proposal. We estimate of the camp proposal plus a cut say in Social Security benefits. That would play out very differently in the public mind if that were the way they were presented. Not question the accuracy of the estimate in this, but i guess my question is should people, since models require some closing assumption, should members in order to get a dynamic score be required to specify the closing assumption they would like used . A simple yes and no question thank you. You. Can i correct the record for just a second . Thats the kind of common misconception on the camp proposal in particular. It is true we have to have a standard closing assumption for the socalled present law baseline in order to get a present law baseline from camp. And what is in there and i will say we probably need to reexamine how important we think that mightve been to the estimate. But what is in there is, you know, some of all of the above approach where the economy is kept on track where debt does not grow faster than gdp by combination of increased taxes and reduced transfer payments. That is separate from how did we analyze the proposed camp reform. So one thing you would remember about the proposed camp reform, it was explicitly designed to be budget neutral that after all of the base broadening and all the tax rate changes were accounted for the would be close, there would be the effect on the deficit and effect if you look at our 15 page conventional revenue table, so let me let me finish. One can imagine a different proposal thats not revenue neutral. Can i just finished this part . Yes. So, but if its under conventional analysis deficit neutral and theres something that causes growth, then you might have the reverse situation where you would have surplus growing faster than gdp which is also not fiscally stable. So you would have to make an assumption that pulled down that. Now, for the camp proposal, and this is all in our analysis so this tells me people are not reading table, not me being the verbiage because the project went with the closing assumption was that the baseline and it explained with the closing assumption was in the proposal. We had to assume a slight increase in transfer payments in the future to make up for the growth that was being generated. All right, thank you. Is question is not about the camp proposal. The question is should come in seoul proposes something thats not revenue neutral or budget neutral, should they have to propose a closing mechanism, a way to raise the revenue. Thats how i interpret the question. Yes, no . Yes. Either give up the model because if you do, if you have a tax cut and you do the correction of transfer, thats going to be very different outcome direction for Government Spending and sort of an even bigger effect of a tax cut if you assume taxes going arise in the future, then you have a huge labor supply response. I think they chose a fairly benign change, although if it was me i wouldve changed government. Begin, lets make this a general answer. I think if the member specifies, if its written in the builtin of course thats what should be done. I think if its not in the bill, it should be a standard assumption, should be an all of the above thing. I think thats the right approach exactly the should apply to everything. And i think it also in fact it should incorporate as well considering distribution effects of the bill. You are then assuming that policymakers would do things that they have not said that they will do. They will have to do something spent to avoid the assumption. You cant afford because budgetary reality requires they be something they have said theyre going to do. They havent said theyre going to fix the fiscal situation but theyre going to have to. But then the car and says my proposal would raise growth. Someone would say thats because youre cutting food stands and the congressman said i never proposed food stamp cuts. I just proposed tax cuts but it allows congressmen or senators to talk out of both sides of their mouth. I think what thats a new. What the standard assumption and false and that should be part of the analysis. Ephemeris is thats not what i want, then the response should be, why didnt you put in the know what it is what you do what . The standard assumption if you have a tax cut and you find future tax rate increases you get a negative impact. If you finance it with the future welfare touching me get a positive income on Economic Growth. One more thing about this and this that i wont say anything else. I think the most benign assumption for a tax changed is a change in Government Spending because at least that allows the income and substitution effects for labor to sort of play out in full. You could just say lets try to choose whats going to least disturbed our analysis directly. Going back to what i was saying, whatever goes into a single point estimate, however you choose if you make congress say what its going to be or you lived up to jct whatever it is i would really love to see the analysis if you chose a different assumption in the baseline and the opposite policy what would happen. One last question in the back. My name is ricky. Im the fiscal policy in turn. My question is a lot of this seems to be all or nothing, either its dynamics going or its nothing. Would make the panel more comfortable if we kept dynamics going and also had the scoring in the city could use it and see almost where the margin of error or the difference is in dynamic scores going to provide a larger estimate . Very short answers. Yes, but i think that is the plan. It clearly should be disclosed. I assume that will be. And again its not all or nothing because were talking about on a small number of bills. It is my hope the budget chairman do not abuse their discretion of the rule. Mistaken in my view gives them a source. I want to thank all the panels. I would think particularly nick in pam. [applause] so i think weve established here that im not sure about len burman suggestion we need to provide an incentive for academics to make Public Policy better, but i think we are establishing the case, and a series about this that if congress is going to proceed with this, resources at jct to explain what theyre doing are needed. I think that communications challenge of this thing is evident from the panel this morning in addition to the idea that giving members of congress intended to do things, that would increase the rate of growth doesnt seem like the worst idea weve ever come up with. But what other interesting parts of the house rule is that it also applies to certain spending bills. That is mandatory spending for entitlements that would increase spending, or decreased spending, by about 40 billion a year. So would have applied, for instance, to the Affordable Care act. It wouldve applied to presumably the fiscal stimulus bill. It does not apply however to ordinary appropriations, and theres some debate about that. So we wanted to avoid focusing only on taxes because spending matters, too and we have three people here who have different viewpoints to help us do that. First is donald merrin to show what is your title . Director of Economic Policy initiative . Very good. And he did a stint at both the cea and was acting director of cbo in 2006 and will talk about where this came up been. Steve mcmillin is now a policy and links which is where he worked with phil gramm. He was Deputy Director of omb in the bush administration. And Jared Bernstein is at Jared Bernstein is that the center on budget and policy priorities the center on budget and policy priorities, senior fellow there and did a stint as chief economist and joe bidens office. And i want to start with you donald, because when you were the acting director at the cbo you are confronted with an immigration bill and you were involved in trying to figure out what the macroeconomic effects would be and how to dynamically analyze the ability to dynamically scored it. The difference being of course people are not into the lingo. Dynamic analysis means you tell them with the macroeconomic effects are the dynamically scoring means you figure that in to the official price guide to talk to us about the immigration spent thanks. For salon want to decide i think the dynamic scoring debate has so much focus on a taxandspend and revelatory policy has not gotten enough attention and its a place with these issues you can be very important. So into those and six much later happen in 2013 congress is considering a major immigration bill that would have the effect of changing the size of the u. S. Population changing the size of u. S. Labor force. By several million people. At the time the joint decision of jct and cbo was that you couldnt ignore that into an escort, if you try to follow the convention of holding macroeconomic aggregate constant, total compensation you would end up with a result code is completely nonsensical. You would be letting 6 million new people join the labor force and you would be assuming they are all unemployed. That would literally be insane. So for large immigration bills, the conventional that exception from the convention is to in fact, take account of how those immigrants would affect the macro economy, but to try to do it in a way that is respectful to the traditional distinction between kind of convention is going in macro dynamic. That are now three categories thats going that happens. Some folks have used the phrase static which i avoid because conventional scores by jct and cbo are not static but they recognize that people respond to have changed tactics if you change them people will respond to if you pay doctors more they might work more with a might work less. But sometimes a debate about that but if you tax cigarettes, people will smoke less. So those are conventional scores. For major immigration bills was taken account of a kind of the first order direct the facts that happens in the macro economy. You have a bigger lead before she let more people in the workforce, more wages over all result in more tax revenue and have more people around so you have more spending on various spending programs and you want to track through the net of that. But with the cbo in jct scores of immigration do today is they dont than take the next step and track their every indirect macroeconomic that would follow. Daily count for some of the increase investment that would occur in the spots to enhanced immigration. They dont account for changes potential in Overall National productivity and what they do is they then analyzed those in a separate report. They have kind of a score that includes some change in the macroeconomic situation into an Advisory Board much as we now have for tax bills that tracks the additional things that would be incorporated if you want to go fully macro dynamics. Under the new rule would that change . You would go through all of the things and to try to incorporate all of the assuming it triggered whatever the 2. 5 of gdp number. And jared much is often made of the inadequacy of American Investment in Infrastructure Investment and infrastructure. As i understand the rule, it would be a little hard because they exempt appropriation bills but in general do you think if were going to dynamically scored tax cuts we got to dynamically scored infrastructure . Wouldnt that make the case for Infrastructure Spending even more attractive . Well, on the surface it sounds like it would but i think in practice i fear that it wouldnt and i fear that it is even harder to do that sort of thing than the tax kinds this course weve been discussing so far. Appropriations, and this has a lot to do with budget process in a way cbo scores of such measures, but appropriations are too uncertain generally for scores beyond a year. That is, the cbo cant sit there and say here are the scores come here are the appropriations that we see in year 10. They get inside her of the appropriations were going to build in year number two. So if the score showed positive effects for appropriations it wouldnt show up beyond cbos estimate of windows appropriations would be in place but a good example is the Highway Trust Fund. How could you possibly if youre cbo said pentagon what could happen when the Highway Trust Fund when its going to go allegedly go bust in me which is a few much no . We can also attach and probably a patch will be in place, i think its a lot to ask cbo to do that. Advice i want to propose a bill, raise the gas tax 50 cents a gallon and i want to use all that money for infrastructure. Couldnt that be dynamically scored . That could be dynamically scored, and depending on the extent to which cbo believed that that would persist in future years, that might work but theres another bias here which is kind of a low productivity by the cbo writes in a recent paper for analysis of changes in federal investment cbo central asthma is additional federal investmentsinvestmentyields have the typical return on investment completed by the private sector with an average delay of five years. So cbo assumes for this kind of investment crowding out of private investment and so that too, would be a bias against the spending and tax of appropriations and, in fact, just speaking a touch more broadly, i tried to think about the positives and the negatives of dynamic scoring on the spending side, and all i could come up with were negatives but the idea that there are biases against spending scores being a positive throughout the process. The most important one, just litigated out on the table, is basically, this is a from work that Richard Hogan did. I did know about this. Its a bias that would lead any dynamic spending scores to sober provide more room for tax cuts not for more spending. So the budget act enforces allocations on the revenue side on the Revenue Target and on the allocation target, and house and senate rules disallow taxes to go below the revenue floor, or appropriations to go above committees allocation. Under the rule were talking about, the house dynamic scoring rule, if we were to move towards discretion spending, cbo would estimate that any positive growth effects would be scored almost entirely as extra revenues just by the rule itself but as something that would give you room on the spending side. You would only have the ability to cut taxes more not increase spending they somewhat would pop out of the model. Steve, we know that when congress does things, whether its the Affordable Care act or immigration or other things that they have some effect on the economy. Tell us what you think about dynamically scoring those. Is it a good idea, and is a possible . In order yes, absolutely a good idea. Possible in degrees. What we found a thing from listening to jct folks on the tax side is if the new house will have been implemented 10 years ago quality of what you would get would be at one level that they been working diligently all these years to improve the quality. Theres been some level of analysis to make that happen on some types of spending programs and when that type of analysis becomes more relevant to the policymaking process, i think youll see investment and improvements in the. Now, it may be that in some areas as we heard on the tax side we just cant figure it out, its too uncertain. The answer for purposes of this exercise is zero. And i think this would happen quite a bit to the extent this becomes more common on spending bills. I just want to comment on one thing jared said. Its important to distinguish between the analysis itself and then point it is used for. So a good analysis on a large increase in Infrastructure Spending will inform the debate and tell policymakers how they ought to vote on what the results of their vote would be but that doesnt always flow into the rules for consideration of legislation. Now, it is true that feedback if one assumes theres a growth spectrum infrastructure, would be primarily on the revenue side. But if you pass a budget resolution in the congress that assumes an increase in Infrastructure Investment, and to dynamically score that that flows through all of the aggregates and you find that the rabid aggregate takes into account those higher revenues under investment in infrastructure. So it only creates a bias in the policy to the extent that a budget resolution leads to that result. So i think that may well be right but i think you are assuming that somehow dynamic scoring this rule is going to lead congress to increase spending cuts or to throw away sequestration of Something Like that and i certainly dont make that assumption. Well, and again what do the same set of facts the different policy to pursue what is the right type of policy to pursue . In this particular case i think when youre looking at a Republican Congress or republican senate, its not likely that that analysis is going to cause them to increase spending caps. Every six years, or however often you do highway bills these days, out comes a rather simple model that Department Transportation put back a while ago saying every billion dollars on highway is 17000 jobs 42000 jobs can or 27,000 jobs coming in, to be a what you he did as it was less than the model was updated. And people use that on both sides of how to advocate more Infrastructure Spending. Sometimes the target is successful sometimes its not. I think those are fair points and we should do more Infrastructure Spending had to go anybody else should a dynamic analysis around it. I have concerns express is thats one corner of a set of changes to this whole dynamic scoring debate that looked to me like it would lead to a bias into proving more tax cuts that i believe we can afford. Donald, a lot of the bills that would clearly trigger would involve rural health. If it had been in place for the Affordable Care act, if it hadnt been placed for the medicare drug perception bill if it is some big wholesale change to medicare. Butchers of in the position of the congressional budget office. How challenging is going to be for them to come up with suggestions about what affects big changes to Health Policy have on this . August its a big challenge. New area to look at. I think you just when you look about dynamics when any major event, put into three didnt you our word about. Jane mentioned there some some short ones some its effects is a positive or negative to been a what changes are making that you may want to think about. In the longer run theres the supplyside effects. Something on health side improved the quality of the American Workforce . Then you have the crowding out effect but that this is on the changes the budget balanced over the tender went into the future crowding out the crowding in private investment . And principal cbo would want to go down all those channels. Is in the short run effect harmon for boosting the economy . Is it a reform that would increase the deficit . Is that reform what are the effects of that . If you try to track through how any of the changes might affect labor. We know from the discussion of cbos analysis of the aca that theres some interesting questions about how the application of the aca may have affected the number of people to choose to be in labor force overtime. If theres a proposal that comes along to make changes to help reform they want to take this into account. Kenny make a comment about that . I agree with donalds comments but i think the aca labor supply example is a good one of the kinds of biases i worry about. In this case one that i labeled a marginal utility buys or a social welfare function buys which i think is nontrivial and its one elmendorf himself spoke of. So the aca comes out cbo comes out with the aca scored and it does have this kind of this does have his labor supply affect, part of which is by allowing people to move from fulltime to parttime work if thats what they want to do because they can now afford to get health care sometimes subsidized in the exchanges. You are releasing job loss. Im not making this a. This is something cbo said was part of the mix. Bat and hurlyburly of the debate where gdp is kind of elevated above everything and labor supply about everything thats a big negative. Backing out to be there was a big dust up that this is not dons fault, not cbos fault this is what happens when metrics like labor supply and gdp are elevated above all others. The social welfare of the nation was enhanced by unlocking job losses. And so a diminished labor supply is not an obviously bad thing unless you think about labor supply and gdp. I like it a lot but i think it increase involuntary parttime work via unlocking of job loss is a very good thing but i think its outside the scope of dynamic scoring in a way that is problematic. But thats the thing that congress should not make all its decisions based on the scores that they could decide that this will cost something but its worth it because it has goals. Is putting an awful lot, thats true of any of the scores. Doug elmendorf i said i think in public, and Bob Reischauer did what he did a violation of the Clinton Health care thing that they should not be your only criteria. Yeah. I mean a group of wise men and women were assessing precisely those kinds of considerations, i would feel a lot better. Congress doesnt fit that description. [laughter] so this is the pressure to allah at cbo, which is so the goal the primary goal is to provide scores to cut the budget process and the dynamic scoring discussion should really be about making those scores as good as possible. Cbo provides important supplement information, for example, it healthy for what would happen to coverage which is influential although not part of the process. You do run into these issues about people get mad at the budget process tends to elevate the budget numbers over other things you might worry about from a social welfare point of view. At cbo is not congressional costbenefit office. It is not the congressional social welfare function office. It would sometimes be fun if it were. Joint attacks right . This is a very important challenge to think through particularly if we expand what gets stored in which is the budget number has to be treated operably in the overall policy discussion weighed against other things. Steve, lets say its 2009. Were in a deep recession. The president proposes a major fiscal stimulus, the arra. The chairman of the Budget Committee held cbo we want to know the dynamics core of this. Would dedicate a good thing to do the . Absolutely. And certainly we saw some numbers from the cea projected what they felt the outcome of implementation to the president s policies would be, and theres not a record to compare that to. But in terms of the relevance of what the dynamics core would have been on the legislative process, on the enactment of those policies the question of whether you were delivered increasing the deficit by seven and 50 billion or 850 billion or 600 billion, or a trillion was not something goes really going to affect the outcome of that particular debate. There was a deliberate policy choice that we need to expand the deficit here over the next couple of years to try to get some beneficial effect in the economy. So if the feedback effect of that was baked into the official scorer, then people would have to go into their talking points and scratch out one number and put in a Different Number but it wouldve looked like a smaller price tag, and that might paved the way to bigger fiscal stimulus. Perhaps, but unless youre up against some arbitrary threshold like the keyboard as opposed to 999 billion, the t word to the political balance, i dont see is fundamentally changed. I think back to t. A. R. P. That was my next question. And you know, some intro conversations about how much money do we need, how much money do we think we can get away asking for . And 500 billion maybe, maybe not but if youre asking for 500 you might as well ask for 700. Just dont ask for a trillion. The people who thought t. A. R. P. Was a terrible policy or were shocked by the price tag i think wouldve been every bit as shocked at 500 billion as they were with the bill that actually went up. Im not sure that you would really get the help that you need. Im a huge advocate you know if you know my work im a huge advocate of temporary fiscal intervention in a keynesian spirit in times like we face in the heart of the great depression. And i think the global results of austerity, which is fiscal contraction in the place of that, art exhibit a in the good fiscal policy looks like and what bad fiscal policy does come including political applications of that, what you on your front page of the paper today. But the thing is, can because of some of the biases built into, i dont know if their biases. To meet our biases. The rules in which these things are scored, not even sure how much help you would get. Through a more dynamic score of these keynesian stimulus. Because the cbo correctly i would say used this is pulling demand for. So you get some demand in the corridors were the policies are in place but then you pay for it later, typically within a 10 year window. Heres her i would say and and this is not at about calling at cbo because they are just falling to the following basic rules of economics. I think many of the crowd out and crowd in estimates about and choose rates at impact on growth are wrong in becoming more incorrect overtime. And the reason i think that is because of changes in the dynamics of Global Capital a laudable funds throughout the world come of capital markets. Thats why think that the extent to which cbo diminishes the growth in later years relative to stamos impact in earlier years are too large. For example, i do think that cbo does a very good job of estimating the and the fight impacts of fiscal stimulus when the Federal Reserve is at zero lower bound. Is a very big deal. Multipliers go up by a factor of two or three based on some of the research on this. So those dynamics make it look like fiscal policy isnt as effective as it is, stimulus fiscal policy. What im hearing is cbo could improve the quality of its best judgment, not that we should ignore their best judgment. That is a fair interpretation of what im saying and they definitely should get my point is that of the earlier panel which i the the earlier panel which i think what i can getting at this point in the question do we have enough knowledge to do that in a method that improves our score, no. Just in terms of analysis would answer your question we should do that. Were not there yet in terms of choosing a score. I want to turn to the audience and ask we will have time for a few questions at the end about tax because like to store the people of a question about the nontax stuff. Telecine were. Dick miller, independent physical because there of work both in only be as a fiscal economist and a few years for dead must be. We knew we wanted to the assumption out of the way so we could argue policy. So here we have the rule house rule that rich has pointed out has impacts not only on those things that also the revenue side. See visit to be taken care of in the budget are you serving the senate will explicitly assume this rule and put together the budget a budget resolution . I dont have knowledge of that. What images they come to the extent the official scoring process incorporates macroeconomic feedback, then any bias that is introduced in terms of spending versus revenue, if, in fact, beneficial spending produces a revenue surge in later years, the strict rules of the budget right now do not allow you to mix and match spending and revenues. At a budget resolution, if that is preferred policy does allow that the that was the only point i was making. Anybody else on spending . Nobody . Anybody . Is really important. Really. Can i make the gentleman in the back. By the door. By the fire alarm. Please dont touch it. I just had a question why what was the rationale behind the house ignoring spending in its rule . I just think they should be made explicit. I do think its quite right to say they ignored spend it with this it was a would apply to mandatory spending, or entitlement, but not to appropriation. And i had no hand in creating that rule but my own, my own guess as to why they went that way, first of all as a practical matter annual increases of at least 40 billion in any appropriated program are extremely rare. And so its unlikely that would be triggered at any point. Secondly, as jared pointed out appropriations are one year at a time things, and so the budget rules dont take into account future effects of appropriations as it stands now. So you might produce an analysis that is interesting about appropriations, but the way the budget rules are structured, it would have no impact on the enforcement of budget exactly right but if you think about the bias that greatly comes to imagine somebody, then i was like but education spending that boost productivity, certainly arguably in later years. Since it is allocated year by year that would create a negative bias in terms of the way in which spending would have a positive. Again, a distinction between what is inadequate about the current system. To have information about what happens to our economy when you spend more on education to the extent we can get that information is very interesting. De facto a budget rules that count 1 dollar can do the same as a dollar in the first year and completely ignore a dollar india but the fear yeah thats a process that is in need of improvement but having an analysis that does show us what happened in those years still helps people figure out how to vote. Questions about anything . Talus a dynamic story. Eric. Very small technical question. In looking at the Affordable Care act, jared mentioned job loss. Im sure labor supply issues are taken into account. Since the purpose of the act was to improve Health Insurance and the help of the population is there anyone that gets factored into estimates of productivity or can be factored in . Donald . I think the answer is aspirational but i dont know what the Evidentiary Base for that is. Thanks. This is question i didnt get to ask on my panel so i will ask this panel. Theres a great discussion of how private sector agents will respond, individuals, businesses, et cetera. Theres a little discussion although it is not framed this way, about how the federal government will respond to the whole financing issue. Theres a question of if have a nonrevenue neutral proposal, then what is the federal government do to make up for the budget shortfall. But i want to ask about both state and local governments and foreign governments. Suppose we did Something Like limit the deductibility of state and local taxes. You would expect that to have an impact on state and local governments. They would have to respond somehow. If we cannot the federal Corporate Tax rate come you would expect other countries to respond if we cut to offset some of the impact. The question i guess is how comfortable are you with how far we go in estimating policy maker responses, other than the federal government . Pam, did you want to respond to that . Well, i think no i guess not. [laughter] don, do you want to respond next donald . I will take a crack at it. When i was at cbo i sat in meetings where we tried to predict the behavior of other parts of government. So we had meetings where we tried to protect whether the Supreme Court would judge a particular provision be constitutional or not. We had lots of meetings where many laws were written with a delegate to the administrator of the program the opportunity to make a choice about how to run the program several years in the future. And so its not you just cant go to the Economic Economic literature and fine assessment of how youre going to respond. You have to collect evidence, sometimes he with his Second Public assume theyre already in office. You do a best judgment of how is this person going to be a big if you go down the macro route youve got to put in your thinking a model of how the Federal Reserve will respond because it just isnt appropriate to assume the federal maintain a constant course. I think you did a similar thing with overseas governments that you already do it with state and local governments to a big issue in the hell thinks of how will state governments respond to changes in Health Policy. There are lots of us at cbo does where summer behind the scenes someone is deciding eastward hostage going to do x. And these 25 states are going to do y. You have levels of Evidentiary Base to do that but it is essential in order to have a plausible estimate. So the call aspiration of the goal is to do that in all the cases where it matters. If theres somebody once respond out there, you want to incorporate it with the sole exception of future legislation. Because since your goal is to score the legislation in front of you, you do not want to be in the position of predicting what future legislation will follow. What that suggests which i think has been a theme of this especially that which can do with models. There will be judgment as there is instead. But do you think adding, asking for jct in the studio to dynamically score things as an excessively of uncertainty and judgment, it will make the with less useful, or not . I think in general its hard to in general but i think theres some cases where it is just in some cases it is no. I went at cbo has been quite strong and stronger with some effects and will basically give a zero or very small effect were just isnt strong Evidentiary Base we were on the other. Toward reform, a whole bunch of issues where people either side feel very, very strongly about it but if there isnt a strong base of evidence to conclude one way or the other, the institutional goal not goal but prior is to go with small or zero if it. What we will sue with dynamic squid is something summit which if there isnt a strong reason to go one way or the other, they would not give it big cherry pick one way or the other spent i thought donalds initial answer to the question was very good and very cognitive, and i agree with it. But i think at the end of your first comment, but when you first made you give a compelling reason why we should accept models that close the fiscal model. Because the fact theyll assume legislation. Legislation that either, that either raises, raises taxes i sing when youre in a situation where to close the fiscal model in your to get it to converge of to make assumptions about how debt debt doesnt explode relative to gdp. Thats the assumption, so what a Later Congress will do. Does that define the tenyear window . Does that it can apply in the tenyear window but more importantly since the decisionmakers in the model have perfect foresight they can observe what you think outside the tenyear window and they will have a behavioral response to that. Thats the way it works. Its hard to find something that will have no effect. Pam and nick, you want to add to anything, respond to anything . Okay. I think we are out of time. I want to remind you all that we have a couple of we have an event on january 30 which is in l. A. On International Tax but we will be webcast. We at the hutchinson have an event which will touch on a lot of these issues on marking the 40th anniversary of the congressional budget office, what do they do welcome what dont they do welcome what challenges do they face. Youre invited to all of those. Secondly, if you look at her feet and is a piece of paper, a coffee cup, pick it up and put in the recycling cans at the back. And third join me in thanking all the participants but particularly the people from cbo who came i mean from jct [laughter] they pled as the forecast coming up this afternoon they could do but i really do want to thank the people from jct. Its not easy to stand up and answer these questions and not know what tom is going to say when you get back to the office. [laughter] i think it an excellent job, so thank you all. [applause]. [inaudible conversations] turning to capitol hill to become both the house and senate are in session. The senate will gavel and this afternoon at 4 30 p. M. Eastern. You can watch it live here on cspan2. More debate an amendment votes expected on the keystone Xl Pipeline Oil bill. Mitch mcconnell filed a motion to limit debate and amendments to the bill as they go into the third week of work on the mush. On the other side of the capitol, the house expected in the 2 00 eastern for legislative work. Members expected to vote on the u. S. Mexico Border Security bill this week. You can watch the house live on cspan. The House Rules Committee meets later today for a markup of the rules for debate on the Border Security bill scheduled to arrive on the house floor wednesday. The bill would include specific mandates for Health Homeland Security Department manages borders to could could you can watch the rules committee at work at five on cspan3. Also live later this week the confirmation for president obamas nominee to be the next attorney general. She scheduled to testify before the Senate Judiciary Committee Live wednesday at 10 a. M. Eastern your she is currently u. S. Attorney for the Eastern District of new york. She was first nominated by former president clinton to be a u. S. Attorney for the district in 1999 but she left the office in 2001 to become a partner at a law firm. She was renominated by president obama in 2010. 55 joe paterno graduated from Harvard Law School in 1984. Tonight on the communicators, net neutrality. Reclassifying broadband as a utility and other key issues facing the federal Communications Commission in 2015. I, for one believe the bipartisan consensus that has been in place for almost two decades has served us pretty well. Decided the internet would be Information Service a more heavily pregnant a telecommunications service. I which wouldve both political parties, chairman martin, chairman powell and chairman jenna chomsky recognize that light touch regulation was the best way to incentivize broadband. So i stand with members of both parties at the fcc and on capitol hill who have recognize that light touch regulation is the best way to go. But as you know the debate has taken a turn starting with the president s announcement in december. We now stand poised to consider what is called title ii or common carrier regulation. In my view that kind of heavyhanded regulation develops eight decades ago would be a tremendous mistake. For the american consumer. Tonight at eight eastern on the communicators on cspan2. The Senate Finance committee recently looked at the state of the economy and unemployment. Testifying former michigan governor john engel and Stanford University Professor Robert hall. This hearing runs about two hours and 15 minutes. The finance committee will come to order. Chairman hatch take good care of this gavel as i know you will. And just, i want you to know how much i enjoyed working with you, your long history of bipartisanship. And this morning as i hand you the gavel, i want to wish you, chairman hatch, all the best. Well, thank you very much. [applause] thank you so much. That comes from a very good man who knows how to use this gavel. Its been so long since ive use when im not sure i know how to do anymore. But we are honored to be with everybody on this commute. This is a terrific committee and we are going to do some very, very important things as it has in the past but i want to personally pay tribute to the distinguished senator from oregon for the find what he ran this committee, and we will try to hopefully follow his example and run it in a way thats fair and reasonable for everybody. And im grateful to you. Its always a pleasure thank you. To work with you and all of our friends on the democrats side. We got a lot of really good people on the republican side as well. Okay. Welcome everyone to the first hearing of the Senate Finance committee in the 114th congress. It is appropriately titled jobs and a healthy economy. despite the numerous differences and disagreements that exist here in washington, i believe that regardless of our party affiliation, we can all agree that job creation and a strong, vibrant economy are good things. The Senate Finance committee has a long tradition of effectiveness and bipartisanship. Given the size and scope of our jurisdiction, thats only appropriate. One of my main goals, as the new chairman of the committee, is to continue that tradition, to allow the committee to function and produce results as it has so many times in the past. That is why i chose this topic for our first hearing. Today, i hope we can have a discussion that will help us find consensus on these challenges rather than highlighting our differences. I will be sorely disappointed if it devolves into yet another back and forth with each side trying to score political points rather than seeking solutions to the problems ailing our economy. The finance committee is uniquely equipped to address the challenges related to jobs and the economy. Indeed, our jurisdiction places us on the front lines of the most important debates well have in this effort. For example we have jurisdiction over our nations tax code. There is bipartisan agreement on the need to fix our tax system to help Hardworking Taxpayers and allow businesses to grow compete, and create more jobs. Our current tax code creates numerous unnecessary roadblocks that stand between us and sustained economic prosperity. For these reasons, i have made tax reform my highest legislative priority for this congress. And i believe senator wyden feels pretty much the same. Over the past few years, i have been working to make the case for tax reform on the senate floor, in public appearances, in written work, and in private conversations. Im going to continue to do so. Recently senator wyden and i set forth the first steps for tax reform in the 114th congress. We created five working groups, all assigned to study different areas of tax reform and come up with proposals that we will then use as we work on bipartisan tax reform legislation. We have a number of great senators on this committee who are just as committed to tax reform as we are. I look forward to seeing the results of their work. We need to get this done. Id like to ask each of the witnesses on our panel to use at least some of their time during their Opening Statements to give us specific ideas on how we can improve our nations tax code. Another area of the committees jurisdiction that is essential to job growth and a healthy economy is international trade. The United States has a long tradition of breaking down barriers and providing access for American Goods and services in foreign markets. This has been great for our economy and we must continue into the future. 95 of the worlds population and 80 of its purchasing power reside outside of the u. S. For our job creators to compete on the world stage, we must ensure that they have greater access to this evergrowing customer base. Toward that end, Congress Needs to renew trade Promotion Authority in short order. This is also something that we need to get done. I am engaged with senator wyden and others on this committee to find a path on tv that will provide the best opportunities for tpa to succeed. I hope we will be able to complete our work soon. I met with the ambassador, our trade ambassador yesterday for a considerable amount of time on these particular issues. The Obama Administration is currently engaged in some of the most ambitious trade negotiations in our nations history. The only way for congress to effectively assert its role in these negotiations and the only way to get trade agreements that reflect the highest standards is through tpa. Or trade Promotion Authority. Id like to ask each of the witnesses on our panel whether they think trade is important to the expansion of Economic Opportunities and the development of a healthy economy and to include their answer in their Opening Statements. The finance committees jurisdiction expands beyond tax and trade into other areas that impact jobs and the economy and Economic Security of american households. We have growing Health Care Costs that continue to put strains on employers and Hardworking Taxpayers. And we have a growing entitlement crisis that threatens to swallow up our government and take our economy down with it. And if we do something about that, thats exactly whats going to happen. All of these issues impact jobs and the economy. And all of them are important. I hope we can have a robust conversation today on what the committee and congress can do to address these important issues. Like i said earlier, i also hope that we can avoid having a partisan back and forth that yields no productive answers or discussion. Of course that doesnt mean critiques of any policy or proposal should be considered out of bounds. Nor does it mean that we shouldnt have a spirited debate on the issues. But, i do hope that, whatever questions we ask or statements we make we will stay focused on gaining a better understanding and on the goal of creating jobs and promoting a healthy economy. Id like to take a moment now to recognize that we have some new members of the Committee Senators heller, coats, and scott. Sounds like a law firm. I want to once again welcome them to the finance committee and say that i look forward to their participation in this hearing and others in the future. I am also pleased senator warner is still on this committee. I expect him to be a very hardworking member of this committee and some of you can bring people together. And im counting on that and banking on it. And im pleased that he is with us. I have no doubt that each of their contributions will be valuable to our efforts. Finally, i also want to note that, at any point during the hearing that we have a quorum present, i plan to move to executive session to formally organize the committee, which will include some routine matters, such as organizing subcommittees and formalizing a specific change to the committee rules. With that, ill turn it over to my counterpart, senator wyden or his opening statement. Thank you very much, chairman hatch. And on behalf of this side of the dais, i, too want to welcome our new colleagues senator coats, senator heller, and senator scott. Ive enjoyed working with each of them and those as senator hatch operably mentioned how important it is to fix this broken dysfunctional mess of the tax code. Ive had a chance to watch senator coats in action doing good and not personal work there, so looking forward to working with all three of our colleagues. Just a couple of additional points about chairman hatch, before turned to the matter at hand. Senator hatch is the second senator from utah to chair this committee. The first was senator reed smoot who chaired the committee from 19231933, and he was perhaps, unfairly, remembered best for the test bill that but bears his name. Fortunately, chairman hatch has a very different view of economics that senator smoot did. I would also like to note that senator hatch is only a third senator to serve simultaneously as president pro tem and chairman of this committee