Monday, March 2, 2015

The Importance of "Scoring" Government Policy

Recently, House Republicans have quietly made some changes to how future tax and spending laws are analyzed for their estimated costs and benefits on government budgets and the economy.  This concept is referred to as "scoring". Up until these recent changes, we had been using "static scoring".  Republicans would prefer "dynamic scoring".

Under static scoring, the estimated effects of proposed spending and tax policies are based on the notion of a fixed government pie.  Think of this as more of a microeconomic analysis of how the policy might alter relative prices, change behavior, and impact sensitive populations.  Static scoring does not emphasize an estimate of the future economic pie enhancing qualities of the change in behavior, to do so would be to use the analysis to “dynamically” score the proposed policy.  Dynamic scoring is an attempt to estimate the future economic impacts of proposed spending and tax policies and include those estimates into a measure of how the future economic pie might change.  Therefore, dynamic scoring relies on long term assumptions about economic growth, interest rates, inflation, and the global economy.  Policy changes that might suggest future increases in the economic pie might be scored higher despite near term budget deficits or adverse impacts on sensitive populations.   

Static scoring evaluates the proposed spending or tax policy with emphasis on the government’s current budget and looks to see if the policy is paid for with offsetting taxes or spending.  Static scoring also evaluates policy based on how the economic pie is divided.  The logic behind using static scoring is that if the uncertain dynamic macroeconomic benefits of the proposed policy do not materialize, then there is less harm done because the dynamic macro effects were not taken into account – there was no expectation.  If they do materialize, then it is a bonus.  However, the downside of static scoring is that policy makers may be too fiscally conservative (ironic?) and the process could result in a bias away from major policy and tax code overhauls.

To adopt dynamic scoring means that spending and tax policy proposals and their acceptance will be influenced by uncertain macro effects.  Dynamic scoring could also include assumptions about future changes in other policies.  As one might guess, this opens up opportunities to manipulate estimates based on preferred economic assumptions which have the potential to be politically driven. If policy proposals are favored based on dynamic scoring and the estimated economic benefits do not materialize, we may be left with deficit increasing and economic pie reducing policies.  Dynamic scoring puts more weight and consequences on correctly predicting the future in a very uncertain world.

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