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Will the CBO Ever Get It? April 3, 2013 10:00 AM | Tagged as macroeconomics;static; dynamic

WSJ March 19, 2013, Page A17 “How the House Budget Would Boost the Economy” by John F. Cogan and John B. Taylor

As The Biz Bucks Guy has described on this blog site before, the Congressional Budget Office uses Keynesian models for scoring Congressional “brain sneezes”.  (Thanks to Duck Dynasty on A&E for that term.) This means “static” scoring, as opposed to “dynamic” scoring.  What does that mean?

Static scoring assumes that as taxes do up, revenues to the Federal treasury go up proportionately.  This is bogus. When taxes get too high, companies cut back. GDP wanes. Revenues decrease. This is the Laffer Curve. (Search on Laffer on this blog for more.) Dynamic scoring takes this effect into account.

Now Professors Cogan and Taylor have developed yet another econometric model (with considerable help from two other PhD’s from Europe). While there are many models, this one is based on common-sense, classical principles, not Keynesian dogma. For example, this model takes into account that the federal government has no money tree. Federal spending comes from the private sector which retards growth. This is where the Keynesian multiplier theory fails.

Their new model shows that Paul Ryan’s proposed budget will boost the economy and lead to a balanced budget by 2023. While The Biz Bucks Guy wishes for more cuts than Ryan’s plan has, this budget is on the right track. To quote Cogan and Taylor, “For too long, policy makers have been misguided by models that lend support to bigger government or to the politically convenient objective of delaying any reduction in spending. It is better to recognize the flaws in this approach and get on with the sensible budget reforms the country so sorely needs.”

Posted By The Biz Bucks Guy
Posted in MacroEconomics | 0 Replies

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