Division on Dynamic Analysis

Bruce Bartlett jumps on the dynamic analysis bandwagon, applauding the creation of the “Division on Dynamic Analysis” at the Treasury Department. Menzie Chinn and PGL have covered the prinicpal problems with this political exercise disguised as economic analysis, so let me just add two small points to what they’ve said.

First, Bartlett is quite wrong when he claims that “few economists today would disagree with the statement that an across-the-board tax-rate reduction would have reflows of about 35 percent.” The best estimates that I’ve seen are from the blue-ribbon panel convened by Congress’ Joint Committee on Taxation, which showed that the “reflow” effects would be generally in the neighborhood of 5-10%, with only one model showing possible effects of over 20%. Furthermore, these effects are temporary, and all of the models generally show that after 5 years or so any positive effect on economic growth is actually reversed. I’ve discussed this extensively in the context of the Bush tax cuts, for example here.

Secondly, is there any reason – any reason at all – to limit this analysis to tax cuts? Being consistent, we should apply exactly the same reasoning to examine the dynamic budgetary effects of changes in spending, which presumably increase economic growth and thus partially pay for themselves.

Perhaps the new Division would even be able to discover that one way to eliminate the budget deficit would simply be to dramatically increase government spending…