Dynamic Scoring and Deficit Financing – When Will the National Review Understand Crowding-Out?

Greg Kaza is elated that the politicians will start (ab)using dynamic scoring:

Dynamic scoring, however, attempts to measure the feedback-effects ignored in these models – those feedback-effects potentially becoming excellent ammunition for supply-side policymakers and tax-cut advocates. There’s no doubt that dynamic scoring is today being taken seriously within the budgeting community … More importantly, as the debate over dynamic scoring heats up, we’re seeing more and more evidence that dynamic scoring actually works. Harvard professor N. Gregory Mankiw, who served as chairman of President Bush’s Council of Economic Advisers between 2003 and 2005, wrote in a 2004 paper that “The feedback [from dynamic scoring] is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing.”

Did Kaza only read the summary of the paper by Gregory Mankiw and Matthew Weinzierl? If so, perhaps he failed to notice something about their model. Government spending – in the form of transfer payments – in this paper was assumed to follow tax revenues. In other words, the model assumed away any material crowding-out effects. Now given the propensity of the Republican Congress and Bush White House to spend and borrow as they pretend to give us tax cuts, a result that is predicated on the assumption of balanced budgets and no crowding-out is not a useful guide to judging current fiscal policy.