Capitol Ideas

...Maybe the Republicans would get their tax cuts after all, despite the best efforts of Darman...

...Clinton and Gore might well get behind it, and the Democrats could smartly take credit for it...

...But it never happened...

...Democrats will be happy to cooperate with that...

...He included in the Budget Enforcement Act a "pay as you go" requirement, now known as PayGo...

...And indeed it is difficult...

...Darman's anti-taxcut provision finally expired in 1997, but the GOP-controlled 1o5th Congress, just ending, has extended it...

...Markets, Volcker promised, would look upon any change "with great skepticism," and if by some mischance economic growth was deduced from tax cuts, he for one "would not believe it...

...On January lo, 1995, the incoming chairman of the House Budget Committee, John Kasich of Ohio, and his Senate counterpart, Pete Domenici of New Mexico, held a joint hearing to review the subject at hand...

...The idea that the demand for something increases when its price is reduced, and declines when the price is increased, is one of the most basic ideas in economics, and it is called "the law of demand...

...Translation: No change is needed or desired...

...We should stick to the conservative estimating...

...I n the end, nothing was done...

...Some of them are even calling for tax cuts...

...The last is worse than the first...

...Martin's Press...

...But with determination it is possible to cut taxes...

...Now you reduce the price by half, to 5o cents...

...So, after a long absence, I'm afraid, economics class will once again come to order...

...Someone might want to suggest to him that he get Pete Domenici's permission first...

...Don't be surprised, then, if there is a tax cut in the next Congress...

...They must be cut as much as possible, and without any thought of the deficit, and without any fear of newspaper editorials...

...The key moment came when the Republicans achieved their majority...

...more generally...

...Fear of the budget deficit was set above all other considerations, so that tax cuts, if enacted, would have to be offset dollar for dollar by spending cuts...

...Tax increases would make us all work harder, then...

...Certainly you will have a larger share of the market...

...A Strange New Respect Award winner and a resolute opponent of tax cutting for lo these twenty years, Domeniciimmediately signaled his preference—that "we continue to put the maximum amount of discipline into this system...

...All the front-page talk was of the Contract With America, but the Washington Post understood the real threat...

...Now she is vice-chairman of the Federal Reserve Board...

...And, in fact, Washington, D.C...

...Your burgers are $1 each...

...But this counsel of perfection only paved the way for leftists like Boxer to urge a "conservative" policy of caution...

...Hard to say...

...For example, the CBO's deputy director and its most powerful presence is James Blum, who has worked for the agency continuously since 1975...

...If there is one lesson that Republicans must re-learn it is the basic supply-side lesson that it is politically impossible to cut spending (except for defense spending) as long as the media's message is the liberal Democrats' message...

...193ors-era Keynesian theory was dominant, with government spending considered a greater contributor to national wealth than private spending, and the discouraging effects of high marginal tax rates ignored...

...June O'Neill, a Republican moderate happy to take dictation, became CBO director, and the GOP fear of increasing deficits overwhelmed their nervous hope of tax cuts...

...Not only did Darman undermine his own boss, but he also booby-trapped Republicans in the years ahead...

...The Contract, after all, would have to pass House and Senate and gain the president's signature...

...In fact, the best thing would be to shut the CBO down completely...

...The overall effect was to "slant policy decisions in favor of higher tax rates:' By the new year, nonetheless, Democrats were more alert to the threat now posed to big government than Republicans were to their opportunity...

...This "self-imposed rule" disregarded the impact of tax changes on gross domestic product...

...CBO procedures could be changed unilaterally by the new House leadership...

...In the 1995 hearing discussed above, almost everyone said how difficult it is to estimate the revenue effects of tax-rate changes...

...Now what is your monthly take...

...Estimating the real world effects of price changes is "dynamic analysis...

...Former Fed Chairman Paul Volcker testified that the existing system has provided an "indispensable element of budget discipline," while Charlie Stenholm of Texas intoned sagely: "If it ain't broke, don't fix it" Senator Barbara Boxer was "relieved at the comments of the panel because we had better be conservative...

...The Congressional Budget Office was set up in 1974, at the time of Watergate and GOP disarray...

...In the Clinton years, revenues captured by Washington have risen by about 2.5 percent of GDP— a huge increase...

...She hired the CBO staff and enshrined the methods used to analyze the budgetary and economic impact of tax and spending programs...

...June O'Neill is leaving CBO in January, and so it might be possible to appoint a replacement who understands what has to be done...

...That means "dynamic scoring" will be more essential than ever...

...Federal taxes as a percentage of gross domestic product are now at an all-time high—higher than they were at the peak of World War II...

...At the lower price, you may Tom BETHELL is TAS 's Washington correspondent...

...Henry Aaron of the Brookings Institution discussed the so-called "income effect," a theory that people seek to stabilize their income, so that when tax cuts increase take-home pay, they just might work less hard...

...Translation: She enjoys spending other people's money and hopes it continues to flood in to Washington...

...As for the new speaker, Bob Livingston, he has vowed to get Social Security off budget...

...If so, they will have succeeded in wresting back from the GOP the most potent (if unused) weapon in their armory...

...As a result, Republicans have been unable to unite behind their most important weapon, and the only one that scares liberals: Tax Cuts...

...In short, tax cuts have been all-but ruled out by Washington's budget procedures, in which the GOP has been heavily implicated...

...20 January 1999 • The American Spectator Bartlett of the National Center for Policy Analysis wrote recently in the Wall Street Journal, "it continues to use the methodologies devised during its early days, and many of its early key players are still on board...

...PostRivlin, a succession of directors declined to tinker with the existing "model" in use...

...Since November 1994, nonetheless, the GOP has been free to get control of the budgetary assumptions used by the Congressional Budget Office — in particular by instituting the aforementioned "dynamic analysis...

...There is one place where this law is regarded with grave suspicion: Capitol Hill...

...Assume that you sell hamburgers, and in the course of a month you take in $1o,000...

...So we still are not free from the dead hand of Darman's 1990 budget deal...

...Which is to say, "Now we can cut tax rates without having to pay for them with spending cuts...

...Cuts in entitlement programs, therefore, would no longer be needed with dynamic revenue estimating...

...Applying the law of demand to the government's own finances, and to the decisions made by the "consumers" of government (otherwise known as taxpayers), is sometimes called "ideology," sometimes "theology," and in the Reagan era it was called (by an adviser to Reagan) "voodoo economics...

...Its five-year projections merely succeed in converting politicians into planners...

...The assumptions underlying congressional budget analysis, which could have been amended when the Republicans gained power, were left untouched...

...Possibly, more than $io,000 will flow into the till...

...make a profit, maybe a loss...

...A few weeks later the Wall Street Journal published an article by Harvard economics professor Martin Feldstein, pointing out that "official revenue estimating staffs [in Washington] base their calculations on the false assumption that taxes do not alter how much or how hard people work...

...In fact, it is one of the few things in economics that deserves to be called a law...

...and not just any spending cuts, but cuts in entitlement programs such as Social Security and Medicare...

...Of course, cutting entitlementspending is impossible, politically...

...The immediate effect will be to eliminate the current budget surplus...

...Ol4 The American Spectator • January 1999 21...

...Although the CBO would today deny being a bastion of Keynesianism," Bruce No New Tax Cuts didn't have to become a GOP slogan...

...Bruce Bartlett has a theory that the Republican leadership was never interested in dynamic scoring because they saw it as the enemy of spending cuts...

...If the Republicans were not willing to act at a moment of self-confidence, they will hardly do so at a time of self-doubt...

...Now we come to an important point...

...Proposed tax cuts in 1999 will then immediately fall afoul ofthe PayGo provision...

...not much danger of all that happening...

...And it gets worse, I'm afraid...

...Wouldn't it be more prudent, he added, "to stick with the current procedures which are conservative in the truest sense of the word...

...Four years later, they still have not been changed...

...As a result, he added, official projections "overstate the revenue gains that would result from increasing tax rates, and the revenue loss that would result from lowering rates...

...CAP TOL IDEAS by Tom Bethell Dynamic Scoring W hen news came in 1994 that the GOP had taken control of the House for the first time in decades, Jude Wanniski of Polyconomics thought, even before taking his head off the pillow: "Now, we can do dynamic analysis...

...The architect of this folly was his budget director, Dick Darman...

...and there's no sign of that changing...

...The outgoing CBO director, Robert Reischauer, added his voice to the choir, saluting the senators' "caution and prudence...

...Retiring Speaker Newt Gingrich was too busy with the Contract With America, and never understood their importance...

...It would remove the pressure to make those cuts if tax reduction could be achieved without them...

...This justified Volcker's claim that there is "no solid theoretical or empirical base" for dynamic scoring...

...Cutting other budget items such as corporate welfare or highway spending would not count...

...The earlier experience with tax cuts has shown that this always happens...

...If such a change were made, the revenue change resulting from a reduction in tax rates would be analyzed by assuming that the lower rates would induce behavioral changes that would both increase tax revenues and stimulate growth in the economy...

...Thus revenues would be sustained even at the lower rates...

...Now we must go back to President Bush's election-losing 1990 budget deal, in which he broke his promise of "no new taxes...

...Its first director was Alice Rivlin of the Brookings Institution, who for decades has been a fixture on the liberal side of the policy debate in Washington...

...But I doubt that it will happen...

...In fact, some of the old Keynesians still in our midst—BusinessWeek editorial writers, for example —are beginning to worry that taxes are crowding out consumption...

...His new book, The Noblest Triumph, was recently published by St...

...At the lower price, you sell more burgers, maybe many more...

...The Washington Post leaped into the breach immediately with an editorial warning that the Budget Office might be turned into a "rubber stamp" for tax cuts, and that "dynamic scoring" loomed as a real possibility...

...After their losses this November, Trent Lott has begun to slap his fist into his palm and promise, "By golly, we're going to cut taxes...

...In fact, you had better be prepared to stock more meat, more buns, and maybe more workers, too...

...Departing Senator Exon of Nebraska was of the same mind, opposing "the latest fad in budget scorekeeping...

...I know "dynamic scoring" sounds a little wonkish and technical, but it is important and its neglect tells us a lot about the recent Republican failures...

...Horrors...