The Congressional Budget Office (CBO) released the final version of its March 7 report, entitled “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004.” The revised version of this report was eagerly awaited for its special section on the “Potential Macroeconomic Effects of the President’s Budgetary Proposals.” A macroeconomic – or “dynamic” – evaluation has never been offered by CBO, and both proponents and critics of the controversial scoring method were anxious to learn what the CBO report would reveal. For many, it seems that the long-awaited results were disappointing in their ambiguity.

The Congressional Budget Office (CBO) released the final version of its March 7 report, entitled “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004.” The revised version of this report was eagerly awaited for its special section on the “Potential Macroeconomic Effects of the President’s Budgetary Proposals.” A macroeconomic – or “dynamic” – evaluation has never been offered by CBO, and both proponents and critics of the controversial scoring method were anxious to learn what the CBO report would reveal. For many, it seems that the long-awaited results were disappointing in their ambiguity.

The Congressional Budget Office (CBO) released the final version of its March 7 report, entitled “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2004.” The revised version of this report was eagerly awaited for its special section on the “Potential Macroeconomic Effects of the President’s Budgetary Proposals.” A macroeconomic – or “dynamic” – evaluation has never been offered by CBO, and both proponents and critics of the controversial scoring method were anxious to learn what the CBO report would reveal. For many, it seems that the long-awaited results were disappointing in their ambiguity.

In words that are somewhat disconcerting in their lack of certainty, the CBO report notes that, “the overall macroeconomic effect of the proposals in the President’s budget is not obvious.” While pointing out that, “taking account of the budget’s potential effects on the economy could change the estimated budgetary cost of the President’s proposals,” the report also warns that, “as with the macroeconomic effects, the direction of this influence could be positive or negative and is unlikely to be dramatic.” According to CBO’s estimates, the “supply-side economic effects” of the Bush proposals could cost an additional 10 percent, or save 15 percent, in the first 5 years. Over the course of the full 10 years, the Bush budget plan could cost an additional 15 percent, or save 17 percent. (CBO explains that “supply-side” effects are those that “determine the quantity of goods and services that the economy is capable of supplying,” such as the quantity and quality of the work force and the amount of productive equipment. On the other side of the economic equation is demand, which can increase with budget policies that increase consumption. CBO warns that estimating demand-side effects is very difficult, and become especially unreliable over long forecasting periods.)

The CBO report explains the many reasons behind its uncertain projections, including:

• The key, but unknown, factor of “people’s expectations of what taxes and other government policies they might face in the future;”
  
  
• The difficulty of timing government policies to “lead (and not follow) the [economic] recovery;” and
  
  
• The degree to which the increase in interest rates, which is likely to accompany a successful stimulus’ effect on GDP, will affect the economy.

This report pays close attention to the President’s proposals to eliminate the corporate dividend tax and expand tax-free savings accounts. (The former serves as the key-stone of the President’s $726 billion “growth package,” and comprises nearly half of its costs; the latter has been all but abandoned until later this fall after even House Republican leaders questioned its timing and impact on the budget.) CBO concedes that, in theory, elimination of the dividend tax should lower the cost to businesses of securing funds because they wouldn’t be spending so much to provide the same after-tax return to investors; but, again, there exist two conflicting theories of what will actually happen in the context of the interplay of other taxes, and CBO decides to split the difference in estimating the effects. Likewise, though an increase in the value of investors’ shares is expected, the size of this increase is uncertain, and CBO again splits the difference.

These numbers and their overall lack of certainty, not surprisingly, don’t sit well with the White House or its Treasury Department, which questions the assumptions made by CBO. Many tax cut supporters thought that since the new CBO Director, Douglas Holtz-Eakin, came from the President’s Council of Economic Advisors, this new CBO report would be more supportive of supply-side economics. According to the White House and defenders of the President’s tax cut, the problems highlighted by the CBO report are a result of spending increases – not of the $726 billion in tax cuts that comprise the “growth plan.” In fact, the White House has actually said that it is inappropriate for CBO to incorporate the overall budget plan presented by the President, and that it should look only at the President’s “growth package” itself in estimating the effects of the tax cut package on the economy. Apparently, the White House prefers these estimates be made only in a vacuum. Treasury has said it will release its own estimates of the economic effects, which are expected to show that the President’s tax cuts will actually generate such a stimulus to the economy that they will cover between 30 percent and 40 percent of their total costs.

This is very troubling, both for what it portends for the fate of programs that address the many vital needs this country faces, as well as for the soundness of the accounting methods used by the White House. Tax cuts are only one type of spending (though in this administration, they are a very large part), and their effects, good and bad, must be analyzed in the real world in which they will be enacted. This real world includes an ongoing, costly war with Iraq, the unknown costs of restoring peace and rebuilding Iraq after the war, as well as our own very pressing needs here at home: millions of uninsured children and adults, rising health care costs, state fiscal crises that threaten students from elementary school through college, the impending retirement of the Baby Boomers, high levels of unemployment, increased emergency response needs highlighted by the September 11 terrorist attacks, and many others.