NCPA - National Center for Policy Analysis

CBO Report Doesn't Make the Grade

January 9, 2002

There is an old joke about some people who fell down a well. When they were unable to climb out, the economist among them said, "Assume a ladder."

A recent example of this can be found in a new paper by the Congressional Budget Office, "Economic Stimulus: Evaluating Proposed Changes in Tax Policy."

The purpose of the CBO paper is to grade various tax proposals to increase economic growth in the short-run. Since it deals only with tax initiatives, monetary policy is ignored, as are proposals for increased government spending. Moreover, the initiatives examined are not necessarily real proposals, in the sense that there is actual legislation that is being seriously pushed by the White House or the leadership in Congress.

More seriously, the CBO analysis assumes away all of the implementation problems of the proposals that it analyzes.

  • Thus the CBO rates a payroll tax holiday highest in terms of its "bang for the buck," although the National Payroll Consortium found that it would take up to 6 months for payroll systems to accommodate it.
  • For this reason, the Democratic staff of the Joint Economic Committee gives the payroll tax holiday low grades for stimulus.
  • The CBO also says that a sales tax holiday has merit, although there is no national sales tax to suspend.

By focusing only on the short-term and grading proposals mainly on their static budgetary effect, the CBO implicitly endorses proposals that it knows will be bad for growth in the long-term.

At this point in the business cycle, it makes more sense for the federal government to forget about short-term stimulus altogether, and just focus on sustaining the economic recovery that is already visible on the horizon.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 9, 2002.


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