Dynamic scoring predicts the impact of fiscal policy changes by forecasting the effects of economic agents' reactions to incentives created by policy. It is an adaptation of static scoring, the traditional method for analyzing policy changes.
When feasible, the method yields a more accurate prediction of a policy's impact on a country's fiscal balance and economic output. The potential for heightened accuracy arises from recognition that households and firms will alter their behavior to continue maximizing welfare (households) or profits (firms) under the new policy. Dynamic scoring is more accurate than static scoring when the econometric model correctly captures how households and firms will react to a policy change.
Dynamic scoring is difficult to apply in practice due to the complexity of modeling economic agents' behavior. Economists must infer from economic agents' current behavior how the agents would behave under the new policy. Difficulty increases as the proposed policy becomes increasingly unlike current policy. Likewise, the difficulty of dynamic scoring increases as the time horizon under consideration lengthens. This is due to any model's intrinsic inability to account for unforeseen external shocks in the future.
Further, the reaction to policy changes may not occur quickly, and thus an intrinsic lag in market behavior obscures the real effect of policy changes.
The methodologies of scoring have origins in Arthur Laffer's "Laffer Curve" (i.e. tax receipts vs tax rates) of the Reagan administration. Using dynamic scoring has recently been promoted by Republican legislators to argue that supply-side tax policy, for example the Bush tax cuts of 2001 and 2011 GOP Path to Prosperity proposal, return higher benefits in terms of GDP growth and revenue increases than are predicted from static scoring. Some economists[who?] argue that their dynamic scoring conclusions are overstated, pointing out that CBO practices already include some dynamic scoring elements and that to include more may lead to politicization of the department.
- Wilson, D; William Beach. "The Economic Impact of President Bush's Tax Relief Plan". The Heritage Foundation. Retrieved 6 April 2011.
- Ryan, Paul. "Path to Prosperity 2012". Retrieved 6 April 2011.
- "Brad deLong's blog". Delong.typepad.com. 2006-05-15. Retrieved 2012-03-27.
- "Center on Budget and Policy Priorities" (PDF). Retrieved 2012-03-27.
- Doesn't Anyone Know the Score? by Newt Gingrich and Peter Ferrara
- Dynamic Due by Bruce Bartlett
- "Here's How Part B Can Save Medicare," by Michael Johns, HME News, July 2009.
- Dynamic Scoring: An Introduction to the Issues By Alen J. Auerbach
- Dynamic Analysis at Treasury: What Are the Next Steps? By Tracy Foertsch
- Resources on the Dynamic Scoring Issue By The Tax Foundation
- Dynamic Scoring: A Back-of-the-Envelope Guide by N. Gregory Mankiw and Matthew Weinzierl
- The Bush Budget's Hidden Gold: Dynamic Scoring Comes to the Treasury By William Beach
- Why the GOP loves ‘dynamic scoring’ by Suzy Khimm
- The Problem with Dynamic Scoring by Josh Barro