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.
Due to the complexity of modeling economic agents' behavior, applying dynamic scoring to a policy can be difficult. 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.
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 changes.
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.
Using dynamic scoring has 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, including Paul Krugman, 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.
On January 6, 2013, the version of the Pro-Growth Budgeting Act of 2013 included in the Budget and Accounting Transparency Act of 2014 passed the United States House of Representatives as part of their Rules adopted in House Resolution 5 largely along party lines by a vote of 234-172. The bill will require the Congressional Budget Office to use dynamic scoring to provide a macroeconomic impact analysis for bills that are estimated to have a large budgetary effect. The text of the provision reads:
|“||(a) An estimate provided by the Congressional Budget Office under section 402 of the Congressional Budget Act of 1974 for any major legislation shall, to the extent practicable, incorporate the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables resulting from such legislation.
(b) An estimate provided by the Joint Committee on Taxation to the Director of the Congressional Budget Office under section 201(f) of the Congressional Budget Act of 1974 for any major legislation shall, to the extent practicable, incorporate the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables resulting from such legislation.
(c) An estimate referred to in this clause shall, to the extent practicable, include--
(d) As used in this clause--
- 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" (PDF). Retrieved 6 April 2011.
- Krugman, Paul (2014-10-05). "Voodoo Economics, the Next Generation". The New York Times. ISSN 0362-4331. Retrieved 2016-12-01.
- "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.
- Marcos, Cristina (6 January 2015). "House adopts 'dynamic scoring' rule". The Hill. Retrieved 12 January 2015.
- "H.R. 1874 - CBO". Congressional Budget Office. Retrieved 28 March 2014.
- "H.Res.5 - Adopting rules for the One Hundred Fourteenth Congress" US House of Representatives, January 6, 2015
- 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