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Fiscal Scoring with Congressional Budget Office Director Phillip Swagel · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> Jon Hartley: This is the Capitalism and Freedom the Twenty-First Century podcast.
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An official podcast of the Hoover Institution Economic Policy Working Group
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where we talk about economics, markets and public policy.
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I'm Jon Hartley, your host.
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Today my guest is Phil Swagel,
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who is the Director of the Congressional Budget Office.
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He previously was the Assistant Secretary for of the treasury for
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Economic Policy during the George W.
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Bush administration from 2006 to 2009.
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And he recently was a professor in International economics at the University
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of Maryland School of Public Policy.
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He was also a nonresident scholar at the American Enterprise Institute,
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a senior fellow at the Milken Institute, and
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co-chair of the Bipartisan Policy Center's Financial Regulatory Reform Initiative.
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Welcome, Phil.
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>> Phillip Swagel: Yeah, thanks so much.
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Thanks for having me.
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>> Jon Hartley: Well, it's a real honor to have you on and to talk about CBO and
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how it works and its role.
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It's really important role.
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I want to first start with talking about where you grew up and
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how you first got interested in economics.
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I mean, you did your undergrad at Princeton and
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PhD at Harvard studying economics.
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I mean, where did that interest begin for you?
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>> Phillip Swagel: Okay, well, so I grew up in Southern California.
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My, my parents were from New York, both of them originally from the city.
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They met at, at Columbia, Columbia and Barnard.
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But most of my life I grew up in California and
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I was kind of always interested in the news and current events.
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So I was the kid at summer camp in Ojai, California.
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I would fish the newspaper out of the trash bin by the counselors' dorms or
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bunks or whatever and read, it was the LA Times back then.
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So I kind of always had that.
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So it's kind of natural that I'd be interested in something with, you know,
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with not politics, but current events, the real world.
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And then in college, I went to Princeton, as you said.
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You know, I just like that connection,
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the connection between kind of something analytic and in the real world.
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>> Jon Hartley: That's fascinating, and I think, you know, many economists sort of,
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I guess first get interested in reading the newspaper and
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following what's going on.
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I mean, how did that interest sort of get fostered further when you were
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an economics major at Princeton, studying economics at Harvard?
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Who your advisors and sort of biggest mentors in that whole process?
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>> Phillip Swagel: Yeah, for me, it was really important and I just lucked out,
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I had fantastic advisors and professors.
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I took microeconomics from Harvey Rosen, who, you know, then I worked with
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when I was at the White House and he was a member and then chair of the cea.
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I took macro with the late Steve Goldfeld.
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Really phenomenal.
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Had been a CEA with President Carter.
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My senior thesis advisor was really a brilliant man who's now retired from
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Princeton, Avinash Dixit.
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And my PhD advisor was one of his students,
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Kalakrishna was my first advisor and then Alberto Alesina was my second.
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And then Larry Katz was also on my committee, who also is just brilliant and
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amazing.
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I had actually, I was just thinking, as you asked, my first year of the Ph.D.
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program.
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So this would have been the fall of 1987.
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The macro class was taught by a mix of Larry Summers and Robert Barrow and
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they kind of alternated and which is great.
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And Professor Barrow, Robert Barrow's brand new at Harvard, and
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he was just fantastic and brilliant and insightful, but also so was Larry Summers.
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And the day I remember I was going to mention was the day of the market crash in
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October of 1987.
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Larry was teaching that day, you know, again, first year PhD,
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macro whatever he was going to teach.
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He said, well, today I'm just going to talk about bubbles instead.
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And just, you know, kind of off the top of his head did a whole class on financial
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markets and bubbles.
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And it's great.
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So yes, academically, yeah, I really, really lucked out.
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And I could talk more about after school some of the people I worked with also.
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And of course some of your friends and co authors as well, like Kevin Hassett.
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>> Jon Hartley: Well, that, that's terrific.
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And sorry, who ended up being the chair of your committee?
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>> Phillip Swagel: So it was Kala Krishna, who's a trade economist and
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just brilliant, warm, funny, insightful, and
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she's now a professor at Penn State.
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>> Jon Hartley: Fantastic, I mean,
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what an amazing group of people to have as mentors.
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And I can only imagine what it would be like to be in
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a class with Larry Summers as the October 1987,
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I always forget, the Black Monday or Black Tuesday crisis.
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>> Phillip Swagel: Yeah, yeah, exactly, exactly.
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I think it was, boy, I think it's Monday.
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But yeah, it's a good question, I'd have to go back and look.
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>> Jon Hartley: I always get confused.
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But I know it's a 25% draw down in one day and
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it was one of the largest, I think still one-day draw down.
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I know it came back later in the day, but one of the strangest market anomalies that
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the economists still haven't been able to fully explain yet.
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I guess I'm curious.
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You became a professor at University of Maryland.
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You served a Treasury during George W Bush administration, and
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now you're director of CBO.
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I take it, economic policy has been something that you really enjoyed.
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What was your experience like during the Bush administration?
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You were there during, you know,
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the global financial crisis later in the George W.
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Bush administration.
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What was it like sort of working on things like TARP and so forth during that time?
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Which feels like it was a while ago and we've had maybe a couple crises since, but
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I think it was definitely a turning point for economic policy.
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And you were there during that time.
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What was it like and what were you working on?
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>> Phillip Swagel: Yeah, it's interesting.
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I mean, just like you said, sometimes it feels like a million years ago and
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sometimes it feels like yesterday and something will come up that reminds me and
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takes me back or I'll meet someone who I haven't talked to since then.
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I mean, you know, it's a terrible time for the economy and the financial system,
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so there's a sense of urgency and there's a sense of mission as well, of,
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you know, we, what we were doing was important and, you know, obviously in.
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Well, I say in retrospect, rescuing the financial system and, you know,
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bailing out, I think, is the, the word people use.
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And that seems like a perfectly fine word.
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Bailing out banks is controversial and unpleasant, but it was necessary.
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And that was something that I think, you know, even in real time we understood,
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you know, necessary, momentous, unpleasant, all those things.
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But, but overall, it's just the sense of mission, of working together and,
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you know, that the economy, you know, had to continue and
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the financial system had to be rescued as part of that.
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>> Jon Hartley: That's terrific.
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And I'm sure, also, I think there's very few researchers who are able
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to stretch out both sort of the research world and the economic policy world.
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I mean, how, you know, after going back to academia,
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after having served at treasury during the Georgia W.
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Bush years, how did that inform your research tastes and
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things you're interested in writing about, doing research on?
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>> Phillip Swagel: Yeah, I have to admit my attention span is shorter.
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You know, going back, going to academic conferences.
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I think this is pretty common for
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even the most accomplished people with much better CVs than mine.
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After policy world, it's hard to go back to academic conferences.
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I've kind of always been interested in things that were real world, and so that
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wasn't so hard, Thinking about financial regulation, that was pretty easy.
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I had students who were interested in real-world things
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since especially as the policy school.
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So for me, Maryland's a very congenial place, and
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the policy school is the right place for me.
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So moving back and forth between academia and
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policy sort of policy world, it feels very natural.
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And even at Maryland, of course, is inside the Beltway, in suburban Washington,
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I was able to be pretty involved in some policy things as well.
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>> Jon Hartley: Well, it's terrific.
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And I know many great economists at the University of Maryland
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who've gotten involved in policy and are really distinguished.
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I think Mike Faulkner right now, who's the Deputy Secretary of Treasury,
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want to talk about, CBO and really drill down into your current day job.
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I want to first get into why CBO matters as well as its history.
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So, the Congressional Budget Office, or CBO was created in 1974 by the budget
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Impalement Control Act, something we've been talking about a lot recently for
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other reasons, and things like surrounding Doge and so forth.
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But, there's what is CBO in my mind.
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I see it as the official scorekeepers passing legislation and
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when there's some sort of a cost requirement that features,
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sort of features primarily in the Bird Rule and reconciliation process.
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Something that the Republicans and
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US Congress are going through a lot right now with passing their tax reform bill.
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Can we maybe just take a minute to summarize how the budget process works?
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Sort starting from, sort of start to finish,
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starting from the budget resolution to the passage of the law and sort of where CBO
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fits into that when it comes up with the scores and where does it really matter?
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>> Phillip Swagel: Okay, yeah, sure no, it's.
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No, thank you.
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I mean, CBO is an agency of Congress, and we're here to support Congress.
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So we get them the information they need when they need it.
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And that's both the kind of what they need and the time,
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when, and that's really our key role.
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And the budget is obviously the budget process is a key part of that.
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Let's think about the reconciliation that they're working on now, right?
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Last week, Congress passed the budget resolution.
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That's a concurrent resolution between the two chambers, the House and the Senate.
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So there's no cost estimate to it.
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That budget resolution sets out the broad parameters
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in a sense of the changes in the deficit that the overall, and
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then how each committee between the two chambers is going to contribute to that.
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And there's differences between the House and the Senate and
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there are different bodies.
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And so we are, we help them on a technical basis, right?
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Coming up with the numbers involved in the resolution.
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And then we're helping the individual, individual committees that are working
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on the specific pieces of the legislation that eventually they will vote on.
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And so that, for example, health care, I mean, Medicaid is being considered.
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Obviously this is public record.
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And so we work with committees of jurisdiction that work on Medicaid.
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In the House, it's E and C, Energy and Commerce is Chairman Guthrie.
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We work with his staff and we go back and forth as they refine ideas.
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We don't say do this, this is the right policy.
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We, it's their policy.
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And we help them analyze what the budget implications are and
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what the other implications are.
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Eventually, the committees will come forward with legislation, and
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they'll have markups where the legislation is considered in public in the committee.
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And then we will come forward with a cost estimate.
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And it's usually after the committee, after the committee process,
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we'll have cost estimates for each committee, so for
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each piece of what could be quite a large piece of legislation.
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And then at the end, the Budget Committee, first in the House, or
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probably first in the House, maybe then in the Senate.
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It's up to them really, what order.
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The budget committees will stitch together the legislation coming out of
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the individual committees,
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and then we'll do another cost estimate for the entire thing.
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And we'll do that jointly with the Joint Committee on Taxation.
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And for anyone watching on video, well, you can see I'm pointing to the ceiling
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and I'm speaking from the fourth floor of the Ford House Office Building.
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The JCT, the Joint Committee on Taxation, is on the fifth floor.
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And so all the parts of the legislation that involve changes to taxes to
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the Internal Revenue Code, they will estimate, but
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we'll work together with them.
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They're in charge of the tax, we're in charge of the non tax.
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We'll do a grand estimate of it all.
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And then we'll do a dynamic estimate of the effect of the legislation on
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the economy.
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And then the feedback back to revenues and the deficit.
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>> Jon Hartley: But you generally have your own models for analyzing, say,
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the effects of taxes as well.
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And these are different from the JCT ones, I guess, so
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there's this whole budget process and I think a lot of people,
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it's obscure to a lot of people.
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In this idea that you what the House Budget and Senate Budget committees do,
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they come up with basically the top line numbers.
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And then it comes down.
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Once those budget resolutions are passed, you think about passing a budget
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every year, then it comes into sort of lower committees or
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sort of downstream committees.
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The Appropriations committees or say House Ways and
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Means, Senate Finance Committee, and so forth.
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The appropriations committees and the House and Senate, and so forth.
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They're the ones that are doing a lot of this work in terms of
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working within that top line number that's been outlined.
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And then it's usually, I think after they've written a bill or
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come up with a markup that you'll go out and score it.
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Typically, I guess in between that and
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passing the bill and you do lots of things.
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There's a lot of things that go into these scores.
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When CBO says it'll cost, X trillion or billions of dollars for
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this particular piece of legislation.
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I want to sort of break down into,
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I guess a number of key sort of issues that go into each of these estimates.
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One of them, which has become very topical right now is this
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whole idea of current policy versus current loss.
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CBO has done a lot of, traditionally done a lot of scoring under current law.
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I mean, some congressional Republicans right now would sort of like to switch to
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current policy to score.
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So that the TICTO renewal bill and it's kind of a philosophical divide,
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I guess in terms of current policy says that we should have a baseline
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that's wherever the policy is today and use that as the baseline.
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And so, things like expirations and
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the law and so forth wouldn't be thought of
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as a change per se or part of the baseline.
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For example, I think extending the taxes from Jobs Act looks inexpensive if we're,
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what we're doing is just keeping sort of the current provisions.
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If the current policy is the baseline, and the current law baseline is different in
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that it says sort of that the cost of expiring provisions does matter.
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So it's really in my mind a philosophical divine.
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But I'm curious, how do you think about it and what should CBO and
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Senate Parliamentarian be doing?
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Is really your job just to sort of be agnostic to these sorts of issues?
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And just sort of come up with scores according to whatever sort of Congress is
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asking you to do, or where does sort of CBO fall into that in terms of, you know,
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current policy versus current law?
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And how would you explain that issue?
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What do you think about it?
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>> Phillip Swagel: Okay, yeah.
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It's an important question and something that the Congress is thinking about now.
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And the way you put it as a philosophical issue, I think is exactly right,
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that different people will look at it in different ways or look at it in both ways.
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To say, like with the tax provisions, these are expiring.
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But a member of Congress might say, well, I think they should continue.
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And I just want to continue what we have now.
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And I feel like looking at it that way is the right way to look at it.
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And another member might say, no, if the current law is this and
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the law has those provisions expiring, and that's the right way to look at it,
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we will provide the information that Congress wants.
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And that means we will provide comprehensive information this year.
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It means we'll provide both that if a member wants current policy basis,
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I mean, they'll have to tell us what is current policy,
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which provisions they think are current policy and are meant to be extended.
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And, of course, I'll have to tell my colleagues upstairs at JCT
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what's current policy, since so much of that is the tax code, and we'll do that.
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And I mean, both agencies, CBO and GCP are here to support the Congress.
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And from the CBO perspective, we will give them the information they,
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you know, they want in the way they want it.
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It'll be our analysis.
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Of course, we won't necessarily give them the numbers they want is whatever
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the numbers are, that's what we'll give them.
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On the other hand, we'll also provide the current law numbers as well.
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And that's, you know, first is by statute that the statutory baseline is on
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a current law basis with some exceptions for programs like Social Security and
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Medicare.
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You know, it's our job to provide Congress with the information they want when
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they need it, is our analysis.
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But they're the ones who decide what information is useful to them.
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And different members with different philosophies, you know, again,
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as you put it, will vote differently based on different information.
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And I just want to make sure that the information we provide is comprehensive.
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And that's really fulfilling the CBO mission.
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>> Jon Hartley: Terrific, I wanna get into dynamic scoring because this is another
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one of these sort of, I think, hot topics.
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So dynamic scoring, CBO and JCT, they have sort of different types of models,
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and they have both, what's called a conventional static model,
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which is where a lot of these sorts of numbers often come from.
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And then, they also have these general equilibrium models
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that do dynamic scoring that account for
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how GDP and the macroeconomy might be impacted by such policies.
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And they're accounting for things like spillovers and
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things like that and are a bit more complicated in that respect.
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And I think one area, I think of confusion, I think for a lot of people,
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is that a lot of advocates of dynamic scoring.
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Often, I think sort of forget that in conventional estimates
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still include elasticity, taxable income,
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which includes sort of behavioral responses to taxation.
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I'm curious, like, what sorts of behavioral responses would
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the conventional static model include in CBO's case?
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I mean, does it include your revenue shortfalls from, say,
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tax avoidance minimization due to, and things like due to wanting to work less?
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How does CBO sort of separate out these sort of conventional
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behavioral response responses, say, evasion avoidance,
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tax minimization from the labor response in dynamic scoring?
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And I mean, do you think there's a lot of value added and say,
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I guess we'll get to dynamic scoring in a second?
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>> Phillip Swagel: Okay.
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Okay. No, no, absolutely.
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And so I start with where you started,
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that the conventional estimates have a lot of behavior in them.
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And you mentioned some of them, some of the dimensions of behavior.
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And we have that the JCT in their tax models, they have that.
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One thing we analyze where this behavior is important is tariff policy.
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And there's that the president is limiting the use of the de
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minimis exception as a couple of large firms in China that ship,
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basically small shipments to the US and those essentially get around the tariffs.
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I don't know if it's evasion avoidance, right?
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One's legal, one's illegal.
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I think it's what they were doing was legal and now it's going to be off,
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you know, out of bounds, and that's going to change the nature of commerce.
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And we have to figure out, well, what will it mean for the supply side, you know,
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for those firms, and then what will that mean for the customers?
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And so there's a lot of behavior in there.
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It's probably not going to shift the overall size of the economy.
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A lot of dollars, probably not macro scale.
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But how would that adjust?
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And so we've got to think about that.
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There's other things like no tax on tips.
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I mean, that would be jct, but they would have to think about, well,
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how will the nature of compensation change if, you know,
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could more activity shift over into tipped?
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You know, the kinds of things that have tips.
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And so that kind of behavior is important.
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I only just mentioned one more, which is, I mentioned before Medicaid policy.
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We're doing a lot of work on that.
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A lot of the impact in the sort of the dollars,
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especially on the state side, and the coverage potential
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coverage changes comes about through decisions made by states.
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So the federal government will change the number of dollars,
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the allocation of dollars between the federal government and states.
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And then, states have to decide how to respond.
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And different states will respond differently.
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They have different views toward Medicaid and uninsured and things like that.
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And we have to take into account of that behavior.
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So it's not of individuals, but it's of states.
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And we talk to the states, we analyze their situations.
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But ultimately there's going to be our assumptions,
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our analysis built into those projections.
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>> Jon Hartley: Fascinating.
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So I guess, like, okay, so I know there are tax models too.
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So like the things like evasion, avoidance and minimization.
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Break that out in a cbo, in the CBO tax model, or.
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>> Phillip Swagel: It's hard.
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So for a cost estimate, JCT would do it.
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And they would have to think about that.
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About, you know, I guess, like the tax on tips,
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they would have to think about, right.
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How will the nature of work reconfigure?
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And what does it mean?
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So what does the behavior mean?
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And we face the same thing with a tariff change.
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You know, how does the nature of commerce reconfigure itself?
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After legislation is enacted, then CBO is in charge of the baseline.
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And so, for example, the 2017 TCJA,
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the December 2017 Tax Act, JCT was responsible for the estimates.
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But then once it was enacted, we put it into the baseline.
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And so in April 2018, CBO published kind of a long analysis
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of how we fit the newly enacted tax bill into the baseline and
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what did it mean for revenue and GDP and so on.
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>> Jon Hartley: I'm familiar with some of that work because I know there's.
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I have some kind of related work with my colleagues Josh Rao and
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Kevin Hassett on facts on investment.
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And I know there's sort of an elasticity that.
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Use from the literature plug into, I think your cap tax model, which is more about
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investment than say you're just thinking about the revenues in your baseline.
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I guess sort of just and we'll get to that in a second.
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We'll talk a little bit more about models and transparency and things like that.
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I totally commend the CBO and being more transparent than the JCT and
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that sometimes,
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we don't even know what the JCT's elasticities of taxable income really are.
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We think they're sort of less than one, but it's hard because at some level it's
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not quite an apples to apples comparison in terms of say, how a literature
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estimate compares in that it's not clear what sorts of things get counted.
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Hence through the question on evasion, avoidance, taxation.
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That's more a JCT question.
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But I guess I'm just curious overall conventional scoring or
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conventional static models versus dynamic scoring.
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In thinking about how these policies, how they impact GDP, what do you think?
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Do you think there's value added there in dynamic scoring?
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I mean, I feel like a contentious issue for
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a very long time in terms of to what degree we should think about
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the estimates that come out of really general equilibrium models,
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which is where these sorts of dynamic scoring effects are being measured often.
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I'm curious, what's your take on sort of dynamic scoring versus conventional stack
25:25
models in general?
25:27
>> Phillip Swagel: Yeah, we want to do more of it and
25:29
we've put a lot of work in over the last really couple of years.
25:36
I'm trying to think of since the 2022 reconciliation legislation passed, right?
25:41
The reconciliation bills tend to be kind of all consuming.
25:45
Then the Congress was divided in 23 and 24.
25:49
So the PAISA legislation slowed down some [LAUGH] and we had some time to prepare.
25:53
And again, working with JCT and being ready for
25:56
reconciliation, there are different roles.
25:59
There's some things where legislation intrinsically has to have a dynamic score.
26:04
A big bill that affects immigration, you're changing the size of the labor
26:08
force if the bill is large enough and intrinsically you're changing the size of
26:13
the economy so that by its nature is dynamic.
26:15
Something in tax policy where you have a really nice paper with Kevin Hasselt and
26:21
Josh Rao that looks at the impact of change in tax policy on the economy or
26:27
on investment, as you mentioned.
26:30
And in the economy, a big change in tax policy or
26:33
even a small change that's focused on pro growth elements,
26:38
that would change the size of the economy and then a dynamic estimate makes sense.
26:44
And then there are members and many members who want us to do dynamic analysis
26:49
on the spending side, sometimes they call at the investment side is
26:53
a change in some policy that changes the size of the labor force, or
26:57
maybe it's direct federal investment, building roads and bridges or
27:02
highways or something else, that changes the productivity in the economy.
27:07
It changes the size of the capital stock.
27:09
And members want that.
27:10
And I want to give members of Congress the information that they think is valuable.
27:15
And look, I think it's valuable too.
27:16
I mean, the more the better, I can explain some of the challenges, but that's my
27:22
overall philosophy is comprehensive, more information to the extent we can.
27:28
And I can go into some of the challenges.
27:30
>> Jon Hartley: I'm sure you have to have some sort of an estimate of what a fiscal,
27:34
your fiscal multiplier would be, I mean,
27:36
there's all sorts of varying estimates in terms of fiscal multipliers.
27:39
I mean, there's certain micro estimates that I think are tend
27:45
to be pretty high and then from maybe things like RCTs and
27:50
things of that nature, quasi experiments of that kind of.
27:55
And that's from sort of more micro day.
27:59
And then you have sort of the big macro sort of estimated elasticity.
28:03
I think often of say, Valerie Ramey's work and the work of others,
28:06
you know, John Sison, Emmy Nakamura and others,
28:09
that you look at these like defense spending shocks.
28:12
And so there's, I think, a school of thought that says that those multiple
28:17
multipliers are pretty low and maybe as low as, you know, 0.3 or
28:21
something like that versus the micro multipliers might be, say, around one and
28:26
a half or two or something like that.
28:28
And then some people argue there's, I guess,
28:30
tax fiscal multipliers that are very different from government spending ones.
28:34
I think Alberto Alsina found that the tax multipliers were often
28:38
bigger than the government spending multipliers.
28:41
I'm curious.
28:42
I assume those would be something that you'd have to think
28:45
about if a member comes to you and says, hey, incorporate
28:49
the dynamic effects of building a bridge or some infrastructure project.
28:53
>> Phillip Swagel: No, that, that's right.
28:54
That's exactly right.
28:55
And we did one paper like that.
28:58
It was requested by the Senator Rob Portman,
29:00
who was leading group with Senator Kirsten Cinnamon and
29:04
others that resulted in legislation on infrastructure investment.
29:09
And that's what they wanted to know, that what's the dynamic feedback
29:13
from infrastructure investment changes productivity, changes the size of
29:17
the economy over a long period will feed back into Revenues and
29:20
they had in mind really roads and bridges, which, you know, takes, well, it takes in
29:25
the US years to build a road or a bridge, you know, sort of infamously sometimes.
29:30
And then we looked at the 30 year horizon of the, you know,
29:34
productivity and revenue feedback.
29:36
It did not pay for itself.
29:39
But depending on how the road or bridge was financed, there could be a substantial
29:44
offset that the added productivity would generate enough, enough revenue to pay for
29:50
it was like as much as half of the cost of the road and bridge.
29:56
Leaving aside the crowding out, so leaving aside the debt that might be incurred to
30:00
finance the road and bridge in the, in the first place.
30:04
So there's still a sizable, a sizable impact that's on the spending side.
30:08
And then, you know, like your work with Kevin and Josh on the tax side and the way
30:14
I think of it and the way I explain it to members that different provisions have
30:19
different pro growth impacts and the, you know, the sort of expensing,
30:23
you know, think about like expensing versus a change in the corporate rate.
30:28
And the corporate rate is permanent, so maybe that's not on the table now.
30:31
But think of like expensing versus the change in the personal rates.
30:34
Those will have different impacts on growth.
30:37
They're both pro growth, but different quantitative impact impacts.
30:41
>> Jon Hartley: Yeah, no, absolutely.
30:42
And it's a huge, I guess, debate right now in Congress in terms of what to
30:47
be focused more on sort of pro growth firm type tax adjustments versus, I guess,
30:53
things are more, I guess on the individual side of things, things that were
30:58
promised in the presidential campaign like tax on tips and things like that.
31:03
And doing questions I think right now, but maybe raising the person, right?
31:07
It's a very interesting dynamic in terms of how these things are being considered.
31:11
The salt deductions are a very big topic as well, but
31:14
I wanna sort of get into this came back to sort of just CBO.
31:19
I wanna talk about just CBO scoring accuracy.
31:23
So, you know, often our CBO scores wrong.
31:27
I mean, I guess no score is ever perfect.
31:31
But I'm curious, you know, we could think about, you know, the Taxes and
31:36
jobs act of 2017 in the first Trump administration tax cuts which reduced
31:40
the corporate rate and brought in expensing provisions for equipment.
31:45
And it also changed a lot in terms of how businesses
31:50
pass through businesses are being taxed.
31:54
And there were also changes to the individual code.
31:57
There were opportunity zones.
31:59
They capped the SALT deduction,
32:02
all sorts of things in terms of your score or the CBO score for that.
32:08
And mind you, as a different CBO director who was there at the time,
32:13
what did CBO get right and wrong there in your mind?
32:16
>> Phillip Swagel: Okay.
32:17
And just to say, well, I started as CBO director in June 2019,
32:22
but I own every mistake CBO has ever made and
32:25
certainly members of Congress remind me of that.
32:29
And that's just, that's the reality.
32:30
And you know, fortunately we get a lot right, but of course we get things wrong.
32:34
And just as a general matter, the more familiar provision is and
32:38
the more incremental legislation is, the easier it is for us to model it.
32:43
And when something's entirely new or big, well, that's harder.
32:47
And you know, the ACA of course, was big and new.
32:50
So just things like that are harder.
32:53
The childcare provisions and the build back better legislation,
32:56
those were big and new.
32:57
You know, we never, in the end, that was never enacted, but
33:00
that's the kind of thing that's harder.
33:02
The 2017 act is an interesting one.
33:04
You know, of course, JCT did the original score, but we,
33:08
what people really think about now, it seems like,
33:11
is our estimates in the baseline is our projections, the technical word.
33:16
So in April 2018, we published the first baseline update after enactment and
33:22
that included the impacts of the, of the legislation.
33:26
So both we had stronger GDP growth, stronger business investment,
33:30
stronger GDP growth, lower revenues, right?
33:34
That stronger growth would improve revenues, but not so much to pay for
33:38
itself and so on.
33:39
And the beginning of 2018 bore that out, right?
33:42
Investment was stronger until about the middle of 2018 when we saw
33:47
some of the first wave of tariffs had a hit.
33:51
CBO is really actually very positive on the investment
33:56
impacts of the provisions in tcg, tcja.
34:00
The, you know, the lower corporate rate, the international provisions, the lower
34:05
personal rates, our internal estimates, like the elasticity you mentioned,
34:09
the change, essentially the change in the price of investment, you know,
34:13
from the tax side, what does that do to the quantity of investment?
34:17
So we're not quite as high as what you and Josh and Kevin found, but
34:21
we're within the range of your uncertainty and
34:24
we're a bit above some of the other academic literature.
34:27
So it's a bit of an irony that we are actually,
34:31
we're very positive on the economics of the Act.
34:36
The revenue estimate that we did again back in this was published in 2018,
34:41
April 2018.
34:43
We are basically spot on for 2018 and 2019.
34:46
That actual revenues came in actually very slightly below what we projected.
34:52
So in some senses we were over optimistic, but really a tiny amount.
34:56
Now, of course, 2020 is a difficult year with the pandemic.
35:00
There's so much going on, legislation.
35:02
So let's leave that out because I don't think anyone could
35:06
have projected what happened in 2020.
35:09
2021.
35:11
After 21, 22, 23, revenues were quite a bit higher than CBO projected.
35:17
And so that's a mistake and error.
35:21
But of course the next thing is to say, well, why what happened and
35:25
why were revenues above the projection starting in 2021?
35:30
And I would point to a couple of things, right?
35:32
Inflation is one is in our estimation, is the biggest piece that inflation.
35:37
There's high inflation starting in the spring of 2021.
35:41
We tax nominal income.
35:43
And so that means that the nominal dollars of revenue were higher than before,
35:47
you know, before the high inflation.
35:50
And I don't think the enactment of TCGA is what caused the high inflation, right?
35:55
So I wouldn't attribute the high inflation to tcga.
35:58
And so it's not fair to say, you should have, you know,
36:01
should have anticipated that.
36:03
The Fed, of course, did put in extraordinary monetary policy
36:07
in response to the pandemic that increased asset values.
36:11
And then we saw that capital gains realizations look to have
36:15
been extraordinarily strong in 2022.
36:19
That of course, TCGA would have also improved asset values.
36:23
But the sudden spike in 2021 and revenue surge 22 looks
36:29
like more the result of the pandemic and the Fed's response than tax policy.
36:35
And then the last thing I'd say is that of course, Starting in early 2021,
36:40
there is a surge of immigration and that for the federal government, well,
36:44
there's cost of immigration, of course, but
36:47
those costs are much heavier on the state and local governments in the US and for
36:52
the federal government, the revenue impact is larger.
36:55
So again,
36:56
revenues were higher than CBO anticipated because of the immigration surge.
37:02
And I just don't think CBO could have
37:05
plausibly expected the immigration surge in 21 back in 2018.
37:10
And I don't think TCGA is what caused the immigration surge either.
37:14
So that, I mean, I'm going on long here, but
37:17
you get the point that revenues were above what CBO projected,
37:22
but only starting from the time of the high inflation,
37:26
the Fed's qe, immigration and other things.
37:30
So once you take that into account, our accuracy looks, look,
37:35
looks a whole lot better.
37:37
>> Jon Hartley: Got it.
37:37
So it's the cap gains I Guess.
37:40
And cap gains tax rates are not indexed to inflation.
37:43
>> Phillip Swagel: That's right.
37:44
>> Jon Hartley: The bracket creep there.
37:45
And you're saying even, you know,
37:47
undocumented immigrants are some degree paying taxes as well.
37:51
>> Phillip Swagel: That's right. That's right.
37:52
And they're increasing the size of the economy.
37:56
Well, many of them do, do, do pay taxes.
37:59
Many of them in the immigration surge were brought in under parole,
38:04
which essentially within six months.
38:07
Many of them had work authorization, and then they had a big incentive to pay on
38:12
the books because they'd have a date with a, you know, a judge and, you know,
38:16
down the road.
38:17
So they had an incentive to pay on the books, to work on the books and
38:20
pay taxes so that they can show that to the judge.
38:23
Yeah. So it's the inflation,
38:25
equity prices driven in part by QE and then the immigration surge.
38:32
All of those meant revenues in 2021 and on were higher
38:36
than could plausibly have been predicted back in 2018.
38:42
>> Jon Hartley: Got it.
38:42
So I know many of the Texas and JOBS act provisions are set to expire.
38:48
In fact, they were made temporary to begin with because of some of these things like
38:52
the Berg Rule and things like that.
38:54
But now there's a desire to make them permanent.
38:58
That's sort of the big feature of the current tax bill that's being pushed
39:03
through Congress.
39:04
How do you go about modeling the impact of ticta or
39:07
taxation Jobs act expiration in your macro baseline?
39:10
I know sometimes you ask me why there's no recession being shown under
39:15
the 2026 year under current law given to these expire.
39:20
I'm curious how you think about those expirations from a modeling standpoint.
39:26
>> Phillip Swagel: Yeah, no, no, thanks.
39:28
And, you know, first of all, to say, you know,
39:30
there's no normative judgment here that when CBO says this, you know,
39:34
this is what we think will happen, or this is the revenue or this is the GDP that
39:38
doesn't say therefore it's the right thing to do or the wrong thing to do.
39:42
And members of Congress have many reasons and it's political philosophy and
39:48
lots of things that are just beyond CBO and you know that.
39:51
So that's where I start.
39:53
We do have the expiration of the provisions in the 2017 act
39:58
affecting the economy.
39:59
And so we have GDP growth slowing in our baseline forecast.
40:03
We have GDP growth slowing from 2.1 in 2025.
40:08
So 2%, 2.1% real GDP growth down to 1.8 in 2026,
40:13
which you know, is a meaningful slowdown.
40:17
But as you said, it's not a recession and it's kind of at,
40:21
it is at odds with, I know with some people have in mind,
40:25
this is quite a large increase in revenue under current law.
40:29
It's a bit less than 1% of GDP under current law.
40:33
And you would think, well,
40:34
that's going to slow down the economy by more than we have in our baseline.
40:38
And there's a couple things going on that we have to, we basically have to model.
40:43
Well, first of all, so much of the 2017 Act is permanent,
40:47
including the most pro growth parts, right?
40:50
The corporate rate, the international provisions provide incentives for
40:54
activity to be domiciled in the US and not to invert and not to go overseas.
40:59
So that's, that's part of it is that a lot of the pro growth part is not expiring.
41:04
The part that is expiring the most pro growth part of that is
41:09
relatively small in terms of dollars.
41:12
This is some of the business side provisions essentially expensing and
41:17
is the depreciation provisions.
41:21
The bigger dollars are on the personal side.
41:23
Now, every household faces, virtually every household faces a change in
41:28
their taxes with the expiration of those provisions.
41:32
But it's still also true that most of the dollars are associated with
41:36
households with relatively high incomes and relatively high wealth.
41:41
And those households tend to have low marginal propensities to consume.
41:45
So even though it's a lot of dollars, the MPC that comes with those dollars
41:50
is relatively low, so the effect on the economy is attenuated by that.
41:55
And so the effect on consumption and GDP is attenuated.
41:58
And then there's the third and last part.
42:01
I guess there's two parts, 3 and 4.
42:04
Well, one is we assume the Fed would respond in part to slowing
42:08
economy under current law.
42:11
The third that's interesting is that we talk to businesses about their view of
42:16
the Tax act and there's a, a substantial number of businesses said to us, well,
42:22
we kind of understood that even though the provisions, some of the provisions
42:27
were permanent, well, of course there could be subsequent legislation.
42:32
And so there's a sense in which in modeling their investment decisions,
42:37
businesses might not have included the full permanent effect of the provisions
42:42
just because they know laws change and even a permanent law can change.
42:47
And again, that would tend to attenuate the impact.
42:51
It meant that the positive impact of the law was not full force.
42:57
And then the expirations in the same way, which actually last thought,
43:01
which makes the econometrics hard.
43:03
So what you and Josh and Kevin did and what other groups have done
43:08
is hard because you're measuring the provisions of the act.
43:13
But then businesses are acting according to their own interpretation of
43:17
the provisions rather than the actual provisions.
43:20
So we face the same difficulty, but it's a combination of those things that
43:24
the expiration has a negative effect on the economy in our estimation.
43:28
But it's not, you know, not sort of full bore and
43:32
not enough to bring the economy to, you know, certainly to a recession.
43:37
>> Jon Hartley: Well, that's fascinating how you think about scoring things like
43:42
that, there're some of those provisions that are set to expire,
43:47
I wanna just talk about, I guess taking a step back here.
43:52
CBO has hundreds of models as far as I'm aware.
43:56
Now some of them are being made public, including your tenure,
44:01
I think like the cap tax model, for example, which measures
44:05
the impacts of a tax change on capital and fixed investment spending.
44:11
I'm curious one, how do we get more of these public and
44:15
what do you think about things like I guess the CBO show your work Act.
44:20
This legislation has been sponsored by Senator Mike Lee, I'm curious.
44:25
CBO is more transparent than JCT.
44:27
I don't think any JCT models are really public at all, So I commend CBO for
44:31
doing this.
44:32
But I'm curious, you know, there's, I think been a lot of interest in,
44:35
in scoring and what goes into scoring in recent years.
44:38
I think you see some of this with, you know, the popularity of, I guess,
44:41
you know that you got the Yale budget lab now and
44:43
the Penn Wharton budget initiative and all these things.
44:46
So, so I think there is demand for, for, for scores.
44:48
But I guess, you know, there's always, I, I think what, what's funny about this sort
44:52
of business is like there's always people who are upset about scores because too big
44:56
or too small depending on I guess what, maybe what they hope to see.
44:59
But I'm curious, I think at some level, you know,
45:03
putting more transparency into what's going into these models
45:06
maybe could help alleviate some of that and thinking about how
45:10
you change what exactly what assumptions are driving certain costs and so forth.
45:15
I'm curious what is sort of the CBO plan for making models public and
45:20
what do you think about this?
45:22
At some level I could see sort of negatives as well in the sense of why did
45:26
you put that in there?
45:27
And so forth, you know, so, so I, I don't think it's necessarily all peaches and
45:30
cream, but I'm curious, what do you think about transparency?
45:33
And how important is that to you as a CBO director?
45:37
>> Phillip Swagel: Okay, no, no, and let me start by saying I agree with your
45:41
assertion that the more transparent we are,
45:45
it will help us when there are disagreements,
45:49
when someone's unhappy with an estimate or a number.
45:53
And we can say, look, here's the assumption in there.
45:58
And if you, whoever's unhappy, if you think we're wrong with that assumption,
46:01
well, let's talk about that.
46:03
And then it's a substantive discussion, it's a focused discussion, and we do that.
46:08
And that kind of transparency is helpful and
46:11
sometimes we'll just have a different view.
46:14
I mentioned earlier, build back better the childcare provisions,
46:18
we actually thought that those provisions would have higher uptake than the,
46:23
the Biden White House did.
46:24
And so our score on that little part of it was bigger than theirs, but
46:27
that was because we actually thought the policy would be more effective,
46:30
in a sense, than they did.
46:32
So these, my predecessor did a lot on transparency,
46:36
as Keith hall, and I'm continuing that.
46:39
My colleagues are continuing that.
46:42
The Captax model you mentioned is a great one, it has a limited user base.
46:46
I know you are busy, like, very highly knowledgeable people for
46:50
whom it's really important.
46:52
You people at Tax Foundation, Brookings, AI,
46:56
a couple others and it's worth it, right?
46:59
It's the transparency, it's puts a little bit of a tax on us, but it's worth
47:04
it because the community who uses it will give us feedback and questions.
47:09
And sometimes if there's something they don't understand or you don't understand,
47:13
and you ask us in our tax analysis, staff are amazing.
47:16
You know, say, yeah, you're right, we could do that better.
47:18
And that's, that's kind of feedback that's helpful.
47:21
We get helpful, we get feedback like that from congressional staff.
47:24
I'm sorry, I'm pointing out my window toward the Capitol, so I'm like,
47:28
at the Southwest corner of the Capitol complex, and so
47:31
I'm pointing the northeast of the dome.
47:33
You know, the health staff, where we work very closely with both, you know,
47:38
both chambers, both sides on health legislation.
47:40
Sometimes, we'll give them a preliminary estimate and let's say, we expected,
47:45
whatever, this to be different or that.
47:47
And we'll talk about, we'll realize, well, no, they you have something, or
47:52
they'll say, you need to talk to this outside expert and we will.
47:55
So that's the kind of transparency that's useful.
47:58
I mean, it's all useful, but then.
47:59
That's useful in a very mechanical, very immediate way.
48:05
We put up other, as you said, we put up other modeling information,
48:09
like from our healthcare health insurance coverage model.
48:13
We recently, recently put up some information about health insurance
48:17
premiums and our projections of private sector premiums.
48:22
I want to do more.
48:23
The challenge is that it takes time,
48:26
especially when legislation is moving quickly, we often just don't have time.
48:31
And we all have time to talk about it with someone, but not to actually go and
48:37
put it on our web, on our website, or in a way that's usable.
48:42
And we just can't stop and put up the models.
48:44
And sometimes that's a time,
48:46
sometimes the legislation is confidential, so we can't do it in advance.
48:52
Sometimes it's judgment and I mentioned earlier,
48:55
we talked about Medicaid and the state behavior.
48:58
The state responses to federal changes in Medicaid is critical to
49:02
understanding the effect of the policy.
49:05
And that's our judgment.
49:07
There's no model in the mathematical sense, but there's our discussions,
49:10
there's our judgment, there's our analysis.
49:13
And so it's not easily encapsulated in something we post on the web.
49:18
But I can sit with people, our experts can sit with people and talk about it.
49:22
And that's what I want us to do more of.
49:24
And so the, Senator Lee's legislation, it's completely understandable and
49:29
the kinds of things that he wants in that legislation, I agree with that.
49:34
We need to put up more that be, make it so
49:37
that other people can understand what we're doing.
49:42
It's hard for us to do it in a way that people can replicate,
49:45
which is ultimately what, you know, what he would like.
49:49
That's just hard.
49:50
I'm not sure we're going to get there in a broad way, but
49:53
I want to do as much as I can, you know, to satisfy the motivation behind that.
49:58
And so I'm.
49:59
Yeah, that's it.
50:00
It's. In a perfect world, we would be there.
50:03
He wouldn't even need the legislation.
50:04
We'd be there without it.
50:06
But given the constraints, you know, we have, I want to do as much as we can.
50:11
Actually, can I just say a word that anyone listening to the podcast,
50:16
we have a Contact Us email on the CBO website,
50:19
is communication.cbo.gov and those inbound emails matter.
50:23
Or if a listener or a viewer, you see a CBO report and
50:27
something looks wrong, well, don't be shy.
50:31
We do Want that feedback?
50:33
We get plenty of feedback from academics, from members of Congress, from staff,
50:37
but from anyone.
50:38
If something looks wrong, I want to know about it.
50:41
And especially constructive criticism is always, is always helpful.
50:45
>> Jon Hartley: Well, that sound very kind you to be receptive
50:50
to feedback in that way.
50:53
I know many people have some very strong thoughts and
50:57
feelings about various estimates.
50:59
Actually, I asked ahead of doing this interview,
51:02
I asked a few of my Hoover Policy, who are Fiscal Policy Initiative colleagues,
51:07
Danny Hile, Josh Ryle, Tom Church and Ben Jarris, what they would ask you.
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And so one of these questions that comes from Danny and a few others
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here is really, I'm curious what you think about sensitivity analysis and
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maybe doing some sort of CBO sensitivity analysis with an estimate.
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I mean, you tend to stick to point estimates, and I can understand why you
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might be reluctant to offer lawmakers, say, multiple figures.
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It can also, I think you maybe leave you more vulnerable to getting things wrong
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and we could talk about the inflation Reduction Act, Affordable Care Act,
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Medicare, prescription drug costs,
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some of the newer things that you mentioned before.
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They're difficult to model because they haven't existed before but
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I'm curious how you might think about that.
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Or, obviously sort of macro variables are different from
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things like the response, various response parameters,
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both these things are subject to some uncertainty.
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But do you have any thoughts on maybe something like a confidence rating,
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attaching a confidence rating to smear scores?
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The intelligence community, for example, uses an analytic confidence scale that
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allows analysts to indicate how confident they feel about their findings.
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Uncertainty is always a difficult thing to measure.
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But I'm curious, would you ever think about, you know, sensitivity analysis and
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using sort of multiple estimates rather than just a single point estimate?
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>> Phillip Swagel: Yeah. Yeah, and
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it's something that we think about internally.
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We've done some formal modeling, and
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some of the members of our panel of economic advisors have been helping,
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helpful in letting us do that in a kind of analytically sound way.
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So the uncertainty around some of our numerical projections,
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budget deficits, growth, things like that, we compare ourselves to others,
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to the administration, to private forecasters.
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Of course, we could all be wrong.
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Many people were wrong about inflation in 2021, and we were one of them.
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So being with the herd isn't always the right thing.
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But we do try to make those comparisons,
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we try to give people a sense of what the uncertainty is as best we understand it.
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And even in a cost estimate, we have a section on sources of uncertainty.
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We have a section on the Basis of the estimate, what information went in, and
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then what do we think are the sources of uncertainty for the congressional process?
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They need a point estimate and ultimately we don't have a choice, right?
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There's, we have, we do a cost estimate for
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everything that gets voted out of committee that's going to the floor.
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We don't get to pick and choose what legislation we're doing cost estimates on.
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And yeah, so there's limitations.
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But yeah, it would be nice if, if we could do more to indicate this uncertainty
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where you said the intelligence community is kind of an interesting one,
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like the, yeah, just to say, hey, this one, we did it really quickly.
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There's. If we had infinite time or even another
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three weeks, here's the things we do and be able to come back to it.
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That's kind of, that's kind of interesting.
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We come back sometimes to estimates, but like the Affordable Care Act and
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the mandates, the mandate in the Affordable Care Act,
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we published something explaining why CBO thought what the agency thought and
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how it was different than what turned out.
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But yeah, we could definitely do more on that.
54:43
>> Jon Hartley: Well, it's fascinating because I think about standard air
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bars and how useful they would be.
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I remember several years ago,
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Loretta Master, when she was president of the Philly Fed,
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she recommended that FOMC policymakers should be allowed to
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include a standard error bar around their Dots in the SEP.
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And the survey of economic projections that they put out, they put out these,
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both forecasts of say, things like GDP, inflation, unemployment, macro variables.
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But also they put out their forecast of where they think the policy rate,
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where the short term interest rate is going to be in the next
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several years in the long run.
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So imagine if they could include a standard error bar as well to sort
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of put in some level of uncertainty, maybe the market would react
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to it in a different way or be an easier way to communicate both,
55:45
I guess a point estimate and some degree of uncertainty as well.
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I'm sure we could spend all day talking about all these sorts of.
55:55
Phil, I really want to thank you for coming on.
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It's been an amazing conversation.
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I know you're in a very key spot right now given the tax
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bill that's going through Congress.
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And I know CBO is spending a lot of time coming up with cost estimates
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during the reconciliation process and working with members very closely.
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So really want to thank you for coming on during this very busy time.
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>> Phillip Swagel: Yeah, thank you.
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Thanks so much.
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Thanks for having me on.
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And thanks to Hoover for hosting the podcast.
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And, yeah, I look forward to continuing the conversation in the future.
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>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
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an official podcast with the Hoover Economic Policy Working Group where we
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talk about economics, markets, and public policy.
56:35
I'm Jon Hartley, your host.
56:36
Thanks so much for joining us.
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