Once again, we find the government trying to justify its public policies using models of unknown complexity and unknown accuracy. The old data processing adage, Garbage In, Garbage Out, has never been truer. One need only consider how the employment statistics are calculated to observe how models depend on the assumptions provided by self-serving and often corrupt politicians. Ask yourself, how can one simply eliminate counting those who have given up finding adequate employment and have ceased receiving unemployment payments to produce a favorable headline in the media?
In this instance, we find the Trump Administration selling their tax reform policies using models which are more likely than not to be inaccurate and not reflective of the future economic conditions. The question is: if we lower corporate income taxes and engage in other tax reforms, is this sufficient to sustain governmental operations without significantly increasing the national debt. Heaven forbid, that politicians actually cut real (no budgetary) spending and pay down what we owe to those who finance our debt.
SECRETARY MNUCHIN: Well, let me just say again, the core principles of this -- we've been meeting with the House and Senate and they agree a hundred percent. The core business is make business rates competitive, bring back trillions of dollars to create jobs, simplify personal taxes, create a middle-income tax cut. So those core principle are non-negotiable. And that's something that we all feel strongly about.
As it relates to will it pay for itself, again, I think as we've said, we're working on lots of details as to this. We have over 100 people in the Treasury that have been working on tax and scoring lots of different scenarios. This will pay for itself with growth and with reduced -- reduction of different deductions and closing loopholes.
Q Mr. Secretary, if it turns out that congressional estimates, when this has been scored -- if it turns out that it actually won't be paid for by growth, it won't keep deficits in check, is the President comfortable with that? Will he sign something?
SECRETARY MNUCHIN: Well, let me just say again, when we look at the deficits, and the deficit has gone from $10 trillion to $20 trillion in the last administration, that is a problem and the President is concerned about that. This plan is going to lower the debt-to-GDP. The economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues. <Source>
House Republicans Change Rules on Calculating Economic Impact of Bills
After the drama of electing a new speaker of the House and the changing of control in the Senate, the House on Tuesday approved an obscure but significant rule change requiring the economic effects of legislation to be included in a bill’s official cost to the Treasury.
The change on “dynamic scoring” — ardently sought since the 1990s by Republicans — could ease passage of major tax cuts by showing that their impact on economic growth would substantially reduce their cost to the Treasury. The move is widely seen as a way for Republican leaders to set ground rules for an ambitious overhaul of the entire United States tax code.
“We’re saying, ‘If you think a piece of legislation is going to have a big effect on the economy, then include that effect in the official cost estimate,’ ” said Representative Tom Price, Republican of Georgia, the new chairman of the House Budget Committee. “So if you think a bill is going to help or hurt the economy, then tell us how much.” <Source>
Dynamic Scoring Forum: The Dangers of Dynamic Scoring
If “dynamic scoring” means that Congress can use any macroeconomic model it wants, then we are thrown back 100 or 150 years in terms of the rigor of our thinking. There are too many models with a very wide variety of assumptions and implications. It is not exactly true that you can find a model that will support any claims, but this is sometimes uncomfortably close to the truth. <Source>
About those economic models …
Believing in computer models is sometimes like noting that the emperor has no clothes, but you are unwilling to risk the wrath of the administration or the progressive socialist democrats to note that any results are unlikely and that using an expanded five year or ten year timeframe is both disingenuous and dishonest. Here is what one of the most noted economists had to say about this “pretense of mathematically-derived economics.
Friedrich August von Hayek – Nobel Prize Lecture
Excerpts from “The Pretence of Knowledge”
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error.
It is an approach which has come to be described as the "scientistic" attitude - an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."
I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.
This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.
While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.
And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.
This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.
Why should we, however, in economics, have to plead ignorance of the sort of facts on which, in the case of a physical theory, a scientist would certainly be expected to give precise information?
It is probably not surprising that those impressed by the example of the physical sciences should find this position very unsatisfactory and should insist on the standards of proof which they find there.
The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables.
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.
He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will.
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
To read the full speech in context, it can be found here … <Source>
Bottom line …
Any of the tax reform pronouncements of the Trump Administration are likely to be guesstimates or, more likely, SWAGs – “scientific” wild-ass guesses based on imperfect modeling and interpreted by so-called experts in the field using their own brand of experience and intuition. Something that Hayek cautioned against in his famous essay.
As for announcements from President Trump, you can discount the superlatives by 50% and chalk the rest up to lies of convenience. It’s a bitch when you can’t trust your government to say “We don’t really know, but we would like to experiment with your freedoms and your money.”
We are so screwed.
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius