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Politics : American Presidential Politics and foreign affairs
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To: TimF who wrote (48941)1/11/2012 2:42:34 PM
From: DuckTapeSunroof  Read Replies (1) of 71588
 
Re: "Dynamic analysis is likely to be an improvement,"

I agree that factoring for feedback effects of changes in tax policy is a logical and useful addition to econometric modeling.

Re: "but its rather hard,"

(LOL. I would say that ALL econometrics modeling is properly described as "difficult". :-)

Re: "and also depends on the assumptions you use."

Yep!

Same with all modeling.

That is why I believe assumptions must be clearly stated up front, and justifiable by hard data, so folks can make their own decisions about the comprehensiveness and the appropriateness of models that seek to provide predictive capabilities.

But to me one of the more fascinating tests of 'static' vs. 'dynamical' was the studies the Bush W.H. had performed, back when they were gearing up to push for their proposed tax policy changes.

CBO, GAO (both static models, but with some different assumptions)... and the dynamical model the W.H. contracted for with a private econometrics firm that was instructed to specifically include 'Laffer Curve' effects from Bush's lowering of tax rates.

All three models predicted effects on GNP for each of ten years, (each modeled the next decade).

And --- this is what was so fascinating to me --- all THREE produced nearly identical results out the back-end.

And --- perhaps EVEN MORE fascinating (considering this is the very 'squishy' world of economics <GGG>) --- was that ALL THREE later proved to have been REMARKABLY ACCURATE in their GNP projections!

(All three showed a boost to national growth rates in the first four or five years after taxes were lowered, because of the stimulative effect... but ALL THREE MODELS, even using some different baseline assumptions, also predicted that UNLESS SPENDING WAS ALSO CUT to at least roughly match the net reductions in government revenues... that the rising level of national debt by MID DECADE would REVERSE ENTIRELY the earlier experience of boosted GNP rates... and the second half of the decade would then experience a LOWERED RATE OF GNP then would have otherwise occurred if no changes at ever been made at all. Exactly what actually happened in the real world.)

In other words, (as commonsense should have told us all along, no need for highfalutin computerized models <g>):

1) Lower taxes = 'Good for growth rates' but,

2) Rising debt levels = 'Bad for growth rates'.

And don't expect simply lowering tax levels to eliminate debt... in the real world ongoing spending levels are a most significant bad of *that* calculation. :-)
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