Greenspan Warns Against ‘Dynamic Scoring’ in Budget

Federal Reserve Board Chairman Alan Greenspan poured cold water Tuesday on one of the hottest Republican ideas, arguing that “dynamic scoring” could harm government credibility in the financial markets.

Greenspan warned a joint hearing of the House and Senate Budget committees not to adopt the controversial budget technique in official estimates of the effects of tax policies.

Under dynamic scoring, the government would change the way it estimates how much revenue would be taken in from changes in tax laws. Analysts would take into account the impact a tax cut or tax hike would have on economic behavior. That sort of analysis could lead Congress to conclude that a tax cut would increase economic activity, and thus actually raise--not lower--tax revenues.

Current budget rules require that any tax cut that reduces federal revenues be offset with either a spending cut or a tax increase. If, however, the Congressional Budget Office officially rules that a tax cut would raise federal revenues, Congress would not have to find offsetting spending cuts.

For the conservative Republicans who now run Congress, dynamic scoring offers a way to fulfill their promised tax cuts without seeming to play havoc with the health of the federal budget or worsening the deficit.

But critics, including Greenspan and former Federal Reserve Chairman Paul A. Volcker, warn that a switch to dynamic scoring would revive the kind of budget gimmickry that marked the early 1980s. Both Greenspan and Volcker said that Washington’s deficit-reduction efforts could lose credibility in the financial markets, sending interest rates soaring.

Volcker said flatly Tuesday that, if Congress uses dynamic scoring, “I won’t believe the numbers.” And Greenspan added that, given the current state of economic forecasting, dynamic scoring amounts to little more than an “informed guess.”

“This is a dangerous game,” warned Sen. Barbara Boxer (D-Calif.) during the hearing. “It’s deja vu all over again.”