Greg Mankiw's Caution on CBO Scoring

Greg Mankiw is a bright young Harvard economist who writes an economics blog. Today's post explains why the CBO budget estimates are suspect. The CBO uses static analysis for the GDP, thus any changes in a bill that would raise or lower economic activity are ignored. This is not a conspiracy, simply a convention that makes the analysis possible to do. But the analytical results are thus limited in their utility. In the current health care bill taxes on investment income are increased. Most economists argue that the taxes will produce some effect on investment in the country which will reduce the the growth rate of GDP. To the extent that the bill's provisions for covering more Americans with health care will have positive GDP effects, some or all of that could be offset. So be very cautious in using either deficit reduction estimate in the CBO analysis.

On the other hand the cost estimates in the bill are less subject to these kinds of dynamic effects (although by opening up a new entitlement utilization is likely to exceed any estimate and thus costs are likely to be higher). Thus, the CBO analysis is interesting but not very useful.