Underinvestment and Slow Growth: PWBM Concedes Flaws
MIchael Simkovic, Underinvestment and Slow Growth: PWBM Concedes Flaws, 167 Tax Notes Federal 449 (2020).
15 Pages Posted: 12 Jun 2020 Last revised: 29 Jan 2021
Date Written: December 7, 2020
The U.S. economy is growing more slowly than it can and should be growing because it does not invest enough in infrastructure, science, and education. There is an important procedural obstacle to funding public investments — a process of scoring the economic effect of legislation. This process is driven by assumptions that are biased in favor of low taxes and against public investment. This budget scoring process systematically underestimates the benefits of public investment and systematically overstates the costs of taxation and debt. The power of the budget scoring process to derail legislation that would fund public investment is amplified by a think tank, the Penn Wharton Budget Model (PWBM). The PWBM assumes that taxes and debt have devastating effects on economic growth and assumes away much of the benefit of public investment. These strong assumptions are not consistent with the breadth of estimates in relevant empirical literature.
The director of the PWBM, Kent A. Smetters, recently responded to criticisms. This article summarizes the original critique of flaws in the PWBM analysis and discusses PWBM’s response (or non-response) to each substantive point. Readers may wish to review the original critique before proceeding.
For the original critique, see: Michael Simkovic, Biased Budget Scoring and Underinvestment, 166 Tax Notes Federal 757 (2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3539734.
Keywords: Tax, Taxation, Taxes, Public Investment, Education, Science, Infrastructure, Wealth Taxes, Economic Growth, Congressional Budget Office, Dynamic Scoring, CBO, Penn Wharton Budget Model, PWBM, GDP Growth, GDP, Growth, Budget Scoring, Fly-Paper Effect
JEL Classification: H2, H21, H23, H24, H3, H4, H42, H43, H5, H52, H54, H6, H61, H68, H75, H76, H83, I25, I26, I28, E1, E
Suggested Citation: Suggested Citation