More Competition on Tax and Budget Estimates Will Improve Public Debates

The economists and statisticians who built and run the Penn Wharton Budget Model (PWBM) must be doing something right because their work is a major irritant to a White House intent on rushing trillions of dollars in new spending through Congress. The president’s chief of staff is said to have dismissed the academic center’s estimates of the Build Back Better (BBB) agenda as tainted by ideology, and a press aid recently claimed the model’s output was “wrong on the math.” Of course, it is this kind of baseless criticism that is transparently political, not the PWBM.

The PWBM is a nonpartisan initiative of the University of Pennsylvania and is directed by Kent Smetters, a tax official in the Department of the Treasury during the George W. Bush administration with a doctorate in economics from Harvard. He works with an expert staff of qualified analysts and reports to a roster of well-respected internal and external advisors on the model’s design and assumptions. All of this information, along with the PWBM cost estimates, are accessible online at the initiative’s website, as is a list of its financial supporters.

The proximate cause of the recent back-and-forth was the release by the PWBM team of several analyses contradicting the administration’s rosy assessments of the budgetary and economic effects of the BBB social spending legislation.

The PWBM projects that, contrary to White House assertions, the BBB plan’s tax hikes and spending cuts — totaling $1.8 trillion over ten years — will not fully offset its $2.1 trillion in new spending. The resulting net deficit increase of $274 billion over a decade would be added to the $256 billion in borrowing required for the recently-enacted infrastructure plan and the $1.8 trillion needed for the COVID relief measure enacted in March. In other words, the Biden administration has already added more than $2.0 trillion to the nation’s debt and may add another $0.3 trillion if BBB passes.

That’s also the optimistic scenario. The PWBM team estimates that BBB spending would balloon to $4.6 trillion over ten years if all of its benefit provisions were implemented permanently and not terminated arbitrarily, as is the case for several of its most expensive items. As one example, more generous subsidies for health coverage are terminated after 2025 to keep the official cost of the plan close to the amount advertised by the president ($1.75 trillion).

The PWBM also shows BBB to be modestly detrimental to long-term economic growth, with the economy in 2050 producing 0.2 percent less output if BBB is enacted than would be the case if it were shelved altogether.

In addition to budget projections, the PWBM can provide in-depth assessments of specific tax and entitlement policies. For instance, the PWBM team has examined the distributional effects of providing relief to taxpayers hit by the cap on state and local tax deductibility enacted in 2017. The authors of BBB want to raise the limit on the amount of taxes that is deductible from $10,000 to $80,000 annually (through 2030). The PWBM estimates that nearly 90 percent of the resulting tax relief would accrue to individuals with incomes in the top 10 percent of all U.S. households.

It is the PWBM projection showing the BBB could cost $4.6 trillion that struck a nerve in the administration because it validates a criticism leveled by an influential Democratic Senator — Joe Manchin of West Virginia. His vote may decide whether BBB passes or fails, and he continues to express strong reservations about the mismatch between BBB’s spending commitments and offsets. More than anything else, the White House appears upset that the PWBM team is influencing how Manchin views the bill, which is further evidence of the center’s effectiveness and credibility.

By dismissing the PWBM, the Biden team probably hopes the media will ignore the model’s projections on the grounds that its director once served in government under a Republican president. If that were really the standard for determining objectivity, it would disqualify scores of others who once served under Democratic presidents. It goes without saying that it is unlikely the media will begin ignoring analyses that are tied in any way to officials who once served in the Obama or Clinton administrations.

The attention focused on the PWBM’s budget projections is highlighting the power that a well-timed analysis has long held in critical public policy debates and the importance of avoiding groupthink on important decisions.

In 2008, the Tax Policy Center’s critique of Senator John McCain’s health care proposal made headlines and added to the campaign’s many problems in the run-up to the election. That was true even though the TPC’s conclusions were based on assumptions disputed in other quarters. In 2009 and 2010, estimates from various academic sources, as well as from the Congressional Budget Office, convinced Congress that the inclusion of an individual mandate for health insurance was crucial to the success of the Affordable Care Act — a conclusion which was later found to be off-the-mark.

These episodes point to the importance of having robust competition among the centers producing tax, budget, and health care analyses. Such forecasts require complex modeling and depend on many assumptions. Competition will ensure the quality and accuracy of what is produced will improve over time because errors and biases will be exposed, and thus also corrected.

For all of these reasons, the White House might have done the country a service by directing criticism toward the PWBM. The added attention may highlight how valuable it is in this moment to have credible estimates calling into question whether BBB is as affordable, and sensibly constructed, as the White House claims.

James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.