April 24, 2025 • 56 mins
Jon Hartley and Phillip Swagel discuss Phill’s career as an academic economist, his time in economic policy, why the CBO is important in the budget policy process, current law versus current policy baselines, dynamic scoring versus static scoring, the accuracy of CBO scores, CBO modeling, as well as CBO model transparency.
Recorded on March 18, 2025.
ABOUT THE SPEAKERS:
Phillip Swagel became the 10th Director of the Congressional Budget Office on June 3, 2019. Previously, he was a professor at the University of Maryland’s School of Public Policy and a visiting scholar at the American Enterprise Institute and the Milken Institute. He has also taught at Northwestern University, the University of Chicago’s Booth School of Business, and Georgetown University. His research has involved financial market reform, international trade policy, and China’s role in the global economy. From 2006 to 2009, Dr. Swagel was Assistant Secretary for Economic Policy at the Treasury Department, where he was responsible for analysis of a wide range of economic issues, including policies relating to the financial crisis and the Troubled Asset Relief Program. He has also served as chief of staff and senior economist at the Council of Economic Advisers in the White House and as an economist at the Federal Reserve Board and the International Monetary Fund. He earned his Ph.D. in economics from Harvard University and his A.B. in economics from Princeton University.
Jon Hartley is currently a Policy Fellow at the Hoover Institution, an economics PhD Candidate at Stanford University, a Senior Fellow at the Foundation for Research on Equal Opportunity (FREOPP), a Senior Fellow at the Macdonald-Laurier Institute, and an Affiliated Scholar at the Mercatus Center. Jon also is the host of the Capitalism and Freedom in the 21st Century Podcast, an official podcast of the Hoover Institution, a member of the Canadian Group of Economists, and the chair of the Economic Club of Miami.
Jon has previously worked at Goldman Sachs Asset Management as a Fixed Income Portfolio Construction and Risk Management Associate and as a Quantitative Investment Strategies Client Portfolio Management Senior Analyst and in various policy/governmental roles at the World Bank, IMF, Committee on Capital Markets Regulation, U.S. Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada.
Jon has also been a regular economics contributor for National Review Online, Forbes and The Huffington Post and has contributed to The Wall Street Journal, The New York Times<
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Jon Hartley (00:08):
This is the Capitalism and Freedom the Twenty-First Century podcast.
An official podcast of the HooverInstitution Economic Policy Working Group
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today my guest is Phil Swagel,
who is the Director ofthe Congressional Budget Office.
He previously was the Assistant Secretaryfor of the treasury for
Economic Policy during the George W.
(00:29):
Bush administration from 2006 to 2009.
And he recently was a professor inInternational economics at the University
of Maryland School of Public Policy.
He was also a nonresident scholar atthe American Enterprise Institute,
a senior fellow at the Milken Institute,and
co-chair of the Bipartisan Policy Center'sFinancial Regulatory Reform Initiative.
Welcome, Phil.
>> Phillip Swagel (00:47):
Yeah, thanks so much.
Thanks for having me.
>> Jon Hartley (00:50):
Well, it's a real honor to have you on and to talk about CBO and
how it works and its role.
It's really important role.
I want to first start with talkingabout where you grew up and
how you first got interested in economics.
I mean,you did your undergrad at Princeton and
PhD at Harvard studying economics.
I mean,where did that interest begin for you?
>> Phillip Swagel (01:11):
Okay, well, so I grew up in Southern California.
My, my parents were from New York,both of them originally from the city.
They met at, at Columbia,Columbia and Barnard.
But most of my life Igrew up in California and
I was kind of always interestedin the news and current events.
So I was the kid at summer camp in Ojai,California.
(01:35):
I would fish the newspaper out ofthe trash bin by the counselors' dorms or
bunks or whatever and read,it was the LA Times back then.
So I kind of always had that.
So it's kind of natural that I'd beinterested in something with, you know,
with not politics, butcurrent events, the real world.
And then in college,I went to Princeton, as you said.
(01:57):
You know, I just like that connection,
the connection between kind of somethinganalytic and in the real world.
>> Jon Hartley (02:05):
That's fascinating, and I think, you know, many economists sort of,
I guess first get interestedin reading the newspaper and
following what's going on.
I mean, how did that interest sort ofget fostered further when you were
an economics major at Princeton,studying economics at Harvard?
Who your advisors and sort of biggestmentors in that whole process?
>> Phillip Swagel (02:23):
Yeah, for me, it was really important and I just lucked out,
I had fantastic advisors and professors.
I took microeconomics from Harvey Rosen,who, you know, then I worked with
when I was at the White House andhe was a member and then chair of the cea.
(02:44):
I took macro with the late Steve Goldfeld.
Really phenomenal.
Had been a CEA with President Carter.
My senior thesis advisor was reallya brilliant man who's now retired from
Princeton, Avinash Dixit.
And my PhD advisor wasone of his students,
Kalakrishna was my first advisor andthen Alberto Alesina was my second.
(03:05):
And then Larry Katz was also on mycommittee, who also is just brilliant and
amazing.
I had actually, I was just thinking,as you asked, my first year of the Ph.D.
program.
So this would have been the fall of 1987.
The macro class was taught by a mix ofLarry Summers and Robert Barrow and
they kind of alternated andwhich is great.
(03:28):
And Professor Barrow,Robert Barrow's brand new at Harvard, and
he was just fantastic and brilliant andinsightful, but also so was Larry Summers.
And the day I remember I was going tomention was the day of the market crash in
October of 1987.
Larry was teaching that day,you know, again, first year PhD,
macro whatever he was going to teach.
(03:50):
He said, well, today I'm just goingto talk about bubbles instead.
And just, you know, kind of off the top ofhis head did a whole class on financial
markets and bubbles.
And it's great.
So yes, academically, yeah,I really, really lucked out.
And I could talk more about after schoolsome of the people I worked with also.
And of course some of your friends andco authors as well, like Kevin Hassett.
>> Jon Hartley (04:13):
Well, that, that's terrific.
And sorry, who ended up beingthe chair of your committee?
>> Phillip Swagel (04:18):
So it was Kala Krishna, who's a trade economist and
just brilliant, warm,funny, insightful, and
she's now a professor at Penn State.
>> Jon Hartley (04:32):
Fantastic, I mean,
what an amazing group ofpeople to have as mentors.
And I can only imagine whatit would be like to be in
a class with Larry Summersas the October 1987,
I always forget, the Black Monday orBlack Tuesday crisis.
>> Phillip Swagel (04:52):
Yeah, yeah, exactly, exactly.
I think it was, boy, I think it's Monday.
But yeah, it's a good question,I'd have to go back and look.
>> Jon Hartley (04:59):
I always get confused.
But I know it's a 25%draw down in one day and
it was one of the largest,I think still one-day draw down.
I know it came back later in the day, butone of the strangest market anomalies that
the economists still haven'tbeen able to fully explain yet.
I guess I'm curious.
You became a professor atUniversity of Maryland.
(05:21):
You served a Treasury duringGeorge W Bush administration, and
now you're director of CBO.
I take it, economic policy has beensomething that you really enjoyed.
What was your experience likeduring the Bush administration?
You were there during, you know,
the global financial crisislater in the George W.
Bush administration.
What was it like sort of working on thingslike TARP and so forth during that time?
(05:46):
Which feels like it was a while ago andwe've had maybe a couple crises since, but
I think it was definitely a turningpoint for economic policy.
And you were there during that time.
What was it like andwhat were you working on?
>> Phillip Swagel (05:58):
Yeah, it's interesting.
I mean, just like you said, sometimesit feels like a million years ago and
sometimes it feels like yesterday andsomething will come up that reminds me and
takes me back or I'll meet someonewho I haven't talked to since then.
I mean, you know, it's a terrible time forthe economy and the financial system,
so there's a sense of urgency andthere's a sense of mission as well, of,
(06:22):
you know, we, what we were doing wasimportant and, you know, obviously in.
Well, I say in retrospect, rescuingthe financial system and, you know,
bailing out, I think,is the, the word people use.
And that seems like a perfectly fine word.
Bailing out banks is controversial andunpleasant, but it was necessary.
(06:44):
And that was something that I think,you know, even in real time we understood,
you know, necessary, momentous,unpleasant, all those things.
But, but overall, it's just the senseof mission, of working together and,
you know, that the economy,you know, had to continue and
the financial system had tobe rescued as part of that.
>> Jon Hartley (07:07):
That's terrific.
And I'm sure, also, I think there'svery few researchers who are able
to stretch out both sort of the researchworld and the economic policy world.
I mean, how, you know,after going back to academia,
after having served attreasury during the Georgia W.
(07:27):
Bush years, how did that informyour research tastes and
things you're interested in writing about,doing research on?
>> Phillip Swagel (07:37):
Yeah, I have to admit my attention span is shorter.
You know, going back,going to academic conferences.
I think this is pretty common for
even the most accomplished peoplewith much better CVs than mine.
After policy world, it's hard togo back to academic conferences.
I've kind of always been interested inthings that were real world, and so that
(07:58):
wasn't so hard, Thinking about financialregulation, that was pretty easy.
I had students who wereinterested in real-world things
since especially as the policy school.
So for me,Maryland's a very congenial place, and
the policy school is the right place forme.
So moving back andforth between academia and
(08:18):
policy sort of policy world,it feels very natural.
And even at Maryland, of course, is insidethe Beltway, in suburban Washington,
I was able to be pretty involvedin some policy things as well.
>> Jon Hartley (08:32):
Well, it's terrific.
And I know many great economistsat the University of Maryland
who've gotten involved in policy andare really distinguished.
I think Mike Faulkner right now,who's the Deputy Secretary of Treasury,
(08:52):
want to talk about, CBO and reallydrill down into your current day job.
I want to first get into why CBOmatters as well as its history.
So, the Congressional Budget Office, orCBO was created in 1974 by the budget
Impalement Control Act, something we'vebeen talking about a lot recently for
(09:13):
other reasons, andthings like surrounding Doge and so forth.
But, there's what is CBO in my mind.
I see it as the officialscorekeepers passing legislation and
when there's some sort of a costrequirement that features,
sort of features primarily inthe Bird Rule and reconciliation process.
(09:34):
Something that the Republicans and
US Congress are going through a lot rightnow with passing their tax reform bill.
Can we maybe just take a minute tosummarize how the budget process works?
Sort starting from,sort of start to finish,
starting from the budget resolution to thepassage of the law and sort of where CBO
fits into that when it comes up with thescores and where does it really matter?
>> Phillip Swagel (09:56):
Okay, yeah, sure no, it's.
No, thank you.
I mean, CBO is an agency of Congress,and we're here to support Congress.
So we get them the informationthey need when they need it.
And that's both the kind ofwhat they need and the time,
when, and that's really our key role.
And the budget is obviously the budgetprocess is a key part of that.
(10:19):
Let's think about the reconciliationthat they're working on now, right?
Last week,Congress passed the budget resolution.
That's a concurrent resolution between thetwo chambers, the House and the Senate.
So there's no cost estimate to it.
That budget resolution setsout the broad parameters
in a sense of the changes inthe deficit that the overall, and
(10:41):
then how each committee between the twochambers is going to contribute to that.
And there's differences betweenthe House and the Senate and
there are different bodies.
And so we are,we help them on a technical basis, right?
Coming up with the numbersinvolved in the resolution.
And then we're helping the individual,individual committees that are working
(11:04):
on the specific pieces of the legislationthat eventually they will vote on.
And so that, for example, health care,I mean, Medicaid is being considered.
Obviously this is public record.
And so we work with committees ofjurisdiction that work on Medicaid.
In the House, it's E and C, Energy andCommerce is Chairman Guthrie.
(11:25):
We work with his staff and we go back andforth as they refine ideas.
We don't say do this,this is the right policy.
We, it's their policy.
And we help them analyze whatthe budget implications are and
what the other implications are.
Eventually, the committees willcome forward with legislation, and
they'll have markups where the legislationis considered in public in the committee.
(11:49):
And then we will comeforward with a cost estimate.
And it's usually after the committee,after the committee process,
we'll have cost estimates foreach committee, so for
each piece of what could be quitea large piece of legislation.
And then at the end, the Budget Committee,first in the House, or
probably first in the House,maybe then in the Senate.
(12:11):
It's up to them really, what order.
The budget committees will stitchtogether the legislation coming out of
the individual committees,
and then we'll do another costestimate for the entire thing.
And we'll do that jointly withthe Joint Committee on Taxation.
And for anyone watching on video, well,you can see I'm pointing to the ceiling
and I'm speaking from the fourth floorof the Ford House Office Building.
(12:34):
The JCT, the Joint Committee on Taxation,is on the fifth floor.
And so all the parts of the legislationthat involve changes to taxes to
the Internal Revenue Code,they will estimate, but
we'll work together with them.
They're in charge of the tax,we're in charge of the non tax.
We'll do a grand estimate of it all.
And then we'll do a dynamic estimateof the effect of the legislation on
(12:56):
the economy.
And then the feedback back to revenues andthe deficit.
>> Jon Hartley (13:02):
But you generally have your own models for analyzing, say,
the effects of taxes as well.
And these are different from the JCT ones,I guess, so
there's this whole budget process andI think a lot of people,
it's obscure to a lot of people.
In this idea that you what the HouseBudget and Senate Budget committees do,
(13:24):
they come up with basicallythe top line numbers.
And then it comes down.
Once those budget resolutions are passed,you think about passing a budget
every year, then it comes intosort of lower committees or
sort of downstream committees.
The Appropriations committees orsay House Ways and
Means, Senate Finance Committee,and so forth.
(13:48):
The appropriations committees andthe House and Senate, and so forth.
They're the ones that are doinga lot of this work in terms of
working within that top linenumber that's been outlined.
And then it's usually,I think after they've written a bill or
come up with a markup thatyou'll go out and score it.
(14:11):
Typically, I guess in between that and
passing the bill andyou do lots of things.
There's a lot of thingsthat go into these scores.
When CBO says it'll cost,X trillion or billions of dollars for
this particular piece of legislation.
I want to sort of break down into,
(14:33):
I guess a number of key sort of issuesthat go into each of these estimates.
One of them, which has becomevery topical right now is this
whole idea of currentpolicy versus current loss.
CBO has done a lot of, traditionallydone a lot of scoring under current law.
I mean, some congressional Republicansright now would sort of like to switch to
(14:56):
current policy to score.
So that the TICTO renewal bill andit's kind of a philosophical divide,
I guess in terms of current policysays that we should have a baseline
that's wherever the policy is today anduse that as the baseline.
And so, things like expirations and
the law and soforth wouldn't be thought of
(15:22):
as a change per se orpart of the baseline.
For example, I think extending the taxesfrom Jobs Act looks inexpensive if we're,
what we're doing is just keepingsort of the current provisions.
If the current policy is the baseline, andthe current law baseline is different in
that it says sort of that the costof expiring provisions does matter.
(15:45):
So it's really in my minda philosophical divine.
But I'm curious, how do you thinkabout it and what should CBO and
Senate Parliamentarian be doing?
Is really your job just to sort of beagnostic to these sorts of issues?
And just sort of come up with scoresaccording to whatever sort of Congress is
asking you to do, or where does sort ofCBO fall into that in terms of, you know,
(16:09):
current policy versus current law?
And how would you explain that issue?
What do you think about it?
>> Phillip Swagel (16:15):
Okay, yeah.
It's an important question and somethingthat the Congress is thinking about now.
And the way you put it as a philosophicalissue, I think is exactly right,
that different people will look at it indifferent ways or look at it in both ways.
To say, like with the tax provisions,these are expiring.
But a member of Congress might say,well, I think they should continue.
(16:38):
And I just want tocontinue what we have now.
And I feel like looking at it thatway is the right way to look at it.
And another member might say, no,if the current law is this and
the law has those provisions expiring,and that's the right way to look at it,
we will provide the informationthat Congress wants.
And that means we will providecomprehensive information this year.
(17:00):
It means we'll provide both that ifa member wants current policy basis,
I mean, they'll have to tellus what is current policy,
which provisions they think are currentpolicy and are meant to be extended.
And, of course, I'll have to tellmy colleagues upstairs at JCT
what's current policy, since so much ofthat is the tax code, and we'll do that.
(17:23):
And I mean, both agencies, CBO andGCP are here to support the Congress.
And from the CBO perspective,we will give them the information they,
you know,they want in the way they want it.
It'll be our analysis.
Of course, we won't necessarily givethem the numbers they want is whatever
the numbers are,that's what we'll give them.
On the other hand, we'll also providethe current law numbers as well.
(17:45):
And that's, you know, first is by statutethat the statutory baseline is on
a current law basis with some exceptionsfor programs like Social Security and
Medicare.
You know, it's our job to provide Congresswith the information they want when
they need it, is our analysis.
But they're the ones who decidewhat information is useful to them.
And different members with differentphilosophies, you know, again,
(18:08):
as you put it, will vote differentlybased on different information.
And I just want to make sure that theinformation we provide is comprehensive.
And that's reallyfulfilling the CBO mission.
>> Jon Hartley (18:20):
Terrific, I wanna get into dynamic scoring because this is another
one of these sort of, I think, hot topics.
So dynamic scoring, CBO and JCT, theyhave sort of different types of models,
and they have both,what's called a conventional static model,
which is where a lot of thesesorts of numbers often come from.
(18:45):
And then, they also have thesegeneral equilibrium models
that do dynamic scoring that account for
how GDP and the macroeconomy mightbe impacted by such policies.
And they're accounting forthings like spillovers and
things like that and are a bitmore complicated in that respect.
(19:07):
And I think one area, I think ofconfusion, I think for a lot of people,
is that a lot of advocatesof dynamic scoring.
Often, I think sort of forgetthat in conventional estimates
still include elasticity, taxable income,
which includes sort of behavioralresponses to taxation.
(19:29):
I'm curious, like,what sorts of behavioral responses would
the conventional staticmodel include in CBO's case?
I mean, does it include yourrevenue shortfalls from, say,
tax avoidance minimization due to, andthings like due to wanting to work less?
How does CBO sort of separateout these sort of conventional
(19:51):
behavioral response responses,say, evasion avoidance,
tax minimization from the laborresponse in dynamic scoring?
And I mean, do you think there'sa lot of value added and say,
I guess we'll get to dynamicscoring in a second?
>> Phillip Swagel (20:05):
Okay.
Okay.No, no, absolutely.
And so I start with where you started,
that the conventional estimateshave a lot of behavior in them.
And you mentioned some of them,some of the dimensions of behavior.
And we have that the JCT in theirtax models, they have that.
One thing we analyze where thisbehavior is important is tariff policy.
(20:29):
And there's that the presidentis limiting the use of the de
minimis exception as a couple oflarge firms in China that ship,
basically small shipments to the US andthose essentially get around the tariffs.
I don't know if it's evasion avoidance,right?
One's legal, one's illegal.
(20:50):
I think it's what they were doing waslegal and now it's going to be off,
you know, out of bounds, and that'sgoing to change the nature of commerce.
And we have to figure out, well, what willit mean for the supply side, you know,
for those firms, and then whatwill that mean for the customers?
And so there's a lot of behavior in there.
It's probably not going to shiftthe overall size of the economy.
(21:10):
A lot of dollars,probably not macro scale.
But how would that adjust?
And so we've got to think about that.
There's other things like no tax on tips.
I mean, that would be jct, butthey would have to think about, well,
how will the nature ofcompensation change if, you know,
(21:31):
could more activityshift over into tipped?
You know,the kinds of things that have tips.
And so that kind of behavior is important.
I only just mentioned one more, which is,I mentioned before Medicaid policy.
We're doing a lot of work on that.
A lot of the impact inthe sort of the dollars,
especially on the state side,and the coverage potential
(21:54):
coverage changes comes aboutthrough decisions made by states.
So the federal government willchange the number of dollars,
the allocation of dollars betweenthe federal government and states.
And then,states have to decide how to respond.
And different stateswill respond differently.
They have different views toward Medicaidand uninsured and things like that.
(22:15):
And we have to take intoaccount of that behavior.
So it's not of individuals,but it's of states.
And we talk to the states,we analyze their situations.
But ultimately there's goingto be our assumptions,
our analysis built into those projections.
>> Jon Hartley (22:31):
Fascinating.
So I guess, like, okay, soI know there are tax models too.
So like the things like evasion,avoidance and minimization.
Break that out in a cbo,in the CBO tax model, or.
>> Phillip Swagel (22:47):
It's hard.
So for a cost estimate, JCT would do it.
And they would have to think about that.
About, you know, I guess,like the tax on tips,
they would have to think about, right.
How will the nature of work reconfigure?
And what does it mean?
So what does the behavior mean?
And we face the same thingwith a tariff change.
(23:08):
You know, how does the natureof commerce reconfigure itself?
After legislation is enacted,then CBO is in charge of the baseline.
And so, for example, the 2017 TCJA,
the December 2017 Tax Act,JCT was responsible for the estimates.
But then once it was enacted,we put it into the baseline.
(23:31):
And so in April 2018,CBO published kind of a long analysis
of how we fit the newly enactedtax bill into the baseline and
what did it mean forrevenue and GDP and so on.
>> Jon Hartley (23:46):
I'm familiar with some of that work because I know there's.
I have some kind of related workwith my colleagues Josh Rao and
Kevin Hassett on facts on investment.
And I know there's sortof an elasticity that.
Use from the literature plug into, I thinkyour cap tax model, which is more about
investment than say you're just thinkingabout the revenues in your baseline.
(24:10):
I guess sort of just andwe'll get to that in a second.
We'll talk a little bit more about modelsand transparency and things like that.
I totally commend the CBO andbeing more transparent than the JCT and
that sometimes,
we don't even know what the JCT'selasticities of taxable income really are.
We think they're sort of less than one,but it's hard because at some level it's
(24:34):
not quite an apples to apples comparisonin terms of say, how a literature
estimate compares in that it's notclear what sorts of things get counted.
Hence through the question on evasion,avoidance, taxation.
That's more a JCT question.
But I guess I'm just curiousoverall conventional scoring or
conventional static modelsversus dynamic scoring.
(24:54):
In thinking about how these policies,how they impact GDP, what do you think?
Do you think there's valueadded there in dynamic scoring?
I mean,I feel like a contentious issue for
a very long time in terms of towhat degree we should think about
the estimates that come out ofreally general equilibrium models,
(25:16):
which is where these sorts of dynamicscoring effects are being measured often.
I'm curious, what's your take on sort ofdynamic scoring versus conventional stack
models in general?
>> Phillip Swagel (25:27):
Yeah, we want to do more of it and
we've put a lot of work in overthe last really couple of years.
I'm trying to think of since the 2022reconciliation legislation passed, right?
The reconciliation bills tendto be kind of all consuming.
Then the Congress was divided in 23 and24.
(25:49):
So the PAISA legislation slowed down some[LAUGH] and we had some time to prepare.
And again, working with JCT andbeing ready for
reconciliation, there are different roles.
There's some things where legislationintrinsically has to have a dynamic score.
A big bill that affects immigration,you're changing the size of the labor
force if the bill is large enough andintrinsically you're changing the size of
(26:13):
the economy sothat by its nature is dynamic.
Something in tax policy where you havea really nice paper with Kevin Hasselt and
Josh Rao that looks at the impact ofchange in tax policy on the economy or
on investment, as you mentioned.
And in the economy,a big change in tax policy or
(26:33):
even a small change that'sfocused on pro growth elements,
that would change the size of the economyand then a dynamic estimate makes sense.
And then there are members and manymembers who want us to do dynamic analysis
on the spending side, sometimesthey call at the investment side is
a change in some policy that changesthe size of the labor force, or
(26:57):
maybe it's direct federal investment,building roads and bridges or
highways or something else, that changesthe productivity in the economy.
It changes the size of the capital stock.
And members want that.
And I want to give members of Congress theinformation that they think is valuable.
And look, I think it's valuable too.
I mean, the more the better, I can explainsome of the challenges, but that's my
(27:22):
overall philosophy is comprehensive,more information to the extent we can.
And I can go into some of the challenges.
>> Jon Hartley (27:30):
I'm sure you have to have some sort of an estimate of what a fiscal,
your fiscal multiplier would be, I mean,
there's all sorts of varying estimatesin terms of fiscal multipliers.
I mean, there's certain microestimates that I think are tend
to be pretty high andthen from maybe things like RCTs and
things of that nature,quasi experiments of that kind of.
(27:55):
And that's from sort of more micro day.
And then you have sort of the bigmacro sort of estimated elasticity.
I think often of say, Valerie Ramey'swork and the work of others,
you know, John Sison,Emmy Nakamura and others,
that you look at these likedefense spending shocks.
And so there's, I think, a school ofthought that says that those multiple
(28:17):
multipliers are pretty low andmaybe as low as, you know, 0.3 or
something like that versus the micromultipliers might be, say, around one and
a half or two or something like that.
And then some people argue there's,I guess,
tax fiscal multipliers that are verydifferent from government spending ones.
I think Alberto Alsina found thatthe tax multipliers were often
(28:38):
bigger than the governmentspending multipliers.
I'm curious.
I assume those would be somethingthat you'd have to think
about if a member comes to you andsays, hey, incorporate
the dynamic effects of building a bridgeor some infrastructure project.
>> Phillip Swagel (28:53):
No, that, that's right.
That's exactly right.
And we did one paper like that.
It was requested bythe Senator Rob Portman,
who was leading group withSenator Kirsten Cinnamon and
others that resulted in legislationon infrastructure investment.
And that's what they wanted to know,that what's the dynamic feedback
from infrastructure investment changesproductivity, changes the size of
(29:17):
the economy over a long periodwill feed back into Revenues and
they had in mind really roads and bridges,which, you know, takes, well, it takes in
the US years to build a road or a bridge,you know, sort of infamously sometimes.
And then we looked at the 30year horizon of the, you know,
productivity and revenue feedback.
It did not pay for itself.
(29:39):
But depending on how the road or bridgewas financed, there could be a substantial
offset that the added productivity wouldgenerate enough, enough revenue to pay for
it was like as much as half ofthe cost of the road and bridge.
Leaving aside the crowding out, so leavingaside the debt that might be incurred to
(30:00):
finance the road andbridge in the, in the first place.
So there's still a sizable, a sizableimpact that's on the spending side.
And then, you know, like your work withKevin and Josh on the tax side and the way
I think of it and the way I explain it tomembers that different provisions have
different pro growth impacts and the,you know, the sort of expensing,
(30:23):
you know, think about like expensingversus a change in the corporate rate.
And the corporate rate is permanent,so maybe that's not on the table now.
But think of like expensing versusthe change in the personal rates.
Those will have differentimpacts on growth.
They're both pro growth, butdifferent quantitative impact impacts.
>> Jon Hartley (30:41):
Yeah, no, absolutely.
And it's a huge, I guess, debate rightnow in Congress in terms of what to
be focused more on sort of pro growth firmtype tax adjustments versus, I guess,
things are more, I guess on the individualside of things, things that were
promised in the presidential campaignlike tax on tips and things like that.
(31:03):
And doing questions I think right now,but maybe raising the person, right?
It's a very interesting dynamic in termsof how these things are being considered.
The salt deductions are a verybig topic as well, but
I wanna sort of get into thiscame back to sort of just CBO.
I wanna talk about justCBO scoring accuracy.
So, you know, often our CBO scores wrong.
(31:27):
I mean, I guess no score is ever perfect.
But I'm curious, you know, we couldthink about, you know, the Taxes and
jobs act of 2017 in the first Trumpadministration tax cuts which reduced
the corporate rate and brought inexpensing provisions for equipment.
And it also changed a lotin terms of how businesses
(31:50):
pass through businesses are being taxed.
And there were also changesto the individual code.
There were opportunity zones.
They capped the SALT deduction,
all sorts of things in terms of yourscore or the CBO score for that.
And mind you, as a different CBOdirector who was there at the time,
(32:13):
what did CBO get right andwrong there in your mind?
>> Phillip Swagel (32:16):
Okay.
And just to say, well,I started as CBO director in June 2019,
but I own every mistakeCBO has ever made and
certainly members ofCongress remind me of that.
And that's just, that's the reality.
And you know, fortunately we get a lotright, but of course we get things wrong.
And just as a general matter,the more familiar provision is and
(32:38):
the more incremental legislation is,the easier it is for us to model it.
And when something's entirely new orbig, well, that's harder.
And you know, the ACA of course,was big and new.
So just things like that are harder.
The childcare provisions andthe build back better legislation,
those were big and new.
You know, we never, in the end,that was never enacted, but
(33:00):
that's the kind of thing that's harder.
The 2017 act is an interesting one.
You know, of course,JCT did the original score, but we,
what people really think about now,it seems like,
is our estimates in the baseline isour projections, the technical word.
So in April 2018, we published the firstbaseline update after enactment and
(33:22):
that included the impacts of the,of the legislation.
So both we had stronger GDP growth,stronger business investment,
stronger GDP growth,lower revenues, right?
That stronger growth would improverevenues, but not so much to pay for
itself and so on.
And the beginning of 2018 bore that out,right?
Investment was stronger until aboutthe middle of 2018 when we saw
(33:47):
some of the first waveof tariffs had a hit.
CBO is really actually verypositive on the investment
impacts of the provisions in tcg, tcja.
The, you know, the lower corporate rate,the international provisions, the lower
personal rates, our internal estimates,like the elasticity you mentioned,
(34:09):
the change, essentially the change inthe price of investment, you know,
from the tax side, what does thatdo to the quantity of investment?
So we're not quite as high as what you andJosh and Kevin found, but
we're within the rangeof your uncertainty and
we're a bit above some ofthe other academic literature.
So it's a bit of an ironythat we are actually,
(34:31):
we're very positive onthe economics of the Act.
The revenue estimate that we did againback in this was published in 2018,
April 2018.
We are basically spot on for2018 and 2019.
That actual revenues came in actuallyvery slightly below what we projected.
(34:52):
So in some senses we were over optimistic,but really a tiny amount.
Now, of course, 2020 is a difficultyear with the pandemic.
There's so much going on, legislation.
So let's leave that out becauseI don't think anyone could
have projected what happened in 2020.
2021.
After 21, 22, 23, revenues were quitea bit higher than CBO projected.
(35:17):
And so that's a mistake and error.
But of course the next thing is to say,well, why what happened and
why were revenues abovethe projection starting in 2021?
And I would point to a couple of things,right?
Inflation is one is in our estimation,is the biggest piece that inflation.
There's high inflation startingin the spring of 2021.
(35:41):
We tax nominal income.
And so that means that the nominal dollarsof revenue were higher than before,
you know, before the high inflation.
And I don't think the enactment of TCGAis what caused the high inflation, right?
So I wouldn't attributethe high inflation to tcga.
And so it's not fair to say,you should have, you know,
(36:01):
should have anticipated that.
The Fed, of course,did put in extraordinary monetary policy
in response to the pandemicthat increased asset values.
And then we saw that capitalgains realizations look to have
been extraordinarily strong in 2022.
That of course, TCGA would havealso improved asset values.
(36:23):
But the sudden spike in 2021 andrevenue surge 22 looks
like more the result of the pandemic andthe Fed's response than tax policy.
And then the last thing I'd say is thatof course, Starting in early 2021,
there is a surge of immigration andthat for the federal government, well,
(36:44):
there's cost of immigration,of course, but
those costs are much heavier on the stateand local governments in the US and for
the federal government,the revenue impact is larger.
So again,
revenues were higher than CBO anticipatedbecause of the immigration surge.
And I just don't think CBO could have
(37:05):
plausibly expected the immigrationsurge in 21 back in 2018.
And I don't think TCGA is whatcaused the immigration surge either.
So that, I mean,I'm going on long here, but
you get the point that revenueswere above what CBO projected,
but only starting from the timeof the high inflation,
(37:26):
the Fed's qe, immigration andother things.
So once you take that into account,our accuracy looks, look,
looks a whole lot better.
>> Jon Hartley (37:37):
Got it.
So it's the cap gains I Guess.
And cap gains tax ratesare not indexed to inflation.
>> Phillip Swagel (37:43):
That's right.
>> Jon Hartley (37:44):
The bracket creep there.
And you're saying even, you know,
undocumented immigrants are somedegree paying taxes as well.
>> Phillip Swagel (37:51):
That's right. That's right.
And they're increasingthe size of the economy.
Well, many of them do, do, do pay taxes.
Many of them in the immigrationsurge were brought in under parole,
which essentially within six months.
Many of them had work authorization, andthen they had a big incentive to pay on
(38:12):
the books because they'd have a datewith a, you know, a judge and, you know,
down the road.
So they had an incentive to pay onthe books, to work on the books and
pay taxes sothat they can show that to the judge.
Yeah.So it's the inflation,
equity prices driven in part by QE andthen the immigration surge.
(38:32):
All of those meant revenues in 2021 andon were higher
than could plausibly havebeen predicted back in 2018.
>> Jon Hartley (38:42):
Got it.
So I know many of the Texas andJOBS act provisions are set to expire.
In fact, they were made temporary to beginwith because of some of these things like
the Berg Rule and things like that.
But now there's a desireto make them permanent.
That's sort of the big feature ofthe current tax bill that's being pushed
(39:03):
through Congress.
How do you go about modelingthe impact of ticta or
taxation Jobs act expirationin your macro baseline?
I know sometimes you ask me whythere's no recession being shown under
the 2026 year under currentlaw given to these expire.
I'm curious how you think about thoseexpirations from a modeling standpoint.
>> Phillip Swagel (39:26):
Yeah, no, no, thanks.
And, you know, first of all,to say, you know,
there's no normative judgment herethat when CBO says this, you know,
this is what we think will happen, or thisis the revenue or this is the GDP that
doesn't say therefore it's the rightthing to do or the wrong thing to do.
And members of Congress have many reasonsand it's political philosophy and
(39:48):
lots of things that are justbeyond CBO and you know that.
So that's where I start.
We do have the expiration ofthe provisions in the 2017 act
affecting the economy.
And so we have GDP growth slowingin our baseline forecast.
We have GDP growthslowing from 2.1 in 2025.
(40:08):
So 2%,2.1% real GDP growth down to 1.8 in 2026,
which you know, is a meaningful slowdown.
But as you said, it's not a recession andit's kind of at,
it is at odds with,I know with some people have in mind,
this is quite a large increasein revenue under current law.
(40:29):
It's a bit less than 1%of GDP under current law.
And you would think, well,
that's going to slow down the economyby more than we have in our baseline.
And there's a couple things going on thatwe have to, we basically have to model.
Well, first of all, somuch of the 2017 Act is permanent,
including the most pro growth parts,right?
(40:50):
The corporate rate, the internationalprovisions provide incentives for
activity to be domiciled in the US andnot to invert and not to go overseas.
So that's, that's part of it is that a lotof the pro growth part is not expiring.
The part that is expiring the mostpro growth part of that is
relatively small in terms of dollars.
(41:12):
This is some of the business sideprovisions essentially expensing and
is the depreciation provisions.
The bigger dollars are onthe personal side.
Now, every household faces, virtuallyevery household faces a change in
their taxes with the expirationof those provisions.
But it's still also true that mostof the dollars are associated with
(41:36):
households with relatively highincomes and relatively high wealth.
And those households tend to have lowmarginal propensities to consume.
So even though it's a lot of dollars,the MPC that comes with those dollars
is relatively low, so the effect onthe economy is attenuated by that.
And so the effect on consumption andGDP is attenuated.
(41:58):
And then there's the third and last part.
I guess there's two parts, 3 and 4.
Well, one is we assume the Fedwould respond in part to slowing
economy under current law.
The third that's interesting is that wetalk to businesses about their view of
the Tax act and there's a, a substantialnumber of businesses said to us, well,
(42:22):
we kind of understood that even thoughthe provisions, some of the provisions
were permanent, well, of course therecould be subsequent legislation.
And so there's a sense in which inmodeling their investment decisions,
businesses might not have included thefull permanent effect of the provisions
just because they know laws change andeven a permanent law can change.
(42:47):
And again,that would tend to attenuate the impact.
It meant that the positive impactof the law was not full force.
And then the expirations in the same way,which actually last thought,
which makes the econometrics hard.
So what you and Josh and Kevin did andwhat other groups have done
(43:08):
is hard because you're measuringthe provisions of the act.
But then businesses are acting accordingto their own interpretation of
the provisions rather thanthe actual provisions.
So we face the same difficulty, butit's a combination of those things that
the expiration has a negative effecton the economy in our estimation.
But it's not, you know,not sort of full bore and
(43:32):
not enough to bring the economy to,you know, certainly to a recession.
>> Jon Hartley (43:37):
Well, that's fascinating how you think about scoring things like
that, there're some of thoseprovisions that are set to expire,
I wanna just talk about,I guess taking a step back here.
CBO has hundreds of modelsas far as I'm aware.
Now some of them are being made public,including your tenure,
(44:01):
I think like the cap tax model,for example, which measures
the impacts of a tax change on capital andfixed investment spending.
I'm curious one,how do we get more of these public and
what do you think about things likeI guess the CBO show your work Act.
This legislation has been sponsoredby Senator Mike Lee, I'm curious.
(44:25):
CBO is more transparent than JCT.
I don't think any JCT models are reallypublic at all, So I commend CBO for
doing this.
But I'm curious, you know, there's,I think been a lot of interest in,
in scoring andwhat goes into scoring in recent years.
I think you see some of this with,you know, the popularity of, I guess,
you know that you gotthe Yale budget lab now and
the Penn Wharton budget initiative andall these things.
(44:46):
So, so I think there is demand for,for, for scores.
But I guess, you know, there's always, I,I think what, what's funny about this sort
of business is like there's always peoplewho are upset about scores because too big
or too small depending on I guess what,maybe what they hope to see.
But I'm curious,I think at some level, you know,
putting more transparency intowhat's going into these models
(45:06):
maybe could help alleviate someof that and thinking about how
you change what exactly what assumptionsare driving certain costs and so forth.
I'm curious what is sort of the CBOplan for making models public and
what do you think about this?
At some level I could see sort ofnegatives as well in the sense of why did
you put that in there?
(45:27):
And so forth, you know, so, so I, I don'tthink it's necessarily all peaches and
cream, but I'm curious,what do you think about transparency?
And how important is thatto you as a CBO director?
>> Phillip Swagel (45:37):
Okay, no, no, and let me start by saying I agree with your
assertion that the moretransparent we are,
it will help us whenthere are disagreements,
when someone's unhappy with an estimate ora number.
And we can say, look,here's the assumption in there.
(45:58):
And if you, whoever's unhappy, if youthink we're wrong with that assumption,
well, let's talk about that.
And then it's a substantive discussion,it's a focused discussion, and we do that.
And that kind oftransparency is helpful and
sometimes we'll justhave a different view.
I mentioned earlier, build backbetter the childcare provisions,
(46:18):
we actually thought that those provisionswould have higher uptake than the,
the Biden White House did.
And so our score on that little partof it was bigger than theirs, but
that was because we actually thoughtthe policy would be more effective,
in a sense, than they did.
So these,my predecessor did a lot on transparency,
as Keith hall, and I'm continuing that.
(46:39):
My colleagues are continuing that.
The Captax model you mentioned isa great one, it has a limited user base.
I know you are busy, like,very highly knowledgeable people for
whom it's really important.
You people at Tax Foundation,Brookings, AI,
a couple others and it's worth it, right?
It's the transparency, it's puts a littlebit of a tax on us, but it's worth
(47:04):
it because the community who uses itwill give us feedback and questions.
And sometimes if there's something theydon't understand or you don't understand,
and you ask us in our tax analysis,staff are amazing.
You know, say, yeah, you're right,we could do that better.
And that's,that's kind of feedback that's helpful.
We get helpful, we get feedbacklike that from congressional staff.
I'm sorry, I'm pointing out my windowtoward the Capitol, so I'm like,
(47:28):
at the Southwest corner ofthe Capitol complex, and so
I'm pointing the northeast of the dome.
You know, the health staff, where wework very closely with both, you know,
both chambers,both sides on health legislation.
Sometimes, we'll give them a preliminaryestimate and let's say, we expected,
whatever, this to be different or that.
And we'll talk about, we'll realize,well, no, they you have something, or
(47:52):
they'll say, you need to talk tothis outside expert and we will.
So that's the kind oftransparency that's useful.
I mean, it's all useful, but then.
That's useful in a very mechanical,very immediate way.
We put up other, as you said,we put up other modeling information,
like from our healthcare healthinsurance coverage model.
(48:13):
We recently, recently put up someinformation about health insurance
premiums and our projectionsof private sector premiums.
I want to do more.
The challenge is that it takes time,
especially when legislation is movingquickly, we often just don't have time.
And we all have time to talk about itwith someone, but not to actually go and
(48:37):
put it on our web, on our website,or in a way that's usable.
And we just can't stop andput up the models.
And sometimes that's a time,
sometimes the legislation is confidential,so we can't do it in advance.
Sometimes it's judgment andI mentioned earlier,
we talked about Medicaid andthe state behavior.
(48:58):
The state responses to federalchanges in Medicaid is critical to
understanding the effect of the policy.
And that's our judgment.
There's no model in the mathematicalsense, but there's our discussions,
there's our judgment,there's our analysis.
And so it's not easily encapsulatedin something we post on the web.
But I can sit with people, our expertscan sit with people and talk about it.
(49:22):
And that's what I want us to do more of.
And so the, Senator Lee's legislation,it's completely understandable and
the kinds of things that he wants inthat legislation, I agree with that.
We need to put up more that be, make it so
that other people canunderstand what we're doing.
(49:42):
It's hard for us to do it ina way that people can replicate,
which is ultimately what,you know, what he would like.
That's just hard.
I'm not sure we're going toget there in a broad way, but
I want to do as much as I can, you know,to satisfy the motivation behind that.
And so I'm.
Yeah, that's it.
It's.In a perfect world, we would be there.
(50:03):
He wouldn't even need the legislation.
We'd be there without it.
But given the constraints, you know,we have, I want to do as much as we can.
Actually, can I just say a word thatanyone listening to the podcast,
we have a Contact Usemail on the CBO website,
is communication.cbo.gov andthose inbound emails matter.
(50:23):
Or if a listener or a viewer,you see a CBO report and
something looks wrong, well, don't be shy.
We do Want that feedback?
We get plenty of feedback from academics,from members of Congress, from staff,
but from anyone.
If something looks wrong,I want to know about it.
And especially constructive criticismis always, is always helpful.
>> Jon Hartley (50:45):
Well, that sound very kind you to be receptive
to feedback in that way.
I know many people have somevery strong thoughts and
feelings about various estimates.
Actually, I asked aheadof doing this interview,
I asked a few of my Hoover Policy, whoare Fiscal Policy Initiative colleagues,
(51:07):
Danny Hile, Josh Ryle, Tom Church andBen Jarris, what they would ask you.
And so one of these questions thatcomes from Danny and a few others
here is really, I'm curious what youthink about sensitivity analysis and
maybe doing some sort of CBOsensitivity analysis with an estimate.
(51:28):
I mean, you tend to stick to pointestimates, and I can understand why you
might be reluctant to offer lawmakers,say, multiple figures.
It can also, I think you maybe leave youmore vulnerable to getting things wrong
and we could talk about the inflationReduction Act, Affordable Care Act,
Medicare, prescription drug costs,
some of the newer thingsthat you mentioned before.
(51:48):
They're difficult to model becausethey haven't existed before but
I'm curious how youmight think about that.
Or, obviously sort of macrovariables are different from
things like the response,various response parameters,
both these things are subjectto some uncertainty.
(52:09):
But do you have any thoughts on maybesomething like a confidence rating,
attaching a confidencerating to smear scores?
The intelligence community, for example,uses an analytic confidence scale that
allows analysts to indicate how confidentthey feel about their findings.
Uncertainty is alwaysa difficult thing to measure.
But I'm curious, would you ever thinkabout, you know, sensitivity analysis and
(52:30):
using sort of multiple estimates ratherthan just a single point estimate?
>> Phillip Swagel (52:34):
Yeah. Yeah, and
it's something that wethink about internally.
We've done some formal modeling, and
some of the members of our panel ofeconomic advisors have been helping,
helpful in letting us do that ina kind of analytically sound way.
So the uncertainty around someof our numerical projections,
budget deficits, growth, things like that,we compare ourselves to others,
(52:58):
to the administration,to private forecasters.
Of course, we could all be wrong.
Many people were wrong about inflationin 2021, and we were one of them.
So being with the herd isn'talways the right thing.
But we do try to make those comparisons,
we try to give people a sense of what theuncertainty is as best we understand it.
(53:19):
And even in a cost estimate, we havea section on sources of uncertainty.
We have a section on the Basis of theestimate, what information went in, and
then what do we think are the sources ofuncertainty for the congressional process?
They need a point estimate andultimately we don't have a choice, right?
There's, we have,we do a cost estimate for
(53:41):
everything that gets voted out ofcommittee that's going to the floor.
We don't get to pick and choose whatlegislation we're doing cost estimates on.
And yeah, so there's limitations.
But yeah, it would be nice if, if we coulddo more to indicate this uncertainty
where you said the intelligencecommunity is kind of an interesting one,
(54:05):
like the, yeah, just to say, hey,this one, we did it really quickly.
There's.If we had infinite time or even another
three weeks, here's the things we do andbe able to come back to it.
That's kind of,that's kind of interesting.
We come back sometimes to estimates,but like the Affordable Care Act and
the mandates,the mandate in the Affordable Care Act,
(54:29):
we published something explaining whyCBO thought what the agency thought and
how it was different than what turned out.
But yeah,we could definitely do more on that.
>> Jon Hartley (54:43):
Well, it's fascinating because I think about standard air
bars and how useful they would be.
I remember several years ago,
Loretta Master,when she was president of the Philly Fed,
she recommended that FOMCpolicymakers should be allowed to
(55:03):
include a standard error bararound their Dots in the SEP.
And the survey of economic projectionsthat they put out, they put out these,
both forecasts of say, things like GDP,inflation, unemployment, macro variables.
But also they put out their forecastof where they think the policy rate,
where the short term interestrate is going to be in the next
(55:27):
several years in the long run.
So imagine if they could includea standard error bar as well to sort
of put in some level of uncertainty,maybe the market would react
to it in a different way orbe an easier way to communicate both,
I guess a point estimate andsome degree of uncertainty as well.
(55:51):
I'm sure we could spend all daytalking about all these sorts of.
Phil, I really want to thank you forcoming on.
It's been an amazing conversation.
I know you're in a very keyspot right now given the tax
bill that's going through Congress.
And I know CBO is spending a lot oftime coming up with cost estimates
during the reconciliation process andworking with members very closely.
(56:14):
So really want to thank you forcoming on during this very busy time.
>> Phillip Swagel (56:18):
Yeah, thank you.
Thanks so much.
Thanks for having me on.
And thanks to Hoover forhosting the podcast.
And, yeah, I look forward to continuingthe conversation in the future.
>> Jon Hartley (56:27):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast with the HooverEconomic Policy Working Group where we
talk about economics,markets, and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.
[MUSIC]
[MUSIC]
>> Jon Hartley (00:08):
This is the Capitalism and Freedom the Twenty-First Century podcast.
An official podcast of the HooverInstitution Economic Policy Working Group
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today my guest is Phil Swagel,
who is the Director ofthe Congressional Budget Office.
He previously was the Assistant Secretaryfor of the treasury for
Economic Policy during the George W.
(00:29):
Bush administration from 2006 to 2009.
And he recently was a professor inInternational economics at the University
of Maryland School of Public Policy.
He was also a nonresident scholar atthe American Enterprise Institute,
a senior fellow at the Milken Institute,and
co-chair of the Bipartisan Policy Center'sFinancial Regulatory Reform Initiative.
Welcome, Phil.
>> Phillip Swagel (00:47):
Yeah, thanks so much.
Thanks for having me.
>> Jon Hartley (00:50):
Well, it's a real honor to have you on and to talk about CBO and
how it works and its role.
It's really important role.
I want to first start with talkingabout where you grew up and
how you first got interested in economics.
I mean,you did your undergrad at Princeton and
PhD at Harvard studying economics.
I mean,where did that interest begin for you?
>> Phillip Swagel (01:11):
Okay, well, so I grew up in Southern California.
My, my parents were from New York,both of them originally from the city.
They met at, at Columbia,Columbia and Barnard.
But most of my life Igrew up in California and
I was kind of always interestedin the news and current events.
So I was the kid at summer camp in Ojai,California.
(01:35):
I would fish the newspaper out ofthe trash bin by the counselors' dorms or
bunks or whatever and read,it was the LA Times back then.
So I kind of always had that.
So it's kind of natural that I'd beinterested in something with, you know,
with not politics, butcurrent events, the real world.
And then in college,I went to Princeton, as you said.
(01:57):
You know, I just like that connection,
the connection between kind of somethinganalytic and in the real world.
>> Jon Hartley (02:05):
That's fascinating, and I think, you know, many economists sort of,
I guess first get interestedin reading the newspaper and
following what's going on.
I mean, how did that interest sort ofget fostered further when you were
an economics major at Princeton,studying economics at Harvard?
Who your advisors and sort of biggestmentors in that whole process?
>> Phillip Swagel (02:23):
Yeah, for me, it was really important and I just lucked out,
I had fantastic advisors and professors.
I took microeconomics from Harvey Rosen,who, you know, then I worked with
when I was at the White House andhe was a member and then chair of the cea.
(02:44):
I took macro with the late Steve Goldfeld.
Really phenomenal.
Had been a CEA with President Carter.
My senior thesis advisor was reallya brilliant man who's now retired from
Princeton, Avinash Dixit.
And my PhD advisor wasone of his students,
Kalakrishna was my first advisor andthen Alberto Alesina was my second.
(03:05):
And then Larry Katz was also on mycommittee, who also is just brilliant and
amazing.
I had actually, I was just thinking,as you asked, my first year of the Ph.D.
program.
So this would have been the fall of 1987.
The macro class was taught by a mix ofLarry Summers and Robert Barrow and
they kind of alternated andwhich is great.
(03:28):
And Professor Barrow,Robert Barrow's brand new at Harvard, and
he was just fantastic and brilliant andinsightful, but also so was Larry Summers.
And the day I remember I was going tomention was the day of the market crash in
October of 1987.
Larry was teaching that day,you know, again, first year PhD,
macro whatever he was going to teach.
(03:50):
He said, well, today I'm just goingto talk about bubbles instead.
And just, you know, kind of off the top ofhis head did a whole class on financial
markets and bubbles.
And it's great.
So yes, academically, yeah,I really, really lucked out.
And I could talk more about after schoolsome of the people I worked with also.
And of course some of your friends andco authors as well, like Kevin Hassett.
>> Jon Hartley (04:13):
Well, that, that's terrific.
And sorry, who ended up beingthe chair of your committee?
>> Phillip Swagel (04:18):
So it was Kala Krishna, who's a trade economist and
just brilliant, warm,funny, insightful, and
she's now a professor at Penn State.
>> Jon Hartley (04:32):
Fantastic, I mean,
what an amazing group ofpeople to have as mentors.
And I can only imagine whatit would be like to be in
a class with Larry Summersas the October 1987,
I always forget, the Black Monday orBlack Tuesday crisis.
>> Phillip Swagel (04:52):
Yeah, yeah, exactly, exactly.
I think it was, boy, I think it's Monday.
But yeah, it's a good question,I'd have to go back and look.
>> Jon Hartley (04:59):
I always get confused.
But I know it's a 25%draw down in one day and
it was one of the largest,I think still one-day draw down.
I know it came back later in the day, butone of the strangest market anomalies that
the economists still haven'tbeen able to fully explain yet.
I guess I'm curious.
You became a professor atUniversity of Maryland.
(05:21):
You served a Treasury duringGeorge W Bush administration, and
now you're director of CBO.
I take it, economic policy has beensomething that you really enjoyed.
What was your experience likeduring the Bush administration?
You were there during, you know,
the global financial crisislater in the George W.
Bush administration.
What was it like sort of working on thingslike TARP and so forth during that time?
(05:46):
Which feels like it was a while ago andwe've had maybe a couple crises since, but
I think it was definitely a turningpoint for economic policy.
And you were there during that time.
What was it like andwhat were you working on?
>> Phillip Swagel (05:58):
Yeah, it's interesting.
I mean, just like you said, sometimesit feels like a million years ago and
sometimes it feels like yesterday andsomething will come up that reminds me and
takes me back or I'll meet someonewho I haven't talked to since then.
I mean, you know, it's a terrible time forthe economy and the financial system,
so there's a sense of urgency andthere's a sense of mission as well, of,
(06:22):
you know, we, what we were doing wasimportant and, you know, obviously in.
Well, I say in retrospect, rescuingthe financial system and, you know,
bailing out, I think,is the, the word people use.
And that seems like a perfectly fine word.
Bailing out banks is controversial andunpleasant, but it was necessary.
(06:44):
And that was something that I think,you know, even in real time we understood,
you know, necessary, momentous,unpleasant, all those things.
But, but overall, it's just the senseof mission, of working together and,
you know, that the economy,you know, had to continue and
the financial system had tobe rescued as part of that.
>> Jon Hartley (07:07):
That's terrific.
And I'm sure, also, I think there'svery few researchers who are able
to stretch out both sort of the researchworld and the economic policy world.
I mean, how, you know,after going back to academia,
after having served attreasury during the Georgia W.
(07:27):
Bush years, how did that informyour research tastes and
things you're interested in writing about,doing research on?
>> Phillip Swagel (07:37):
Yeah, I have to admit my attention span is shorter.
You know, going back,going to academic conferences.
I think this is pretty common for
even the most accomplished peoplewith much better CVs than mine.
After policy world, it's hard togo back to academic conferences.
I've kind of always been interested inthings that were real world, and so that
(07:58):
wasn't so hard, Thinking about financialregulation, that was pretty easy.
I had students who wereinterested in real-world things
since especially as the policy school.
So for me,Maryland's a very congenial place, and
the policy school is the right place forme.
So moving back andforth between academia and
(08:18):
policy sort of policy world,it feels very natural.
And even at Maryland, of course, is insidethe Beltway, in suburban Washington,
I was able to be pretty involvedin some policy things as well.
>> Jon Hartley (08:32):
Well, it's terrific.
And I know many great economistsat the University of Maryland
who've gotten involved in policy andare really distinguished.
I think Mike Faulkner right now,who's the Deputy Secretary of Treasury,
(08:52):
want to talk about, CBO and reallydrill down into your current day job.
I want to first get into why CBOmatters as well as its history.
So, the Congressional Budget Office, orCBO was created in 1974 by the budget
Impalement Control Act, something we'vebeen talking about a lot recently for
(09:13):
other reasons, andthings like surrounding Doge and so forth.
But, there's what is CBO in my mind.
I see it as the officialscorekeepers passing legislation and
when there's some sort of a costrequirement that features,
sort of features primarily inthe Bird Rule and reconciliation process.
(09:34):
Something that the Republicans and
US Congress are going through a lot rightnow with passing their tax reform bill.
Can we maybe just take a minute tosummarize how the budget process works?
Sort starting from,sort of start to finish,
starting from the budget resolution to thepassage of the law and sort of where CBO
fits into that when it comes up with thescores and where does it really matter?
>> Phillip Swagel (09:56):
Okay, yeah, sure no, it's.
No, thank you.
I mean, CBO is an agency of Congress,and we're here to support Congress.
So we get them the informationthey need when they need it.
And that's both the kind ofwhat they need and the time,
when, and that's really our key role.
And the budget is obviously the budgetprocess is a key part of that.
(10:19):
Let's think about the reconciliationthat they're working on now, right?
Last week,Congress passed the budget resolution.
That's a concurrent resolution between thetwo chambers, the House and the Senate.
So there's no cost estimate to it.
That budget resolution setsout the broad parameters
in a sense of the changes inthe deficit that the overall, and
(10:41):
then how each committee between the twochambers is going to contribute to that.
And there's differences betweenthe House and the Senate and
there are different bodies.
And so we are,we help them on a technical basis, right?
Coming up with the numbersinvolved in the resolution.
And then we're helping the individual,individual committees that are working
(11:04):
on the specific pieces of the legislationthat eventually they will vote on.
And so that, for example, health care,I mean, Medicaid is being considered.
Obviously this is public record.
And so we work with committees ofjurisdiction that work on Medicaid.
In the House, it's E and C, Energy andCommerce is Chairman Guthrie.
(11:25):
We work with his staff and we go back andforth as they refine ideas.
We don't say do this,this is the right policy.
We, it's their policy.
And we help them analyze whatthe budget implications are and
what the other implications are.
Eventually, the committees willcome forward with legislation, and
they'll have markups where the legislationis considered in public in the committee.
(11:49):
And then we will comeforward with a cost estimate.
And it's usually after the committee,after the committee process,
we'll have cost estimates foreach committee, so for
each piece of what could be quitea large piece of legislation.
And then at the end, the Budget Committee,first in the House, or
probably first in the House,maybe then in the Senate.
(12:11):
It's up to them really, what order.
The budget committees will stitchtogether the legislation coming out of
the individual committees,
and then we'll do another costestimate for the entire thing.
And we'll do that jointly withthe Joint Committee on Taxation.
And for anyone watching on video, well,you can see I'm pointing to the ceiling
and I'm speaking from the fourth floorof the Ford House Office Building.
(12:34):
The JCT, the Joint Committee on Taxation,is on the fifth floor.
And so all the parts of the legislationthat involve changes to taxes to
the Internal Revenue Code,they will estimate, but
we'll work together with them.
They're in charge of the tax,we're in charge of the non tax.
We'll do a grand estimate of it all.
And then we'll do a dynamic estimateof the effect of the legislation on
(12:56):
the economy.
And then the feedback back to revenues andthe deficit.
>> Jon Hartley (13:02):
But you generally have your own models for analyzing, say,
the effects of taxes as well.
And these are different from the JCT ones,I guess, so
there's this whole budget process andI think a lot of people,
it's obscure to a lot of people.
In this idea that you what the HouseBudget and Senate Budget committees do,
(13:24):
they come up with basicallythe top line numbers.
And then it comes down.
Once those budget resolutions are passed,you think about passing a budget
every year, then it comes intosort of lower committees or
sort of downstream committees.
The Appropriations committees orsay House Ways and
Means, Senate Finance Committee,and so forth.
(13:48):
The appropriations committees andthe House and Senate, and so forth.
They're the ones that are doinga lot of this work in terms of
working within that top linenumber that's been outlined.
And then it's usually,I think after they've written a bill or
come up with a markup thatyou'll go out and score it.
(14:11):
Typically, I guess in between that and
passing the bill andyou do lots of things.
There's a lot of thingsthat go into these scores.
When CBO says it'll cost,X trillion or billions of dollars for
this particular piece of legislation.
I want to sort of break down into,
(14:33):
I guess a number of key sort of issuesthat go into each of these estimates.
One of them, which has becomevery topical right now is this
whole idea of currentpolicy versus current loss.
CBO has done a lot of, traditionallydone a lot of scoring under current law.
I mean, some congressional Republicansright now would sort of like to switch to
(14:56):
current policy to score.
So that the TICTO renewal bill andit's kind of a philosophical divide,
I guess in terms of current policysays that we should have a baseline
that's wherever the policy is today anduse that as the baseline.
And so, things like expirations and
the law and soforth wouldn't be thought of
(15:22):
as a change per se orpart of the baseline.
For example, I think extending the taxesfrom Jobs Act looks inexpensive if we're,
what we're doing is just keepingsort of the current provisions.
If the current policy is the baseline, andthe current law baseline is different in
that it says sort of that the costof expiring provisions does matter.
(15:45):
So it's really in my minda philosophical divine.
But I'm curious, how do you thinkabout it and what should CBO and
Senate Parliamentarian be doing?
Is really your job just to sort of beagnostic to these sorts of issues?
And just sort of come up with scoresaccording to whatever sort of Congress is
asking you to do, or where does sort ofCBO fall into that in terms of, you know,
(16:09):
current policy versus current law?
And how would you explain that issue?
What do you think about it?
>> Phillip Swagel (16:15):
Okay, yeah.
It's an important question and somethingthat the Congress is thinking about now.
And the way you put it as a philosophicalissue, I think is exactly right,
that different people will look at it indifferent ways or look at it in both ways.
To say, like with the tax provisions,these are expiring.
But a member of Congress might say,well, I think they should continue.
(16:38):
And I just want tocontinue what we have now.
And I feel like looking at it thatway is the right way to look at it.
And another member might say, no,if the current law is this and
the law has those provisions expiring,and that's the right way to look at it,
we will provide the informationthat Congress wants.
And that means we will providecomprehensive information this year.
(17:00):
It means we'll provide both that ifa member wants current policy basis,
I mean, they'll have to tellus what is current policy,
which provisions they think are currentpolicy and are meant to be extended.
And, of course, I'll have to tellmy colleagues upstairs at JCT
what's current policy, since so much ofthat is the tax code, and we'll do that.
(17:23):
And I mean, both agencies, CBO andGCP are here to support the Congress.
And from the CBO perspective,we will give them the information they,
you know,they want in the way they want it.
It'll be our analysis.
Of course, we won't necessarily givethem the numbers they want is whatever
the numbers are,that's what we'll give them.
On the other hand, we'll also providethe current law numbers as well.
(17:45):
And that's, you know, first is by statutethat the statutory baseline is on
a current law basis with some exceptionsfor programs like Social Security and
Medicare.
You know, it's our job to provide Congresswith the information they want when
they need it, is our analysis.
But they're the ones who decidewhat information is useful to them.
And different members with differentphilosophies, you know, again,
(18:08):
as you put it, will vote differentlybased on different information.
And I just want to make sure that theinformation we provide is comprehensive.
And that's reallyfulfilling the CBO mission.
>> Jon Hartley (18:20):
Terrific, I wanna get into dynamic scoring because this is another
one of these sort of, I think, hot topics.
So dynamic scoring, CBO and JCT, theyhave sort of different types of models,
and they have both,what's called a conventional static model,
which is where a lot of thesesorts of numbers often come from.
(18:45):
And then, they also have thesegeneral equilibrium models
that do dynamic scoring that account for
how GDP and the macroeconomy mightbe impacted by such policies.
And they're accounting forthings like spillovers and
things like that and are a bitmore complicated in that respect.
(19:07):
And I think one area, I think ofconfusion, I think for a lot of people,
is that a lot of advocatesof dynamic scoring.
Often, I think sort of forgetthat in conventional estimates
still include elasticity, taxable income,
which includes sort of behavioralresponses to taxation.
(19:29):
I'm curious, like,what sorts of behavioral responses would
the conventional staticmodel include in CBO's case?
I mean, does it include yourrevenue shortfalls from, say,
tax avoidance minimization due to, andthings like due to wanting to work less?
How does CBO sort of separateout these sort of conventional
(19:51):
behavioral response responses,say, evasion avoidance,
tax minimization from the laborresponse in dynamic scoring?
And I mean, do you think there'sa lot of value added and say,
I guess we'll get to dynamicscoring in a second?
>> Phillip Swagel (20:05):
Okay.
Okay.No, no, absolutely.
And so I start with where you started,
that the conventional estimateshave a lot of behavior in them.
And you mentioned some of them,some of the dimensions of behavior.
And we have that the JCT in theirtax models, they have that.
One thing we analyze where thisbehavior is important is tariff policy.
(20:29):
And there's that the presidentis limiting the use of the de
minimis exception as a couple oflarge firms in China that ship,
basically small shipments to the US andthose essentially get around the tariffs.
I don't know if it's evasion avoidance,right?
One's legal, one's illegal.
(20:50):
I think it's what they were doing waslegal and now it's going to be off,
you know, out of bounds, and that'sgoing to change the nature of commerce.
And we have to figure out, well, what willit mean for the supply side, you know,
for those firms, and then whatwill that mean for the customers?
And so there's a lot of behavior in there.
It's probably not going to shiftthe overall size of the economy.
(21:10):
A lot of dollars,probably not macro scale.
But how would that adjust?
And so we've got to think about that.
There's other things like no tax on tips.
I mean, that would be jct, butthey would have to think about, well,
how will the nature ofcompensation change if, you know,
(21:31):
could more activityshift over into tipped?
You know,the kinds of things that have tips.
And so that kind of behavior is important.
I only just mentioned one more, which is,I mentioned before Medicaid policy.
We're doing a lot of work on that.
A lot of the impact inthe sort of the dollars,
especially on the state side,and the coverage potential
(21:54):
coverage changes comes aboutthrough decisions made by states.
So the federal government willchange the number of dollars,
the allocation of dollars betweenthe federal government and states.
And then,states have to decide how to respond.
And different stateswill respond differently.
They have different views toward Medicaidand uninsured and things like that.
(22:15):
And we have to take intoaccount of that behavior.
So it's not of individuals,but it's of states.
And we talk to the states,we analyze their situations.
But ultimately there's goingto be our assumptions,
our analysis built into those projections.
>> Jon Hartley (22:31):
Fascinating.
So I guess, like, okay, soI know there are tax models too.
So like the things like evasion,avoidance and minimization.
Break that out in a cbo,in the CBO tax model, or.
>> Phillip Swagel (22:47):
It's hard.
So for a cost estimate, JCT would do it.
And they would have to think about that.
About, you know, I guess,like the tax on tips,
they would have to think about, right.
How will the nature of work reconfigure?
And what does it mean?
So what does the behavior mean?
And we face the same thingwith a tariff change.
(23:08):
You know, how does the natureof commerce reconfigure itself?
After legislation is enacted,then CBO is in charge of the baseline.
And so, for example, the 2017 TCJA,
the December 2017 Tax Act,JCT was responsible for the estimates.
But then once it was enacted,we put it into the baseline.
(23:31):
And so in April 2018,CBO published kind of a long analysis
of how we fit the newly enactedtax bill into the baseline and
what did it mean forrevenue and GDP and so on.
>> Jon Hartley (23:46):
I'm familiar with some of that work because I know there's.
I have some kind of related workwith my colleagues Josh Rao and
Kevin Hassett on facts on investment.
And I know there's sortof an elasticity that.
Use from the literature plug into, I thinkyour cap tax model, which is more about
investment than say you're just thinkingabout the revenues in your baseline.
(24:10):
I guess sort of just andwe'll get to that in a second.
We'll talk a little bit more about modelsand transparency and things like that.
I totally commend the CBO andbeing more transparent than the JCT and
that sometimes,
we don't even know what the JCT'selasticities of taxable income really are.
We think they're sort of less than one,but it's hard because at some level it's
(24:34):
not quite an apples to apples comparisonin terms of say, how a literature
estimate compares in that it's notclear what sorts of things get counted.
Hence through the question on evasion,avoidance, taxation.
That's more a JCT question.
But I guess I'm just curiousoverall conventional scoring or
conventional static modelsversus dynamic scoring.
(24:54):
In thinking about how these policies,how they impact GDP, what do you think?
Do you think there's valueadded there in dynamic scoring?
I mean,I feel like a contentious issue for
a very long time in terms of towhat degree we should think about
the estimates that come out ofreally general equilibrium models,
(25:16):
which is where these sorts of dynamicscoring effects are being measured often.
I'm curious, what's your take on sort ofdynamic scoring versus conventional stack
models in general?
>> Phillip Swagel (25:27):
Yeah, we want to do more of it and
we've put a lot of work in overthe last really couple of years.
I'm trying to think of since the 2022reconciliation legislation passed, right?
The reconciliation bills tendto be kind of all consuming.
Then the Congress was divided in 23 and24.
(25:49):
So the PAISA legislation slowed down some[LAUGH] and we had some time to prepare.
And again, working with JCT andbeing ready for
reconciliation, there are different roles.
There's some things where legislationintrinsically has to have a dynamic score.
A big bill that affects immigration,you're changing the size of the labor
force if the bill is large enough andintrinsically you're changing the size of
(26:13):
the economy sothat by its nature is dynamic.
Something in tax policy where you havea really nice paper with Kevin Hasselt and
Josh Rao that looks at the impact ofchange in tax policy on the economy or
on investment, as you mentioned.
And in the economy,a big change in tax policy or
(26:33):
even a small change that'sfocused on pro growth elements,
that would change the size of the economyand then a dynamic estimate makes sense.
And then there are members and manymembers who want us to do dynamic analysis
on the spending side, sometimesthey call at the investment side is
a change in some policy that changesthe size of the labor force, or
(26:57):
maybe it's direct federal investment,building roads and bridges or
highways or something else, that changesthe productivity in the economy.
It changes the size of the capital stock.
And members want that.
And I want to give members of Congress theinformation that they think is valuable.
And look, I think it's valuable too.
I mean, the more the better, I can explainsome of the challenges, but that's my
(27:22):
overall philosophy is comprehensive,more information to the extent we can.
And I can go into some of the challenges.
>> Jon Hartley (27:30):
I'm sure you have to have some sort of an estimate of what a fiscal,
your fiscal multiplier would be, I mean,
there's all sorts of varying estimatesin terms of fiscal multipliers.
I mean, there's certain microestimates that I think are tend
to be pretty high andthen from maybe things like RCTs and
things of that nature,quasi experiments of that kind of.
(27:55):
And that's from sort of more micro day.
And then you have sort of the bigmacro sort of estimated elasticity.
I think often of say, Valerie Ramey'swork and the work of others,
you know, John Sison,Emmy Nakamura and others,
that you look at these likedefense spending shocks.
And so there's, I think, a school ofthought that says that those multiple
(28:17):
multipliers are pretty low andmaybe as low as, you know, 0.3 or
something like that versus the micromultipliers might be, say, around one and
a half or two or something like that.
And then some people argue there's,I guess,
tax fiscal multipliers that are verydifferent from government spending ones.
I think Alberto Alsina found thatthe tax multipliers were often
(28:38):
bigger than the governmentspending multipliers.
I'm curious.
I assume those would be somethingthat you'd have to think
about if a member comes to you andsays, hey, incorporate
the dynamic effects of building a bridgeor some infrastructure project.
>> Phillip Swagel (28:53):
No, that, that's right.
That's exactly right.
And we did one paper like that.
It was requested bythe Senator Rob Portman,
who was leading group withSenator Kirsten Cinnamon and
others that resulted in legislationon infrastructure investment.
And that's what they wanted to know,that what's the dynamic feedback
from infrastructure investment changesproductivity, changes the size of
(29:17):
the economy over a long periodwill feed back into Revenues and
they had in mind really roads and bridges,which, you know, takes, well, it takes in
the US years to build a road or a bridge,you know, sort of infamously sometimes.
And then we looked at the 30year horizon of the, you know,
productivity and revenue feedback.
It did not pay for itself.
(29:39):
But depending on how the road or bridgewas financed, there could be a substantial
offset that the added productivity wouldgenerate enough, enough revenue to pay for
it was like as much as half ofthe cost of the road and bridge.
Leaving aside the crowding out, so leavingaside the debt that might be incurred to
(30:00):
finance the road andbridge in the, in the first place.
So there's still a sizable, a sizableimpact that's on the spending side.
And then, you know, like your work withKevin and Josh on the tax side and the way
I think of it and the way I explain it tomembers that different provisions have
different pro growth impacts and the,you know, the sort of expensing,
(30:23):
you know, think about like expensingversus a change in the corporate rate.
And the corporate rate is permanent,so maybe that's not on the table now.
But think of like expensing versusthe change in the personal rates.
Those will have differentimpacts on growth.
They're both pro growth, butdifferent quantitative impact impacts.
>> Jon Hartley (30:41):
Yeah, no, absolutely.
And it's a huge, I guess, debate rightnow in Congress in terms of what to
be focused more on sort of pro growth firmtype tax adjustments versus, I guess,
things are more, I guess on the individualside of things, things that were
promised in the presidential campaignlike tax on tips and things like that.
(31:03):
And doing questions I think right now,but maybe raising the person, right?
It's a very interesting dynamic in termsof how these things are being considered.
The salt deductions are a verybig topic as well, but
I wanna sort of get into thiscame back to sort of just CBO.
I wanna talk about justCBO scoring accuracy.
So, you know, often our CBO scores wrong.
(31:27):
I mean, I guess no score is ever perfect.
But I'm curious, you know, we couldthink about, you know, the Taxes and
jobs act of 2017 in the first Trumpadministration tax cuts which reduced
the corporate rate and brought inexpensing provisions for equipment.
And it also changed a lotin terms of how businesses
(31:50):
pass through businesses are being taxed.
And there were also changesto the individual code.
There were opportunity zones.
They capped the SALT deduction,
all sorts of things in terms of yourscore or the CBO score for that.
And mind you, as a different CBOdirector who was there at the time,
(32:13):
what did CBO get right andwrong there in your mind?
>> Phillip Swagel (32:16):
Okay.
And just to say, well,I started as CBO director in June 2019,
but I own every mistakeCBO has ever made and
certainly members ofCongress remind me of that.
And that's just, that's the reality.
And you know, fortunately we get a lotright, but of course we get things wrong.
And just as a general matter,the more familiar provision is and
(32:38):
the more incremental legislation is,the easier it is for us to model it.
And when something's entirely new orbig, well, that's harder.
And you know, the ACA of course,was big and new.
So just things like that are harder.
The childcare provisions andthe build back better legislation,
those were big and new.
You know, we never, in the end,that was never enacted, but
(33:00):
that's the kind of thing that's harder.
The 2017 act is an interesting one.
You know, of course,JCT did the original score, but we,
what people really think about now,it seems like,
is our estimates in the baseline isour projections, the technical word.
So in April 2018, we published the firstbaseline update after enactment and
(33:22):
that included the impacts of the,of the legislation.
So both we had stronger GDP growth,stronger business investment,
stronger GDP growth,lower revenues, right?
That stronger growth would improverevenues, but not so much to pay for
itself and so on.
And the beginning of 2018 bore that out,right?
Investment was stronger until aboutthe middle of 2018 when we saw
(33:47):
some of the first waveof tariffs had a hit.
CBO is really actually verypositive on the investment
impacts of the provisions in tcg, tcja.
The, you know, the lower corporate rate,the international provisions, the lower
personal rates, our internal estimates,like the elasticity you mentioned,
(34:09):
the change, essentially the change inthe price of investment, you know,
from the tax side, what does thatdo to the quantity of investment?
So we're not quite as high as what you andJosh and Kevin found, but
we're within the rangeof your uncertainty and
we're a bit above some ofthe other academic literature.
So it's a bit of an ironythat we are actually,
(34:31):
we're very positive onthe economics of the Act.
The revenue estimate that we did againback in this was published in 2018,
April 2018.
We are basically spot on for2018 and 2019.
That actual revenues came in actuallyvery slightly below what we projected.
(34:52):
So in some senses we were over optimistic,but really a tiny amount.
Now, of course, 2020 is a difficultyear with the pandemic.
There's so much going on, legislation.
So let's leave that out becauseI don't think anyone could
have projected what happened in 2020.
2021.
After 21, 22, 23, revenues were quitea bit higher than CBO projected.
(35:17):
And so that's a mistake and error.
But of course the next thing is to say,well, why what happened and
why were revenues abovethe projection starting in 2021?
And I would point to a couple of things,right?
Inflation is one is in our estimation,is the biggest piece that inflation.
There's high inflation startingin the spring of 2021.
(35:41):
We tax nominal income.
And so that means that the nominal dollarsof revenue were higher than before,
you know, before the high inflation.
And I don't think the enactment of TCGAis what caused the high inflation, right?
So I wouldn't attributethe high inflation to tcga.
And so it's not fair to say,you should have, you know,
(36:01):
should have anticipated that.
The Fed, of course,did put in extraordinary monetary policy
in response to the pandemicthat increased asset values.
And then we saw that capitalgains realizations look to have
been extraordinarily strong in 2022.
That of course, TCGA would havealso improved asset values.
(36:23):
But the sudden spike in 2021 andrevenue surge 22 looks
like more the result of the pandemic andthe Fed's response than tax policy.
And then the last thing I'd say is thatof course, Starting in early 2021,
there is a surge of immigration andthat for the federal government, well,
(36:44):
there's cost of immigration,of course, but
those costs are much heavier on the stateand local governments in the US and for
the federal government,the revenue impact is larger.
So again,
revenues were higher than CBO anticipatedbecause of the immigration surge.
And I just don't think CBO could have
(37:05):
plausibly expected the immigrationsurge in 21 back in 2018.
And I don't think TCGA is whatcaused the immigration surge either.
So that, I mean,I'm going on long here, but
you get the point that revenueswere above what CBO projected,
but only starting from the timeof the high inflation,
(37:26):
the Fed's qe, immigration andother things.
So once you take that into account,our accuracy looks, look,
looks a whole lot better.
>> Jon Hartley (37:37):
Got it.
So it's the cap gains I Guess.
And cap gains tax ratesare not indexed to inflation.
>> Phillip Swagel (37:43):
That's right.
>> Jon Hartley (37:44):
The bracket creep there.
And you're saying even, you know,
undocumented immigrants are somedegree paying taxes as well.
>> Phillip Swagel (37:51):
That's right. That's right.
And they're increasingthe size of the economy.
Well, many of them do, do, do pay taxes.
Many of them in the immigrationsurge were brought in under parole,
which essentially within six months.
Many of them had work authorization, andthen they had a big incentive to pay on
(38:12):
the books because they'd have a datewith a, you know, a judge and, you know,
down the road.
So they had an incentive to pay onthe books, to work on the books and
pay taxes sothat they can show that to the judge.
Yeah.So it's the inflation,
equity prices driven in part by QE andthen the immigration surge.
(38:32):
All of those meant revenues in 2021 andon were higher
than could plausibly havebeen predicted back in 2018.
>> Jon Hartley (38:42):
Got it.
So I know many of the Texas andJOBS act provisions are set to expire.
In fact, they were made temporary to beginwith because of some of these things like
the Berg Rule and things like that.
But now there's a desireto make them permanent.
That's sort of the big feature ofthe current tax bill that's being pushed
(39:03):
through Congress.
How do you go about modelingthe impact of ticta or
taxation Jobs act expirationin your macro baseline?
I know sometimes you ask me whythere's no recession being shown under
the 2026 year under currentlaw given to these expire.
I'm curious how you think about thoseexpirations from a modeling standpoint.
>> Phillip Swagel (39:26):
Yeah, no, no, thanks.
And, you know, first of all,to say, you know,
there's no normative judgment herethat when CBO says this, you know,
this is what we think will happen, or thisis the revenue or this is the GDP that
doesn't say therefore it's the rightthing to do or the wrong thing to do.
And members of Congress have many reasonsand it's political philosophy and
(39:48):
lots of things that are justbeyond CBO and you know that.
So that's where I start.
We do have the expiration ofthe provisions in the 2017 act
affecting the economy.
And so we have GDP growth slowingin our baseline forecast.
We have GDP growthslowing from 2.1 in 2025.
(40:08):
So 2%,2.1% real GDP growth down to 1.8 in 2026,
which you know, is a meaningful slowdown.
But as you said, it's not a recession andit's kind of at,
it is at odds with,I know with some people have in mind,
this is quite a large increasein revenue under current law.
(40:29):
It's a bit less than 1%of GDP under current law.
And you would think, well,
that's going to slow down the economyby more than we have in our baseline.
And there's a couple things going on thatwe have to, we basically have to model.
Well, first of all, somuch of the 2017 Act is permanent,
including the most pro growth parts,right?
(40:50):
The corporate rate, the internationalprovisions provide incentives for
activity to be domiciled in the US andnot to invert and not to go overseas.
So that's, that's part of it is that a lotof the pro growth part is not expiring.
The part that is expiring the mostpro growth part of that is
relatively small in terms of dollars.
(41:12):
This is some of the business sideprovisions essentially expensing and
is the depreciation provisions.
The bigger dollars are onthe personal side.
Now, every household faces, virtuallyevery household faces a change in
their taxes with the expirationof those provisions.
But it's still also true that mostof the dollars are associated with
(41:36):
households with relatively highincomes and relatively high wealth.
And those households tend to have lowmarginal propensities to consume.
So even though it's a lot of dollars,the MPC that comes with those dollars
is relatively low, so the effect onthe economy is attenuated by that.
And so the effect on consumption andGDP is attenuated.
(41:58):
And then there's the third and last part.
I guess there's two parts, 3 and 4.
Well, one is we assume the Fedwould respond in part to slowing
economy under current law.
The third that's interesting is that wetalk to businesses about their view of
the Tax act and there's a, a substantialnumber of businesses said to us, well,
(42:22):
we kind of understood that even thoughthe provisions, some of the provisions
were permanent, well, of course therecould be subsequent legislation.
And so there's a sense in which inmodeling their investment decisions,
businesses might not have included thefull permanent effect of the provisions
just because they know laws change andeven a permanent law can change.
(42:47):
And again,that would tend to attenuate the impact.
It meant that the positive impactof the law was not full force.
And then the expirations in the same way,which actually last thought,
which makes the econometrics hard.
So what you and Josh and Kevin did andwhat other groups have done
(43:08):
is hard because you're measuringthe provisions of the act.
But then businesses are acting accordingto their own interpretation of
the provisions rather thanthe actual provisions.
So we face the same difficulty, butit's a combination of those things that
the expiration has a negative effecton the economy in our estimation.
But it's not, you know,not sort of full bore and
(43:32):
not enough to bring the economy to,you know, certainly to a recession.
>> Jon Hartley (43:37):
Well, that's fascinating how you think about scoring things like
that, there're some of thoseprovisions that are set to expire,
I wanna just talk about,I guess taking a step back here.
CBO has hundreds of modelsas far as I'm aware.
Now some of them are being made public,including your tenure,
(44:01):
I think like the cap tax model,for example, which measures
the impacts of a tax change on capital andfixed investment spending.
I'm curious one,how do we get more of these public and
what do you think about things likeI guess the CBO show your work Act.
This legislation has been sponsoredby Senator Mike Lee, I'm curious.
(44:25):
CBO is more transparent than JCT.
I don't think any JCT models are reallypublic at all, So I commend CBO for
doing this.
But I'm curious, you know, there's,I think been a lot of interest in,
in scoring andwhat goes into scoring in recent years.
I think you see some of this with,you know, the popularity of, I guess,
you know that you gotthe Yale budget lab now and
the Penn Wharton budget initiative andall these things.
(44:46):
So, so I think there is demand for,for, for scores.
But I guess, you know, there's always, I,I think what, what's funny about this sort
of business is like there's always peoplewho are upset about scores because too big
or too small depending on I guess what,maybe what they hope to see.
But I'm curious,I think at some level, you know,
putting more transparency intowhat's going into these models
(45:06):
maybe could help alleviate someof that and thinking about how
you change what exactly what assumptionsare driving certain costs and so forth.
I'm curious what is sort of the CBOplan for making models public and
what do you think about this?
At some level I could see sort ofnegatives as well in the sense of why did
you put that in there?
(45:27):
And so forth, you know, so, so I, I don'tthink it's necessarily all peaches and
cream, but I'm curious,what do you think about transparency?
And how important is thatto you as a CBO director?
>> Phillip Swagel (45:37):
Okay, no, no, and let me start by saying I agree with your
assertion that the moretransparent we are,
it will help us whenthere are disagreements,
when someone's unhappy with an estimate ora number.
And we can say, look,here's the assumption in there.
(45:58):
And if you, whoever's unhappy, if youthink we're wrong with that assumption,
well, let's talk about that.
And then it's a substantive discussion,it's a focused discussion, and we do that.
And that kind oftransparency is helpful and
sometimes we'll justhave a different view.
I mentioned earlier, build backbetter the childcare provisions,
(46:18):
we actually thought that those provisionswould have higher uptake than the,
the Biden White House did.
And so our score on that little partof it was bigger than theirs, but
that was because we actually thoughtthe policy would be more effective,
in a sense, than they did.
So these,my predecessor did a lot on transparency,
as Keith hall, and I'm continuing that.
(46:39):
My colleagues are continuing that.
The Captax model you mentioned isa great one, it has a limited user base.
I know you are busy, like,very highly knowledgeable people for
whom it's really important.
You people at Tax Foundation,Brookings, AI,
a couple others and it's worth it, right?
It's the transparency, it's puts a littlebit of a tax on us, but it's worth
(47:04):
it because the community who uses itwill give us feedback and questions.
And sometimes if there's something theydon't understand or you don't understand,
and you ask us in our tax analysis,staff are amazing.
You know, say, yeah, you're right,we could do that better.
And that's,that's kind of feedback that's helpful.
We get helpful, we get feedbacklike that from congressional staff.
I'm sorry, I'm pointing out my windowtoward the Capitol, so I'm like,
(47:28):
at the Southwest corner ofthe Capitol complex, and so
I'm pointing the northeast of the dome.
You know, the health staff, where wework very closely with both, you know,
both chambers,both sides on health legislation.
Sometimes, we'll give them a preliminaryestimate and let's say, we expected,
whatever, this to be different or that.
And we'll talk about, we'll realize,well, no, they you have something, or
(47:52):
they'll say, you need to talk tothis outside expert and we will.
So that's the kind oftransparency that's useful.
I mean, it's all useful, but then.
That's useful in a very mechanical,very immediate way.
We put up other, as you said,we put up other modeling information,
like from our healthcare healthinsurance coverage model.
(48:13):
We recently, recently put up someinformation about health insurance
premiums and our projectionsof private sector premiums.
I want to do more.
The challenge is that it takes time,
especially when legislation is movingquickly, we often just don't have time.
And we all have time to talk about itwith someone, but not to actually go and
(48:37):
put it on our web, on our website,or in a way that's usable.
And we just can't stop andput up the models.
And sometimes that's a time,
sometimes the legislation is confidential,so we can't do it in advance.
Sometimes it's judgment andI mentioned earlier,
we talked about Medicaid andthe state behavior.
(48:58):
The state responses to federalchanges in Medicaid is critical to
understanding the effect of the policy.
And that's our judgment.
There's no model in the mathematicalsense, but there's our discussions,
there's our judgment,there's our analysis.
And so it's not easily encapsulatedin something we post on the web.
But I can sit with people, our expertscan sit with people and talk about it.
(49:22):
And that's what I want us to do more of.
And so the, Senator Lee's legislation,it's completely understandable and
the kinds of things that he wants inthat legislation, I agree with that.
We need to put up more that be, make it so
that other people canunderstand what we're doing.
(49:42):
It's hard for us to do it ina way that people can replicate,
which is ultimately what,you know, what he would like.
That's just hard.
I'm not sure we're going toget there in a broad way, but
I want to do as much as I can, you know,to satisfy the motivation behind that.
And so I'm.
Yeah, that's it.
It's.In a perfect world, we would be there.
(50:03):
He wouldn't even need the legislation.
We'd be there without it.
But given the constraints, you know,we have, I want to do as much as we can.
Actually, can I just say a word thatanyone listening to the podcast,
we have a Contact Usemail on the CBO website,
is communication.cbo.gov andthose inbound emails matter.
(50:23):
Or if a listener or a viewer,you see a CBO report and
something looks wrong, well, don't be shy.
We do Want that feedback?
We get plenty of feedback from academics,from members of Congress, from staff,
but from anyone.
If something looks wrong,I want to know about it.
And especially constructive criticismis always, is always helpful.
>> Jon Hartley (50:45):
Well, that sound very kind you to be receptive
to feedback in that way.
I know many people have somevery strong thoughts and
feelings about various estimates.
Actually, I asked aheadof doing this interview,
I asked a few of my Hoover Policy, whoare Fiscal Policy Initiative colleagues,
(51:07):
Danny Hile, Josh Ryle, Tom Church andBen Jarris, what they would ask you.
And so one of these questions thatcomes from Danny and a few others
here is really, I'm curious what youthink about sensitivity analysis and
maybe doing some sort of CBOsensitivity analysis with an estimate.
(51:28):
I mean, you tend to stick to pointestimates, and I can understand why you
might be reluctant to offer lawmakers,say, multiple figures.
It can also, I think you maybe leave youmore vulnerable to getting things wrong
and we could talk about the inflationReduction Act, Affordable Care Act,
Medicare, prescription drug costs,
some of the newer thingsthat you mentioned before.
(51:48):
They're difficult to model becausethey haven't existed before but
I'm curious how youmight think about that.
Or, obviously sort of macrovariables are different from
things like the response,various response parameters,
both these things are subjectto some uncertainty.
(52:09):
But do you have any thoughts on maybesomething like a confidence rating,
attaching a confidencerating to smear scores?
The intelligence community, for example,uses an analytic confidence scale that
allows analysts to indicate how confidentthey feel about their findings.
Uncertainty is alwaysa difficult thing to measure.
But I'm curious, would you ever thinkabout, you know, sensitivity analysis and
(52:30):
using sort of multiple estimates ratherthan just a single point estimate?
>> Phillip Swagel (52:34):
Yeah. Yeah, and
it's something that wethink about internally.
We've done some formal modeling, and
some of the members of our panel ofeconomic advisors have been helping,
helpful in letting us do that ina kind of analytically sound way.
So the uncertainty around someof our numerical projections,
budget deficits, growth, things like that,we compare ourselves to others,
(52:58):
to the administration,to private forecasters.
Of course, we could all be wrong.
Many people were wrong about inflationin 2021, and we were one of them.
So being with the herd isn'talways the right thing.
But we do try to make those comparisons,
we try to give people a sense of what theuncertainty is as best we understand it.
(53:19):
And even in a cost estimate, we havea section on sources of uncertainty.
We have a section on the Basis of theestimate, what information went in, and
then what do we think are the sources ofuncertainty for the congressional process?
They need a point estimate andultimately we don't have a choice, right?
There's, we have,we do a cost estimate for
(53:41):
everything that gets voted out ofcommittee that's going to the floor.
We don't get to pick and choose whatlegislation we're doing cost estimates on.
And yeah, so there's limitations.
But yeah, it would be nice if, if we coulddo more to indicate this uncertainty
where you said the intelligencecommunity is kind of an interesting one,
(54:05):
like the, yeah, just to say, hey,this one, we did it really quickly.
There's.If we had infinite time or even another
three weeks, here's the things we do andbe able to come back to it.
That's kind of,that's kind of interesting.
We come back sometimes to estimates,but like the Affordable Care Act and
the mandates,the mandate in the Affordable Care Act,
(54:29):
we published something explaining whyCBO thought what the agency thought and
how it was different than what turned out.
But yeah,we could definitely do more on that.
>> Jon Hartley (54:43):
Well, it's fascinating because I think about standard air
bars and how useful they would be.
I remember several years ago,
Loretta Master,when she was president of the Philly Fed,
she recommended that FOMCpolicymakers should be allowed to
(55:03):
include a standard error bararound their Dots in the SEP.
And the survey of economic projectionsthat they put out, they put out these,
both forecasts of say, things like GDP,inflation, unemployment, macro variables.
But also they put out their forecastof where they think the policy rate,
where the short term interestrate is going to be in the next
(55:27):
several years in the long run.
So imagine if they could includea standard error bar as well to sort
of put in some level of uncertainty,maybe the market would react
to it in a different way orbe an easier way to communicate both,
I guess a point estimate andsome degree of uncertainty as well.
(55:51):
I'm sure we could spend all daytalking about all these sorts of.
Phil, I really want to thank you forcoming on.
It's been an amazing conversation.
I know you're in a very keyspot right now given the tax
bill that's going through Congress.
And I know CBO is spending a lot oftime coming up with cost estimates
during the reconciliation process andworking with members very closely.
(56:14):
So really want to thank you forcoming on during this very busy time.
>> Phillip Swagel (56:18):
Yeah, thank you.
Thanks so much.
Thanks for having me on.
And thanks to Hoover forhosting the podcast.
And, yeah, I look forward to continuingthe conversation in the future.
>> Jon Hartley (56:27):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast with the HooverEconomic Policy Working Group where we
talk about economics,markets, and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.
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