CBO Plays “Let’s Pretend” On Kerry–Lieberman Scoring

Posted on Fri 07/09/2010 by

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By David Kreutzer, Ph.D.

Here’s a principles-of-economics question: Suppose the U.S. gross domestic product (national income) is currently $14 trillion. Then suppose the U.S. raised all tariff, income tax, and sales tax rates to 100 percent. How much money would the government collect? If you realized that nobody would generate taxable income under such a regime and answered “zero,” congratulations.

If, instead, you answered $14 trillion, you may have a future at the Congressional Budget Office (CBO), because that is how they analyze (score) the fiscal impacts of the Kerry–Lieberman climate change bill. In defense of the many good economists at the CBO, the Kabuki Theater of legislation-scoring requires they use static analysis—that is, they have to assume that higher tax rates do not affect investment or work-effort decisions and, therefore, have no negative impact on national income and income-tax revenues.

This leads to the sort of stylized ritual we observed Wednesday. First, the CBO sent the lead sponsor a letter estimating the costs of the Kerry–Lieberman cap-and-trade climate bill, in which analysts assume no detrimental impact on national income despite tax increases of hundreds of billions of dollars per year. Then Senators Kerry and Lieberman issued a statement earnestly announcing the CBO’s unrealistic projection of a $19 billion deficit reduction as though people might actually believe it. And finally, in Act III, the media reported the results with a straight face.

Please note that, even though Senator Kerry said this isn’t a cap-and-trade bill, we can be pretty sure that’s what it is because (1) Senator Lieberman said it is a cap-and-trade bill; (2) the CBO said it is a cap-and-trade bill (actually they said it “would establish two separate regulatory initiatives known as cap-and-trade programs”); and (3) it has to be a cap-and-trade bill—it directs the EPA to cap allowed CO2 emissions, and the associated permits can be traded.

If it seems like déjà vu, don’t worry, you have seen this before in the form of the wildly unpopular Waxman–Markey and Kerry–Boxer bills from last year. How different is Kerry–Lieberman? Here’s what the CBO letter says about Kerry–Lieberman in comparison to the two bills from last year:

Regarding the GHG cap-and-trade program, all three pieces of legislation include roughly the same caps on emissions, roughly cover the same entities, and allow for about the same amount of total offsets used to satisfy compliance.

The CBO notes that the new bill (Kerry–Lieberman) throws some bones to the nuclear power industry and adds not-so-likely-now revenue-sharing for oil-and-gas leases on the Outer Continental Shelf. Also, in what would be a good first step if they were to carry it forward a couple of centuries, the full onset of the bill’s provisions are delayed a couple of years.

In short, this bill is last-year’s model with a new hood ornament and some mud flaps. So, using the Kerry–Boxer bill from last fall as a guide, here’s what we could expect should the bill become law:

  • Not less debt but trillions of dollars more government debt (after adjusting for inflation, Kerry–Boxer would add $2.7 trillion to the national debt by 2035—putting a family of four on the hook for an additional $27,000)
  • Fewer jobs (employment under Kerry–Boxer would track 1.4 million jobs below business as usual, on average, for the years 2012–2035, and peak job losses would exceed 2.5 million)
  • Higher energy prices (by 2035 Kerry–Boxer would add 45 percent to gasoline prices and 72 percent to electricity prices)
  • Lower income (Kerry–Boxer would chop $9.9 trillion from GDP between 2012 and 2035—an average loss of over $4,500 per year per family of four).

The Senators’ statement and the CBO letter ignore almost all of the important economic impacts of the proposed legislation. Instead there is a bit of hoopla over one laughably optimistic estimate for one really expensive bill.

David Kreutzer, Ph.D. writes articles for The Heritage Foundation and is the Senior Policy Analyst in Energy Economics and Climate Change, Center for Data Analysis.

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