Dynamic scoring
Encyclopedia
Dynamic scoring predicts the impact of fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

 changes by forecasting the effects of economic agents' reactions to policy. It is an adaptation of static scoring, the traditional method for analyzing policy changes.

The method yields a more accurate prediction of a policy's impact on a country's fiscal balance and economic output when it can be performed accurately. The potential for heightened accuracy arises from recognition that households and firms will alter their behavior to continue maximizing welfare (households) or profits (firms) under the new policy. Dynamic scoring is more accurate than static scoring when the econometric model correctly captures how households and firms will react to a policy change.

Dynamic scoring is difficult to apply in practice due to the complexity of modeling economic agents' behavior. Economists must infer from economic agents' current behavior how the agents would behave under the new policy. Difficulty increases as the proposed policy becomes increasingly unlike current policy. Likewise, the difficulty of dynamic scoring increases as the time horizon under consideration lengthens. This is due to any model's intrinsic inability to account for unforeseen external shocks in the future.

History

Dynamic scoring has recently been promoted by conservatives to argue that supply-side tax policy, for example the Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

 of 2001 and 2011 GOP Path to Prosperity proposal, return higher benefits in terms of GDP growth and revenue increases than are predicted from static scoring.

Criticism

Some liberal economists have argued that conservatives have oversold the conclusions of dynamic scoring, that current CBO
CBO
CBO is a three letter abbreviation which may mean:* CBO-FM, a CBC Radio One station in Ottawa, Ontario, Canada* Central Bank of Oman* Central Boycott Office, a specialized agency of the Arab League based in Damascus...

 practices already include some dynamic scoring elements and that to include more may lead to politicization of the department.

See also

  • Aggregate demand
    Aggregate demand
    In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...

  • Consumer theory
    Consumer theory
    Consumer choice is a theory of microeconomics that relates preferences for consumption goods and services to consumption expenditures and ultimately to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relations in...

  • IS/LM model
    IS/LM model
    The IS/LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market...

  • Profit maximization
    Profit maximization
    In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem...

  • Static scoring

External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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