The Congressional Budget Office, the institution that furnishes cost-benefit analyses for federal legislation under consideration by Congress, has a really hard job. But some of the assumptions they rely on to predict economic consequences are just plain weird. Economist Mark Paul leads us through the strangest practices at the CBO, including their (untrue) claim that public investment is only half as productive as private investment and the complete lack of peer-reviewing of reports that can signal the death knell for a bill.

Mark Paul is an Economist at the New College of Florida and a Fellow at the Berggruen Institute.

Twitter: @MarkVinPaul

Further reading:

Nick Hanauer:

We have allowed ourselves to become prisoners of this nonsense.

Mark Paul:

Groups like CBO and Penn Wharton simply assume that public spending is bad. As a result, whenever a member of Congress proposes public spending, they show that it’s bad for the economy. Well, if you simply assume it’s bad is no wonder that the results show it’s bad

Nick Hanauer:

To persuade Americans that investing in themselves is bad for the economy and the rest of it, it is just a frickin’ outrage.

Speaker 3:

From the home offices of Civic Ventures in downtown Seattle, this is Pitchfork economics with Nick Hanauer. The best place to get the truth about who gets what and why.

Nick Hanauer:

I’m Nick Hanauer, founder of Civic Ventures.

David Goldstein:

I’m David Goldstein, senior fellow at Civic Ventures.

So Nick, we’re recording this podcast the morning after President Biden’s first State of the Union Speech. I don’t know if you got a chance to listen to it, but there was a lot of stuff in there. It was a very Pitchfork Economics kind of speech.

Nick Hanauer:

It was.

David Goldstein:

A very specific venture speech. He mentioned building the economy from the bottom up and the middle out twice.

Nick Hanauer:

I know, I know.

David Goldstein:

Twice he called for a $15 minimum wage. It was a very good night for us and the work you and the rest of us have done over the years. One of the things that struck out from me is that the President started taking a lot of the programs that were in his Build Back Better and pulling them out separately, things like daycare and universal preschool. Of course, one of the reasons why he’s doing this is we haven’t been able to pass Build Back Better because senators like Manchin and Sinema say they’re way too expensive. It’s like $3 trillion over 10 years. Where did they get that number?

Nick Hanauer:

From the CBO.

David Goldstein:

That’s right, the Congressional Budget Office.

Nick Hanauer:

And today we get to interview an economist named Mark Paul, who’s sort of an expert in the structure of the models the CBO uses to score things like daycare, investments in roads and bridges, and all the rest what’s in Build Back Better. It’s going to be a fascinating conversation, but I think the headline is that these models that the CBO uses are built on assumptions that lead to certain kinds of answers. If the assumptions are wrong, then the answers are going to be wrong, and those assumptions were created by people who frankly don’t want to see investment in roads and bridges, don’t want to see investment in human capacity, who want to keep tax rates on corporations low, and the rest of it. It’s basically a neoliberal construct designed by and for neoliberals to make the rich richer and everybody else poor. It’ll be really interesting to hear his analysis of the CBO and why those models never successfully predict what actually happens.

Mark Paul:

My name is Mark Paul. I’m an economist at the New College of Florida and a fellow at the Berggruen Institute at the University of Southern California. I also have a forthcoming book with the University of Chicago Press entitled, “Freedom Is Not Enough: Economic Rights In an Unequal World.” It will be out next summer.

Nick Hanauer:

So today we’re really excited to talk to you about economic models and the assumptions that those models are based on. What would be helpful, I think, to our listeners is for you to talk about what economic models are and how assumptions connect to those models.

Mark Paul:

Economic models are essentially an abstraction from reality that tries to help us understand what the effect of a change in the economy would actually mean for economic outcomes. In other words, if President Biden wants to pass his Build Back Better agenda, what does that actually mean for the economy? In fact, Congress actually has an official scorekeeper whose job is to estimate this for Congress. It’s called the Congressional Budget Office, and they have a whole host of different economic models that they run to estimate the economic and budgetary impacts of proposed legislation. I like to call them the scorekeepers; they’re really the referees here. They run these economic models that I think are the most important policy models out there. 

Yet, to tell you the truth, almost nobody understands that. Instead what we see is outlets like the New York Times and Wall Street Journal running headlines that present the results. Let’s say as an example, “Build Back Better Might Add To the Deficit.” They’ll run that headline, but nobody really gets the assumptions behind them. But as we all know, the devil’s really in the details, and I’m excited for this conversation because we’re going to be able to dig into some of those details. When you do, you really start to question how valid these models are. Are they actually telling us something helpful? 

There’s a famed British statistician who I always go back to, George Box. He famously quipped, “All models are wrong, but some are helpful.” I’d go so far as to say that the current models used by groups like the Congressional Budget Office, as well as private entities that also act as scorekeepers in the press like the Penn Wharton Budget Model, are not only wrong, but they’re not helpful, and they’re downright misleading to the public. 

What policy makers and the public really want to know is, “Is this legislation going to improve our lives?” We know the economy’s broken, but it’s really confusing when we have these models out there saying that reasonable plans, things like increasing minimum wage are actually bad for the economy. It leaves us scratching our head and saying, “Well, what’s up and what’s down?” To understand that we have to dig into those details.

David Goldstein:

There’s two separate issues here. One is when we’re doing a cost-benefit analysis our definition of “benefit” is really narrow. It’s “What does it do to GDP? What does it do to revenue?” as opposed to, “Does it increase wellbeing?” The other is, which you have pointed out, that when it comes actually to just looking at this narrow idea of its impact on the budget, these models are, for lack of a better term, I guess the numbers are pulled out of their ass. You pointed this out in terms of public investment versus private investment. Explain how the CBO comes up with its numbers there.

Mark Paul:

Yeah. This is truly a shame. What we see is that groups like CBO and Wharton simply assume that public spending is bad. As a result whenever a member of Congress proposes public spending, they show that it’s bad for the economy. Well, if you simply assume it’s bad, it’s no wonder that the results show it’s bad. Let me give you an example, right? So, public investment is one of the craziest examples you can find here. 

In the economics literature what we find is that on average public investment is at least as productive as private investment, and often more so. In fact, there’s this really well known review that shows that public investment is 50% more productive on average than private investment. So, what does the CBO actually assume? Do they take this literature into account? Well, no. But, don’t take my word for it. Take theirs. The CBO says, and I quote, “CBO further estimates that productive federal investment has an average annual rate of return of about 5%, or half of the agency’s estimate of the average rate of return on private investment,” end quote. In other words, they simply say that government is just terrible at their job and any public investments are largely wasteful. When you have a senator say, “Hey, let’s invest in America’s schools. Let’s invest in our crumbling infrastructure.” It’s no wonder that the economic impact that these are negligible, if not simply negative. 

We see this both with Democratic and Republican initiatives. As an example, the Trump White House came after CBO when their infrastructure spending got fairly bad scores. The same thing happened with President Biden’s bipartisan infrastructure bill. There again, the CBO said, “You know, this is not going to have any positive effect on the economy,” despite the fact that our crumbling infrastructure today cost the average American household $3,300 a year in extra cost from sitting in traffic, to potholes that damage their cars, to a lack of ability to take public transit almost anywhere in the nation. It’s amazing how far behind we are. The crux of it is if you assume public spending is bad, your numbers are going to say public spending is bad. The truth is in the pudding here.

Nick Hanauer:

I just want to make a clarifying comment for our listeners. When you say economic literature review, you mean actual, empirical evidence.

Mark Paul:

I mean empirical evidence that has been peer-reviewed. This is an interesting thing. Neither the Congressional Budget Office, nor Penn Wharton, neither of their models have ever been peer-reviewed. In effect, these groups operate as black boxes where they really hide the details from the public rather than function as educators. They should be out there telling policy makers, “Hey, these are the limitations of our assumptions. This is really all the details that are going into our analysis.” so that we can actually understand what’s happening and make an educated decision for ourselves. Instead, we’re simply left to, in the words of Chuck Grassley the Republican Senator from Iowa, to assume that, quote, “CBO is God.” He even went so far as to say, quote, “Policy lives and dies by the CBOs word.”

This is really interesting, right? CBO is supposed to be this nonpartisan group that is the scorekeeper around here. They don’t make policy recommendations. However, if they tell us that something is bad for the economy, that legislation is dead on arrival. Minimum wage, dead on arrival. President Biden’s Build Back Better agenda? Dead on arrival. We even have members of both parties pointing to CBO scores and saying these investments in America are going to leave the economy worse off despite all the evidence is pointing to the contrary.

Nick Hanauer:

Right. It’s just maddening that you could conclude… As Goldy pointed out in a conversation we were having earlier, how magical these round numbers are.

Mark Paul:

Yeah.

Nick Hanauer:

It’s just 50% less good, right? It’s just clearly a number pulled out of somebody’s ass. It is so stunningly biased against what is both true and just plausible. Whenever people bring up government waste I love to raise the anecdote of Microsoft buying my company, aQuantive, for $6.5 billion some years ago. aQuantive was a super fast growing, super profitable company operating in an incredibly rich and fast-growing industry. Within a few years they had destroyed every ounce of value we had created over 10 years and wrote off the whole thing.

David Goldstein:

Wait. Wait. Nick, you’re telling me that Microsoft didn’t get that 10% return that the CBO-

Nick Hanauer:

No.

David Goldstein:

… assumes?

Nick Hanauer:

It’s just ridiculous to believe that private companies, who spent just extravagantly on the craziest things often, are more effective deployers of capital than building roads or infrastructure, or investing in R and D in the way that the federal government does.

Mark Paul:

That’s exactly right. But, this is the crazy thing about it is that they assume this hard trade-off exists. In other words, if we spend money to invest in the public to improve people’s lives they assume that takes money away from private companies. 

Nick Hanauer:

Yeah. 

Mark Paul:

But we know that’s exactly not how the economy works. 

Nick Hanauer:

Right. 

Mark Paul:

So here again, we have this… yet another fallacious assumption built in that just artificially creates these hard trade-offs that just [crosstalk 00:12:48]

Nick Hanauer:

You cannot do both cannot do both. 

Mark Paul:

Exactly.

Nick Hanauer:

That you cannot do both. It’s nuts. Another crazy assumption baked into all of this is the time scale, isn’t it?

David Goldstein:

A 10 year window where all of the costs are accounted for over those 10 years and, depending on the investment, very few of the benefits.

Mark Paul:

Well, see, this is an interesting thing. Here I do want to give CBO a little slack. CBO is created by Congress. Congress largely writes the rules that CBO has to operate through. Congress essentially demands a 10 year estimate. Truth be told, that’s very hard, right? The economy’s large. The economy’s complex. And yet, Congress is sitting there asking CBO to provide them with a firm budget estimate. I really wish that both CBO and Penn Wharton would do a better job providing a range of estimates rather than a single number, given how much economic uncertainty there is. But, that’s not what we have. 

The second thing that I think we should focus in on here… You all brought up costs and benefits earlier. Well in general, these models only focus on the cost and really leave the benefits completely to the side. Thinking about of change, I think, is perhaps a case in point. Again, going back to President Biden’s Build Back Better, just because has been dominating the news cycles recently, when they score this legislation, they assume two things. 

First, they assume that business as usual can continue. We know that given where we are with the climate crisis business as usual is simply not an option. It’s going to lead to three, four degrees of warming that will absolutely obliterate the economy. A stable climate underpins our livelihoods and underpins the entire economy. Yet they just assume that away for a second. Second, they assume away any of the actual benefits from reducing carbon emissions. Right now a quarter of a million Americans die every year from the air pollution associated with burning fossil fuels. But again, all those benefits are just assumed away. 

There’s no wonder we see these scores showing that public investment is a bad idea if all you do is tally up the cost and forget about that other side of the equation, the benefit side. Here, too, we just see time and time again that the cards are just stacked in the wrong direction. They’re not actually providing us with truthful information so that we can make good decisions on how to improve economic opportunity and outcomes here in America.

David Goldstein:

On those health outcomes, actually, I know CBO actually goes even further. They estimate that early deaths reduce budgetary expenses. It reduces expenses on Medicare and Social Security. So, that’s a net positive for the budget.

Mark Paul:

That that’s exactly right.

David Goldstein:

If climate change kills people, it reduces costs.

Mark Paul:

Yeah. This leads us to a question of, “What do we do? Can we improve these models or do we burn it down?” The US is a total outlier. No other agency in any other country has nearly the type of power that the CBO has. Here’s the thing, CBO actually statutorily has no decision making power, but the amount of sway they hold on the Hill is really unparalleled. They are the high priests on the Hill, so to say.

Nick Hanauer:

So what do you think… I mean, you didn’t answer your own question, which is, “Should we improve them, or should we burn it all down?”

Mark Paul:

Yeah. It’s a hard one. For me, I don’t think it’s an either-or. I think first of all we need to dethrone these models and put them in their place.

Nick Hanauer:

Yeah. 

Mark Paul:

These should not rule our decision-making process when it comes to legislation. We need to really make them secondary to the democratic process. There’s no reason that a completely wonky, wrong economic model that nobody understands should hold our democracy hostage. That’s the first thing. But then the second thing is there’s no question we can improve these models. They really just ignore the past 20 years of economic research. Minimum wage is a great example. Fantastic work by the economist Arin Dube and others has shown increasing the minimum wage doesn’t lead to job loss, yet they simply assume it does. If we change the assumptions, we get different outcomes. We should be working on changing the assumptions to be in line with what we know about the economy in the 21st century. These models are just based on trickle down economics, which has been thoroughly debunked at this point. 

Now, the same thing goes for taxation. These models assume any form of progressive taxation is terrible for the economy, the worst offenders being things like taxes on the extremely wealthy, because those are supposedly the only job creators in society, and taxes on corporations which are the most effective institutions at spending capital. Which of course, as you just told us, that’s just absolute nonsense. 

Nick Hanauer:

Yeah. 

Mark Paul:

To give you one example of how crazy these models are, these models have one representative person in the entire model. Not only are they just completely out of line with reality, but they can’t tell us anything about some of the things we care most deeply about like inequality, because inequality just doesn’t exist in a model. We assume it away.

Nick Hanauer:

Yeah. Just to underscore that point these models have one perfectly rational, perfectly selfish representative agent that the whole thing is based on, which is just completely nuts.

Mark Paul:

I’ve got a PhD in economics. I’ve thought a lot of about rational individuals. I can say, for better or worse, I am not a rational individual, nor as anybody I know in the economic sense, right? This is just not how the real world operates. We need to change these models, and we need to update them. 

Market power is a great example. We know companies like Amazon hold tremendous power over workers. They can pay them poverty wages, same thing with companies like Walmart. But again, these are all assumed away in the model. Climate change, assumed away in the model. Inequality, assumed away in the model. If we actually bring some of these key features of the modern economy into these models, I think we can improve them. I think we can make them useful. But I also think, as I said earlier, that we need to really dethrone them. There’s no reason that they should put place golden handcuffs on policymakers the way they do today.

David Goldstein:

What’s fascinating is I understand in some cases these are guesstimates. These are difficult numbers to come up with, difficult things to model. They don’t have the data. In other cases, my God, there’s decades of empirical evidence telling them that they’re wrong and they still don’t modify their models. One of the classic ones is that the CBO assumes that deficit financed federal investment automatically raises interest rates and crowds out private investment even though there’s no evidence of that over the past 30 years.

Mark Paul:

Yeah. That’s exactly right. That’s a huge example here. What we see in reality is that public spending doesn’t crowd out private investment. Public spending crowds in private investment, right?

Nick Hanauer:

A hundred percent.

Mark Paul:

Public spending puts money into workers’ hands. What do workers do? They go out and spend that money. What do businesses do in response? They hire more workers and actually invest. So, CBO just has the relationship totally backwards here, and it’s deeply unfortunate that the Citadel of CBO and Penn Wharton seem so determined to stay in 1960s University of Chicago world of economics. 

And I will say, Penn Wharton is a substantially worse offender here than CBO is. Whenever they assume various values in the model, what we call parameter values, Penn Wharton always goes as far right as you can. Whereas CBO definitely is on the wrong side of the majority of these assumptions we’re talking about, but they’re not as radically out of right field as Penn Wharton. 

But, we see people like the current director of the Congressional Budget Office, Philip Swagel, he came from the American Enterprise Institute, one of the most deeply conservative and really radical institutions out there. Yet even Democrats don’t seem interested in replacing him. Nancy Pelosi has the power to change him. He’s a Trump appointee. He has a tremendous amount of control over what CBO does with these models and how they construct them, yet for some reason we see bipartisan buy-in here to continue the CBO’s business as usual, which essentially dictates continued emphasis on deficit reduction, wellbeing of Americans be damned.

Nick Hanauer:

Yeah. Interesting. I don’t mean to put you on spot, but if you had to list the five most egregiously wrong… or four, whatever, egregiously wrong assumptions baked into the CBO model, what do you think those are? Is that a fair question?

Mark Paul:

That’s a great question, and a hard one to answer. It depends on what we’re evaluating, right? 

Nick Hanauer:

Yeah. 

Mark Paul:

On some types of legislation, various assumptions are more important and it changes depending on the legislation we’re looking at. But in general, first of all, I think the most egregious thing that they do is just a complete and utter lack of transparency. To go out there and say, “This is what’s going to happen to the economy,” with such certainty and without really informing the users of this model, which are folks like you and I, but also policy makers with major decision-making power, as well as the economic press… I think that’s just a complete travesty. 

In terms of the actual assumptions, some of these we already hit on, but it’s things like the really minuscule positive effect of public investment. In Penn Wharton they go so far as to say that public investment is akin to throwing money into the ocean. This is just absolutely outrageous and really hamstrings legislatures from ever building the 21st century economy that we direly need.

I think the second one is thinking about taxes on corporations and high income individuals. They just say that these are implausibly contractionary. Any taxes on corporations is bad, where in fact, we know, especially given the prevalence of market power, that taxes on corporations can actually improve economic outcomes because taxes on profits are not the same as taxes on investments. In other words, increasing corporate taxes is simply going to help have a more level playing field for corporate America.

Nick Hanauer:

Yeah. In fact, I would add high corporate tax rates are one of the biggest incentives corporations have to make investments because those investments effectively hide profits.

Mark Paul:

Exactly, exactly. And that’s why we’re [crosstalk 00:23:34]

Nick Hanauer:

When corporate taxes were very high investments were very high, because that’s how you shielded your profits from tax. As soon as tax rates on corporations dropped corporations stopped making investments because it became easier and easier to just take the money out of the company and pad the pockets of either shareholders or executives.

Mark Paul:

Exactly. We don’t have an economy that prioritizes or rewards companies creating jobs and investing in America. We have an economy that rewards payouts to shareholders and CEOs. We can change the rules of the game, but the problem is these models tell us the current rules are the best world we can possibly hope for. But, just look around in San Francisco right now. I can tell you walking around downtown San Francisco, this is not a world that I would ever choose to build or live in. 

One of the other ones, and this really gets to me, is they essentially assume that transfers to low income people reduce labor supply and economic activity. That’s bunch of econ jargon. Let me explain what that means. In Biden’s Build Back Better agenda, for example, they wanted to invest in low income housing. These models assume that if you invest in low income housing and make it cheaper for low income people simply to afford a place to live, which we know that almost half of the Americans can’t afford their homes today, they’re going to work less. How can you assume something like that if you’ve ever talked to an average person?

Nick Hanauer:

Right.

Mark Paul:

If you’re homeless, you’re not productive. If you’re worried about paying the rent every month and losing sleep over it, as so many Americans are, you’re not going to be able to work at your top game. Housing insecurity is just a fundamental human need, but here are these models telling us if we provide people with housing security they’re going to work less. I mean, come on.

David Goldstein:

Whereas we assume that if you pay rich people more, they work more. That’s why we don’t want to raise their taxes.

Nick Hanauer:

Yes, exactly.

David Goldstein:

They’ll just stop working. If we tax Nick too much, he’ll just stop working.

Nick Hanauer:

Yeah. It is fascinating. One of my favorite things about trickle down economics is how rich people need positive incentives and poor people need negative incentives.

Mark Paul:

Oh yeah. It’s so egregious in these models. Here’s another crazy thing. They assume that people’s wages are equal to how productive they are, and that’s why taxes on the rich are so bad for the economy in their world. If you tax the rich, you’re taxing the most productive people in society. But, that’s simply not the case. 

Nick Hanauer:

Yeah.

Mark Paul:

Groups like Penn Wharton go a step further, and I would say are downright racist in their assumptions. They assume by definition that immigrant workers are less productive than domestic American workers. I mean, talk about racism baked into an economic model. It’s really, really just egregious stuff out there. 

Nick Hanauer:

Fascinating. [crosstalk 00:26:28]

David Goldstein:

If anything, we know it’s the opposite. Immigrants are a greater source of innovation. They file more patents. They start more companies, they and their children. There’s a lot of evidence that shows that.

Nick Hanauer:

Yeah. So Mark, if you were in charge, this is the benevolent dictator question we always ask, what would you do?

Mark Paul:

Well, I’d start off by replacing the head of the CBO tomorrow. There’s just no reason why we should have somebody like Phillip Swagel in this type of position with the power he has. Then, I’d work to bring in some of our leading economists in this space. People like Arin Dube, people like the Nobel prize winner Joe Stiglitz, and others to help us rethink how we structure these models and to work on reforming them to better encapsulate the 21st century economy. And, to help us build a model that actually tells us something meaningful about how to create a healthier and more inclusive… Then, I’d work with Congress to make all of this far, far more transparent and also to put right in the mission of the CBO to actually educate policymakers and journalists about the model’s limitations and about what the model is actually doing here.

The other thing I would do is pass a number of bills that have actually already been introduced by Congress to adjust what the CBO does. As one example, Representative Barbara Lee called for the CBO to start scoring the impact of the government’s legislative action on poverty reduction. Right now groups like the CBO and Penn Wharton just tell us nothing about what legislation means for people across income distribution. 

Nick Hanauer:

Right. 

Mark Paul:

Some legislation’s going to benefit the bottom 90% of Americans, but maybe it’ll make the top 10% worse off, and in turn they assume that this is a bad idea. Well, I think that’s just absolute bananas.

Nick Hanauer:

Right. 

Mark Paul:

We need to throw out simple emphasis on just GDP and instead really emphasize on the distributional implications, especially for the bottom half of Americans.

David Goldstein:

Mark, do we need a cultural change, too? Even good models are just models. We need Congress and the press to stop treating it like it’s God regardless how good its models are.

Mark Paul:

Yeah, and unfortunately there’s bipartisan buy-in to the continuation of status quo right now. We see both Nancy Pelosi continuing to embrace PAYGO in Congress. This is hugely detrimental if we ever actually want to engage in passing meaningful progressive legislation that actually provides employment, provides more unionized jobs, and provides basic things like pre-K. It’s just crazy how little investment we have in our education system today. We do need to change how people think about and use these models. That really means dethroning them. There’s just no reason they should have the power that they have today.

Nick Hanauer:

That’s great.

Mark Paul:

But keep in mind, Congress gives them that power, and Congress can take that away.

Nick Hanauer:

Right. So one final question. Why do you do this work?

Mark Paul:

I went to culinary school out of high school. I love cooking. I worked for years on the line at restaurants seeing immigrants busting their ass every day, and despite showing up to work every day they were still making $9 an hour. None of us could actually afford to eat the food we cooked. That just never sat right with me. So, I started studying economics and thinking about, “How can we rewrite the rules of this game we call the economy so that people can just earn a decent living, can get the education they want, can have a comfortable home to go to at the end of the day?” That’s really what motivated me, just this deep desire for a more just, equitable, and simply fair economy. 

Most of us want the same things. We want to send our kids to good schools. We want to come home to a comfortable house. We want to avert the climate crisis. But unfortunately, economics just keeps getting in our way so I’m here dedicating my life’s work to reform how we do economics and hopefully work towards a better society that we desperately need.

Nick Hanauer:

That’s a fantastic answer. Thank you very much for being with us. This is a terrific interview and really super, super informative.

Mark Paul:

Thanks so much for having me. It’s been a lot of fun.

Nick Hanauer:

So Goldy, that was a fascinating conversation. I just have to admit that my blood pressure went up throughout the conversation because it just makes me so mad. It just makes me so mad that we have allowed ourselves to become prisoners of this nonsense, that we have allowed these bullshit assumptions to guide our policy making process, to influence the narratives that the media creates, to persuade Americans that investing in themselves is bad for the economy, and the rest of it. It is just a fricking outrage.

David Goldstein:

And, we’ve been here before, Nick, because we went through this a couple years ago when CBO scored a minimum wage hike and said it would cost a minimum of 500,000 jobs, cost 1.5 million jobs, when in fact all of the empirical evidence there over the past 25, 30 years tells you that that’s just not true. It never happens. 

Nick Hanauer:

Yeah. 

David Goldstein:

And yet, that’s what their models say so we can’t…

Nick Hanauer:

That’s right.

David Goldstein:

We can’t do a $15 minimum wage because that’s a job killer. When you actually get into… when you look at all the ways the CBO operates in these estimates, the fact that it bizarrely assumes that public investment produces half the returns of private investment, the fact that it assumes that federal investments crowd out private investments, and that deficit financing always raises interest rates when there’s all the empirical evidence showing that’s not true, that it assumes that raising taxes on corporations and rich people like you reduces private investment, reduces employment, reduces tax revenues, when in fact [crosstalk 00:33:03]

Nick Hanauer:

It’s all so crazy.

David Goldstein:

… there are decades of research showing absolutely no correlation between top marginal tax rates, individual or corporate, and any of these economic indicators. In fact, if there’s any correlation, it’s the opposite. That when taxes are higher the economy grows faster and productivity grows faster. This is the one that actually still gets me the most, the fact that they use a 10 year window. I understand that’s because Congress says, “Use a 10 year window,” but they use a 10 year window in which all of the costs of the investment are accounted for, yet because we’re investing in people and in infrastructure that lasts for a lifetime, almost none of the benefits.

Nick Hanauer:

Yeah. 

David Goldstein:

There’s a great example… I was looking up the… I can’t remember… was it the Roosevelt Institute or the Center for Equitable Growth? They were talking about universal preschool. Last night in the state of the union address, President Biden advocated for universal preschool for all three and four year olds. In the Build Back Better Plan CBO estimated a 10 year cost of $200 billion for that. That’s the outlay. By the 10th year they’re only getting back 68 cents on the dollar. All of those returns, by the way, are from opening up preschools and hiring teachers. That’s where they see you’ll get some economic growth from that. 

What it doesn’t account for is the benefits to the children; that every study shows that high quality preschool increases the child’s productivity. You’ve got lower rates of dropouts, lower rates of teen pregnancy, higher home ownership, higher car ownership, lower levels of debt, higher incomes over the course of these children’s lives. This doesn’t just pay off 20, 30, 40 years into the future, but throughout the entire lifetime of the children that go through these programs.

If you actually estimate, even just to the budget, it starts to pay off in 15 years. In the 15th year you actually see lower costs than the money you put in. By the 15th year it’s costing you less. By year 35, just in the budget, it’s like $1.50 back for every dollar you put in. But, when you look at the total societal benefits, it’s like 10 times that. 

Nick Hanauer:

Yeah. 

David Goldstein:

But the CBO can never account for that because they’re only looking at what it costs over the first 10 years, and you never look at the payoff from investments.

Nick Hanauer:

Yeah. The whole thing is ridiculous. It’s so frustrating. It’s such an extraordinary self-own, you know? 

David Goldstein:

Right. 

Nick Hanauer:

I just don’t know how as a country we have allowed this to happen. Of course as always, all of the nonsense at the end of the day is a protection racket for the rich. 

David Goldstein:

Right. 

Nick Hanauer:

But, it is maddening. Maddening.

David Goldstein:

And it’s frustrating, Nick, that Democrats, when they’re in control of Congress, don’t fix this. 

Nick Hanauer:

Yeah.

David Goldstein:

But, I’ve got somebody else to criticize here, and that is my former colleagues in the media. I’m a paid propagandist now, not a journalist, but my fellow former… the journalists who are still out there, I just want to say to you, “Stop being rolled.”

Nick Hanauer:

Yeah. 

David Goldstein:

Just stop it already. 

Nick Hanauer:

Yeah. 

David Goldstein:

When the CBO comes out with this and Manchin says, “Oh, $3 trillion!” and you repeat that as if it’s true, when has the CBO ever been right? 

Nick Hanauer:

Yeah. 

David Goldstein:

Go back and look at their estimates.

Nick Hanauer:

Never!

David Goldstein:

Their estimates of future interest rates from government spending always, always, always overestimated. It never comes true. 

Nick Hanauer:

Yeah.

David Goldstein:

These are models. You know what you should do? You should go back and watch Monty Python and the Holy Grail and that little clip, “Camelot, Camelot, Camelot!” “It’s only a model.” That’s what it is. It’s only a model. It’s not reality.

Nick Hanauer:

That’s so true.

David Goldstein:

It’s not reality. It’s a little toy castle on a hill.

Nick Hanauer:

That’s right. You know what they say, Goldy, being an economist means never having to say you’re sorry. Anyway. Well, more to come on that. I think it’s a really important issue. And, thanks to Mark. Great work.

David Goldstein:

On a related theme, on the next episode of Pitchfork Economics we’ll be talking with journalist Tom Bergen about how economics ruins the economy.

Speaker 3:

Pitchfork Economics is produced by Civic Ventures. If you like the show make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook @CivicAction and @NickHanauer. Follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram @pitchforkeconomics. As always from our team at Civic Ventures, thanks for listening. See you next week.