Congress Needs CBO to Crunch the Numbers on Dodd-Frank Repeal

COMMENTARY Budget and Spending

Congress Needs CBO to Crunch the Numbers on Dodd-Frank Repeal

Jun 16th, 2017 2 min read

Commentary By

Salim Furth, Ph.D. @salimfurth

Research Fellow, Macroeconomics

Norbert J. Michel, Ph.D. @norbertjmichel

Director, Center for Data Analysis

Congressional Budget Office Director Keith Hall and CBO Deputy Director Mark Hadley hold a media briefing on the annual Budget and Economic Outlook report on January 24, 2017. MICHAEL REYNOLDS/EPA/Newscom

When lawmakers passed the Dodd-Frank Act in 2010, they didn’t bother to sweat the details. They left it up to the executive branch to fill in all the regulatory blanks. As a result, there was no way the Congressional Budget Office (CBO) could have accurately estimated the likely macroeconomic effects of the Dodd-Frank Act while the bill was under discussion.

Four hundred rule-makings and seven years later, analysts have both law and real-world results to work with. If the repeal of Dodd-Frank comes before Congress, CBO is capable of making a reasonable estimate of the likely budgetary effect of repeal.

To prove this concept, we pulled an open-source macroeconomic model off the shelf and plugged in one of the major estimated effects of the Dodd-Frank Act: an increase in the cost of investment. Then we removed the excess cost, and compared the outcomes. Our results were published Thursday in a Heritage Foundation issue brief.

In the “repeal” scenario, the economy leveled up by 1 percent, with higher investment leading to wage growth.

Higher wages and investment incomes, in turn, yielded an extra $340 billion in federal revenues over the first 10 years (following CBO reporting conventions), and $817 billion over the first 20. As a result of the higher revenues and growth, the federal debt ratio was almost a percentage point lower by the end of 2026.

From a budget perspective, these are not revolutionary changes. But they approach the threshold (0.25 percent of GDP in a year) that now triggers a dynamic score from CBO. What is noteworthy is that the budget impact is so large, despite the bill having a negligible impact on the budget on a static basis.

Our modeling effort took into account just one of the distortions caused by Dodd-Frank. There is good reason to believe the law may also increase the frequency and severity of recessions and may diminish innovation in the financial sector and elsewhere.

A more complex set of models than the one we used would be necessary to incorporate the other costs and benefits of repealing Dodd-Frank. That’s where CBO comes in. With a large team of economists and a suite of micro- and macro-economic models, Congress’ in-house analysts are as equipped as anyone to answer major questions in macroeconomic policy.

“Dynamic scoring”, as macroeconomic analysis is called on Capitol Hill, can help policymakers learn far more about a proposal’s consequences other than just how it will affect the federal budget. Members of Congress should be eager to know how repeal of Dodd-Frank would affect wages, unemployment, investment returns, and the odds of future financial crises. In a wide-reaching regulatory field, the direct economic effects may be much more important to voters than the indirect budgetary effects.

Some will object — reasonably, we hasten to add — that one cannot accurately measure the economic impact of repealing a law as opaque and multifaceted as Dodd-Frank. If that is the case, how could congressmen have voted for the bill in good faith back in 2010, before its rules were written? At the time, analysts had almost nothing to work with, and members could not have known the effects. The majority nonetheless bought the pig in the poke.

CBO now has empirical evidence and a body of law to analyze. When Congress takes up the task of restoring the financial liberties lost to the Dodd-Frank Act, CBO should cooperate with both budget committees to score the repeal, taking into account the major macroeconomic effects that any repeal effort is sure to have.

This piece originally appeared in The Hill on 4/13/17