Arthur Laffer Offers Economic Advice — Unironically

Arthur Laffer is best known for being completely discredited as an economist. Laffer was the guy who convinced a group of conservative activists (specifically Dick Cheney and Donald Rumsfeld) that cutting taxes, especially for the wealthy, would lead to wild economic growth and increased government revenues. To label this theory an abject failure would be an insult to abject failures.

Now Laffer is offering us all advice on how to run the economy. In the depths of Williamsburg there is a hipster enrolling in business school after realizing that irony has reached its apex.

Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.

One could say the same thing about Mitt Romney and other Republicans eager to repeat the growth stunting and debt expanding policy suggestions of Arthur Laffer.

It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

This chart is certainly tricky. It does not actually account for the “stimulus” as most people understand it. Most of us use the term “stimulus” to describe the boost in spending initiated by the Obama administration. However, this graph includes the spending part of the stimulus (in 2009) but cuts off before the stimulus could have any effect. Data from 2010 and 2011 is available, but would disrupt Laffer’s argument.

Arthur Laffer also shows us that no country in the OECD experienced growth from 2007 to 2009. Given that the recession was a global phenomenon actually undermines any attempt to make policy judgments based on the stimulus programs of every country. Simply put, if GDP was contracting regardless of government spending it does not prove that stimulus programs failed, but that a recession was going on.

Does the chart suggest that stimulus helped curb the recession? Yes, actually. While Laffer tries to compare the United States to economies like Estonia and Ireland. Looking at the only remotely comparable economies — Germany and the United Kingdom — we see that smaller government spending programs resulted in deeper recessions.

President Obama’s $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now.

Just a complete lie. It’s actually embarrassing that the Wall Street Journal would allow a writer to perpetuate something wholly disproven.

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn’t make much sense. In essence, it’s when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Laffer’s hyper-simplified description of stimulus is juvenile and misleading. Actually stimulus spending is usually deficit spending or tax cuts. Laffer is trying to subtly make his case for giving massive tax breaks to those with the most resources even though it has nothing to do with the question of stimulus.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

Certainly all spending carries with it a debit. But suggesting that the net income effect is always zero is ludicrous. In the world Laffer describes, wealth cannot be created. When businesses grow, they create wealth greater than their initial investment. That’s how profit works. Likewise, government spending is a cost with potential gains exceeding the cost.

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.

Most “stimulus” spending involves giving million-dollar corporations incentives to expand and building public infrastructure that private citizens would not build on their own. In fact it’s the opposite of paying people not to work. Laffer claims that government spending trades off with private investment. Yet he doesn’t even attempt to argue that massive private infrastructure dollars are just waiting in the wings.

But Arthur Laffer saves his best jab for the end:

Today, even stimulus spending advocates have their Ph.D. defenders.

Interestingly, the stimulus advocates have ALWAYS had their Ph.D. defenders. It’s actually Laffer and his supply-siders who recently appeared on the scene pushing a crack-pot theory that has yielded 30 years of failure. The idea that the supply-siders are the tried and true establishment is a tactic to undermine their ideological opponents, but the slightest examination of the field of economics renders this laughable.

2 comments for “Arthur Laffer Offers Economic Advice — Unironically

  1. John
    December 18, 2012 at 3:24 pm

    Its funny that you think Supply-Side economics was a failure cause the stats sure show different.

    In the 80’s Reagan created 16 million new jobs which is the 2nd highest amount of jobs a president has created. The average annual GDP rate of Reagan’s presidency was 3.4%. There was a bad recession during Reagan’s first 2 years in office unemployment was as high as 10.8% and 6 years later it was at 5.4% when Reagan left office. More people joined the labor force. Inflation rate was at 11.8% when Reagan took office and lowered to as low as 1.1%. Oil prices dropped over 50% per barrel. Median household income increased from $17,923 to $27,388. Poverty rate was as high as 15.2% during the recession and was 13% when Reagan left office. The stock market grew.

    In the 90’s Clinton created 23 million new jobs which is the most jobs a president has created. The average annual GDP rate of Clinton’s presidency was 3.9%. Unemployment dropped from 7.3% to 4%. Poverty decreased from 15% to 11.3%. Median household income increased from $30,167 to $41,415. Stock market grew tremendously. Yes Clinton was a Democrat but he was a moderate who had mainly conservative economic policies plus he had a Republican controlled congress for 6 years.

    In the 2000’s George W. Bush his first two years in office the economy was poor due to the dot com bust, 9/11 and the wars. There were 132,466,000 jobs in Jan. 01 when Bush took office. 2.64 million jobs were lost over the next two and a half years with total jobs dropping to129,820,00 by Aug. 03. Jobs then started to increase and 8.2 MILLION JOBS were created over the next 4.4 years with a total of 138,023,000 jobs in Jan. 08. Then due to the financial crisis 4.46 million jobs were lost over 2008 there were 133,561,000 jobs in Jan. 09 when Bush left office. So before the financial crisis Bush actually saw good growth in jobs, 8.2 million jobs created in 4.4 years which is excellent

    Bush and Republicans were not the main cause of the financial crisis as Democrats like to think. Both parties are at fault.

    So Reagan and Clinton the two biggest job creators did it under supply-side economics. And even George W. Bush after his first two years of a poor economy saw good job creation with 8.2 million jobs created in 4.4 years before the financial crisis. The stats prove you wrong!

    • December 18, 2012 at 4:11 pm

      Thanks for citing statistics. Over on another post I’m incredibly frustrated by someone unwilling to use any evidence and that makes the whole process so annoying.

      It comes down to what you want to call “supply side economics.” Does a drop in tax rates spur short-term economic growth? Sure. In much the same was a stimulus does. In fact, Keynesian economics would see a tax cut and stimulus spending as equally viable tools.

      But supply-siders go further and suggest that any tax increase hurts growth and any decrease will create sustainable growth. That’s not borne out. It also depresses government revenues…which Laffer said it wouldn’t.

      “In the 80′s Reagan created 16 million new jobs which is the 2nd highest amount of jobs a president has created.”

      But even Carter created 10 million in a single term. This is not so much to defend Carter as to place Reagan’s success in context — job growth was not markedly better than the average. This BLS graph shows a pretty steady increase over time unaffected by policy shifts. Supply side just didn’t move the needle on the long-term trend.

      “The average annual GDP rate of Reagan’s presidency was 3.4%. There was a bad recession during Reagan’s first 2 years in office unemployment was as high as 10.8% and 6 years later it was at 5.4% when Reagan left office.”

      Of note, this growth and the decline in unemployment did occur after Reagan caved and raised taxes. I’m not making a causality argument, but reiterating that supply-side policies don’t accurately predict the economy in small steps. Small decreases don’t boost growth and small increases don’t hurt growth.

      “Inflation rate was at 11.8% when Reagan took office and lowered to as low as 1.1%”

      I credit no one but Volcker with that because the Fed’s policies in the early 80s were amazing.

      “Oil prices dropped over 50% per barrel”

      This is a Reagan success but not a supply-side success. He brought OPEC to heel.

      “Median household income increased from $17,923 to $27,388”

      True, but adjusted for inflation, a median income of $17923 in January 1981 was worth $24445.84 in 1989 dollars. So median income growth was not as impressive as it looks in nominal dollars.

      I agree with your Clinton assessment (though I will note that median income grew more in real terms than under Reagan), and in a lot of ways that’s my point. Supply-side in the abstract isn’t “evil” as much as it just didn’t accomplish anything out of the ordinary. And supply-side as a particular political strategy is a failure because it tells us all how a 3% tax hike for wealthy Americans would be the end of the world, and that’s just not accurate as shown by the latter half of Reagan’s administration and the Clinton administration.

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