Forbes (and Data): Art Laffer is wrong... consistantly.

Great Moments In Punditry: Art Laffer Edition
Economist Arthur Laffer has had a long, distinguished career. Unfortunately one of the things that has distinguished it is that he has often been extremely wrong.

That’s why, in a new feature for this blog, I have Revoked Art Laffer’s Pundit License. ™

This means that everyone who reads this blog will understand that Laffer has been quite wrong about many things, and continues to appear on TV as if he had been right. Well, something has happened Mr. Laffer: you were caught being wrong. Now it’s time to ‘fess up if you want your Pundit License reinstated. Until it is reinstated you are strongly advised to not make grand, sweeping proclamations about the economy, or America’s political scene. The credibility you save might just be your own.

I will periodically revive this feature whenever I see pundits being completely wrong in public over long, extended periods of time, and suffering few if any repercussions.

Laffer is best known for his eponymously-named Laffer Curve, and made the case that lowering income taxes for the wealthy will generally create more revenue. This helped gain him entry into the Reagan White House, where he helped shape the idea known as “trickle-down economics.” The takeaway is that as you lower taxes on the wealthy they reinvest their cash back into the economy in infinite ways, enriching everyone. In this light the idea is that lower income taxes for the highest earner actually lead to more tax revenue for the federal government, in the end.

I do not want to revoke Laffer’s Pundit License because of this theory. Instead I will let the past decade of stagnant economic growth coupled with low income taxes, low capital gains taxes, and low estate taxes make the case for me.

Okay, maybe I do want to take on the Laffer Curve. But, better yet, I will let Bruce Bartlett do it for me. Bartlett was, like Laffer, one of the early proponents of trickle-down economics, and has a long history of service to the Republican party. He was senior policy analyst in the Reagan White House, and deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration. So, you could say Bartlett has Republican street cred.

He also has regular cred, because he’s done his research, and has come to the heretical conclusion, based on facts, that lower income taxes do not pay for themselves. Not now, and not during Reagan’s time. In fact, Bartlett notes, tax revenues dropped quite noticeably during Reagan’s time in office, and what increase revenues did see only came because Reagan actually rose taxes 11 times, not because he cut them.

“The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s (tax cut) policies,” Bartlett blogged.

In addition, Bartlett noted, the Congressional Budget Office recently concluded that the tax cuts of the George W. Bush era reduced federal revenues $2.8 trillion between 2002 and 2011.

Brian S. Wesbury, a noted economist and Forbes columnist, also debunks the idea that higher tax rates automatically spell recession and revenue collapse. In fact, during the Clinton administration the exact opposite happened, he wrote: “Real GDP grew 3.7% at an annual rate in the second half of 1993 and then 4.2% for the full year of 1994. No recession.”

In response Laffer said: “The Laffer Curve is a pedagogic device showing abstractly the relationship between tax rates and tax revenues. It doesn’t predict either higher or lower revenues from a tax cut. What I have argued is that tax rate cuts on the highest income earners have generally led to higher revenues and that tax rate cuts on middle income and lower income earners have generally lost revenues. Across-the-board tax cuts could go either way. With Kennedy, I do think the tax cuts raised revenues, and with ‘W’ tax cuts lowered revenues.”

Now let’s move onto Dr. Laffer’s more recent ideas and pronunciations, both predating and post-dating the economic collapse. I do this not for my own gratification, but because Laffer was not only wrong, but clearly wrong.

Perhaps the most damming evidence against Laffer comes to us courtesy of CNBC. Laffer was put into a televised debate with the investor Peter Schiff on August 28, 2006, not long before the housing bubble started to implode, and our economy went into its near-death spiral. This was a crucial time in our recent economic history. And if you had gone whole hog with what Laffer said you, well, you wouldn’t have been laffing all the way to bank, that’s for sure.

Here are some of the key moments of this debate:

00:45 seconds in: Schiff predicts that a recession is coming and it will be “pretty bad … and will last not just for quarter but for years.” Why? “The basic problem with the U.S. economy is that we have too much consumption and borrowing and not enough production and savings.” Then the American consumer will stop consuming, and save more, “especially when he sees his home equity evaporate.” Ding! The debate’s already over, only no one told Laffer.

01:39: Laffer responds: “No, I don’t believe any of it.” He makes the point that savings are down, but “wealth” has risen dramatically. Then he adds this sentence, which should be inscribed on his tombstone: “The United States economy has never been in better shape.” He concludes Schiff is totally wrong, and he, Laffer, just doesn’t “know where he is getting his stuff.”

2:15: Schiff counters “wealth” hasn’t increased, only the paper value of stocks and real estate. He adds that when the stock market bursts all that wealth will evaporate, leaving only debt. Bingo.

2:23: Laffer says he will be Schiff a penny that he’s wrong. Schiff counters that he’ll bet more than a penny. I wish the U.S. had bet Laffer, oh, $1 trillion.

Laffer says one condition of the bet is that Schiff signs a letter to Laffer when he is proven wrong, admitting his error. Has Laffer written such instead? If so, I must have missed it.

3:05: Anchor Michelle Cabrusa-Carrera notes a huge portion of the economy is related to construction and housing. What happens should those jobs goes away? Laffer says there will be lots of things that will fill those lost jobs again. “The neat thing about this economy is that we have a lot of flexibility in what we produce, and what we have.” It just wasn’t so. He adds this isn’t a housing economy, but rather one driven by good economic policies, and “it’s working beautifully.” And it is, if you’re a billionaire, or in the business of selling books filled with off-base economic theories.

3:36: Schiff says it’s a good economy if you’re an investor in gold, or oil. He said this, by the way, in 2006.

Schiff isn’t right about everything. He predicts the artificially low interest rates will become a thing of the past in the near future, which never happened. Why? Because so many of the other things he predicted did happen.

I asked Laffer about his debate performance, and this is how he responded: “That interview was on August 28th, 2006. The S&P 500 closed that day at 1301.78 and peaked on October 9th, 2007 at 1565.15 … Unemployment for August 2006 was at 4.7% and we did not have a reading above that until December 2007. GDP grew for the third quarter of 2006 as well as for the next five quarters. In August of 2006, I didn’t see any signs of impending doom in the US. I saw signs of clear decline in mid to late-2007, when my co-authors and I began drafting our book, The End of Prosperity.”

I really don’t see how this changes the point that Laffer was dead wrong. He lacked the ability to be prescient about anything other than the immediate future. To me it sounded like the house-of-cards economy that Laffer praised was simply able to stay upright for a little more time, and that’s it.

Oh, and I asked him if he ever wrote his letter to Schiff. He didn’t answer that question.

This tape of Laffer is valuable because it is five years old, and Laffer was incredibly wrong. Yet he is still on TV and the lecture circuit, the same as ever, and has clearly paid no penalty for his mistakes. This article is all about accountability, something that pretty much doesn’t exist for the pundit class.

But, okay, that interview is a few years old. What about more recent clips or writings from Laffer?

Here’s one. In October 2008 Laffer also completely railed against the stimulus plan in an opinion piece called “That ‘Stimulus’ Nonsense.”

“It will do enormous damage to our economy,” he wrote. He also rips apart the theory of the stimulus: if you take money from producers and give it out to what seems like a random group of people, distinguished in no way, it will add up a net zero in stimulus, he argues. What you take from Peter (Schiff?) to give to Paul, will not in turn generate anything for Uncle Sam.

This sounds totally reasonable. It is also wrong.

According to Factcheck.com, quoting the Congressional Budget Office, the stimulus in fact created jobs, and lowered unemployment rates “between 0.7 percentage points and 1.8 percentage points” and “increased the number of people employed by between 1.4 million and 3.3 million” in the second quarter of 2010. It also raised real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent for the same period.

This is not to say the stimulus was a cure all, but it did stimulate, as intended. Again, Laffer was wrong. You may not like the stimulus for many reasons, but at the very least it did not do enormous damage to our economy as Laffer confidently predicted, and at the most it created some jobs and some wealth.

Laffer also has made some other questionable statements about his own history. On November 13, 2006 he addressed the members of The Heritage Foundation’s President’s Club, held at the Ronald Reagan International Trade Center in Washington. His speech was titled The Four Pillars of Reaganomics, and included some of Laffer’s personal experiences with The Gipper.

One of his experiences, he says, dates back to late 1979, or 1980. The background is that he, Reagan, and a few others were at the Beverly Hills Hilton, talking about policy. According to Laffer Reagan asked Dick Allen, who became Reagan’s first National Security Advisor, what the thrust of U.S. policy had been in the post-WWII era. And Allen said, in effect, we’ve cajoled our enemies, and harassed our friends.

Then Laffer makes this statement in his speech: “And Reagan couldn’t hold the comment back and he said, and I’m going to quote it, and I think this is a direct quote, he said, ‘Well, Dick, I guess we’re just going to have to reverse those policies, now aren’t we? We’re going to have to scare the bajeebers out of our enemies with Star Wars and we’re going to have to make our friends stinking rich with supply-side economics.’”

They loved this at the Heritage Foundation, but there is only one problem with it. Star Wars, aka the Strategic Defense Initiative, didn’t exist in 1979, or even 1980. Reagan had thought about a missile defense system, but his first speech about it came in March 23, 1983 and there is no evidence that the term “Star Wars” was in popular use prior to the speech. (The name SDI didn’t come until after the speech.) According to author Frances Fitzgerald, in her book “Way Out There In The Blue: Reagan, Star Wars and the End of the Cold War”–a definitive history of the program–Reagan was actually annoyed that his beloved SDI was given the semi-mocking nickname–he thought it was partly a knock on him being a former actor. (See P. 39 of the book.)

And, remember, Laffer said he was pretty sure he had directly quoted Reagan. Either Laffer is making something up, or he is just wrong. Either one is bad.

I asked Laffer about this quote above, and here is what he said: “Referring back to conversations with then ex-Governor Reagan in 1979 and 1980, he specifically discussed increasing our military capabilities to deter our enemies with what later would be dubbed ‘Star Wars’. I personally loved the phrase and have used it frequently.”

There he goes again. Laffer’s speech was either a general paraphrase of history, or it was a direct quote, but it can’t have been both, because there is almost 0% chance that Reagan said anything about “Star Wars” by name in 1979 or 1980.

Is this picayune? I don’t think it is. Why? Because Laffer has made his statements in public forums, and he, as a person with some sway in this society, is someone that people listen to and quote from. If he has put forward a version of things that just didn’t happen he should learn to be more precise. Especially when he claims to have quoted someone.

Finally, we get to Laffer’s recent, almost endearingly cranky take on Occupy Wall Street. He administered this would-be smackdown on Oct. 18, on Fox with Neil Cavuto. His argument was that if the flat tax is instituted economic growth will blossom, the good times will return, and all those protestors will be too busy working at insurance agencies to complain. Could this happen? Who knows? But Laffer backs up this argument with a number of barely-related historical points that are simply, factually wrong.

Here’s one. “By ’79,” Laffer told Cavuto, “we had 16 years of down stock market.” Not true. Between December 1963, and December 1979 the Dow Jones Industrial Average rose 25%. Is this amazing growth? No, but it’s not flat, either.

When I asked Laffer about this he said, he had no ideas what I referred to when I talked about the behavior of the stock market from 1963 to 1979. “I don’t typically use those years as a period.” Except for when he did.

He also says gave us this quote about the Carter era: “There was protests all over. I mean the race riots across the country until Reagan came in. In the two years of Reagan being president there were no race riots. These riots stopped. Unions disappeared. All the conflict disappeared with prosperity. ”

Huh? Race riots across the country in the late 1970s? Does anyone remember this except Laffer? They shouldn’t because it just isn’t true.

There was, however, a “disco demolition” riot at a baseball field, yes. A shooting of protestors by members of the Klu Klux Klan, in Greensborough, North Carolina, and the famed New York City blackout riots. But no widespread race riots, for Reagan to magically make disappear. Laffer may mean the ‘60s, which did have widespread race riots, but it still wouldn’t make any sense.

Laffer’s responded that he got his race riot figure from a book called The Encyclopedia of American Facts and Dates. Assuming this is even a trustworthy source it still doesn’t say what Laffer says it says. It says there were five “major race riots” during the Carter era, compared with 16 during LBJ’s era, and eight during Kennedy’s time in office. Five does not sound like “race riots across the country” to me.

What about Laffer’s other claim that two years into Reagan’s term “unions disappeared?” This one is easy to debunk as there are still millions of people in unions right now. And while it’s true that union membership had declined significantly since Reagan’s time, the truth is union membership had already declined significantly since the 1950s by the time Reagan was elected.

According to information from the U.S. Bureau of Labor Statistics union membership as a total percentage of the workforce peaked in 1953 at 32.5%. By 1980 that figure had fallen to 23.2%. During the Carter Era total union membership fell by 3%. During Reagan’s first term it fell by 3.8%, which is more, but not orders of magnitude more.

Laffer also attributed to Reagan attributes commonly identified with a god: namely that when he entered the scene “all conflict stopped.” Does anyone else remember the ‘80s as a time without conflict, when the lion lay down with the lamb and dogs and cats lived together in perfect harmony? I sure don’t.

So, Mr. Laffer, your Pundit License is being held in the central office, until that time that you write a letter admitting to us you were wrong, much as you wanted from Peter Schiff. Don’t worry, we’ll wait for it.

http://www.forbes.com/sites/daveserchuk/2011/12/28/great-moments-in-punditry-art-laffer-edition/






I'm pretty sure Reagonomics has gone way beyond theory into ideology and so none of it's adherents really care about facts, but I thought I'd post this anyway.

You have an uncanny ability to ferret out articles written by snide douchebags who think their condescending sarcasm is clever.

I wonder why that is.

But he's not nice when he tells me things I don't like to hear!

Can't argue facts, argue tone.

Argue the facts? You mean a statistician's bitch-off?

Pass. I'll leave that to the rest of you bullshitters. I mean, unless you want to skip to the part where you admit that whole TLDR is another strained attempt at rationalizing sticking it to anyone who has more stuff than you. But that part never comes, and I'm not interested in the obfuscation.

because fraud is okay in Albertopia
but only if you're taking from those with less than you.

read the fucking article before spouting... just once.

Lying shitbag. Go fuck yourself.

So you do agree that financial institutions have been screwing us through misrepresentation/fraud and should be deprived of ill gotten gains,and criminal charges filed?

Didn't think so... my statement stands, shitbag.

wrong - consistantly?

The Bush tax cuts might be the stupidest designed tax cuts ever.

Fraud doesn't cover every shady behavior you don't fucking like.

Predatory lending, and failing to talk someone out of assuming debt for example. Neither are fraud.

Real fraud I obviously do have a problem with. Willfully deceiving you, taking your money in exchange for something other than the contracted-for product.

But none of this "spirit of the arrangement," "what I felt was the case" bullshit qualifies. Unless his job title is something like "guidance counselor," you're a fucking idiot to expect someone to hold your hand and lead you to the wiser choices.

Key point:

Whether a tax cut brings in more revenue is a function of where on the hypothetical Laffer curve the income tax rate currently is. The Kennedy tax cuts and the Reagan tax cuts are proof that tax cuts can raise revenues.

By the way, here are the weasel words Bartlett uses (and which the article's author lets speak for him) to claim revenues went down:

By Bartlett's standard, increasing tax revenues from a tax cut don't count because the percentage of GDP going to the government goes down. Well, duh! The tax cuts are intended to spur the economy and they do. The increase in revenue is a side benefit. If the percentage of GDP going to the state decreases, these clowns view that as a loss for the state EVEN IF revenues go up. This explains a lot about how our debt has gotten so out of control.

And I'm supposed to take the rest of this seriously?

Anyway, if you think Laffer is wrong, raise income tax rates to 100%. That should maximize revenues, right? If lowering tax rates CAN'T increase revenue, then raising them MUST by that logic. Unless you realize that people would long since quit working when taxed at such a high rate. In which case, you have to agree with...Laffer.

If you think Laffer is right, lower income tax rates to 0%. That should maximize revenues.

In fact, his famous curve accurately predicts 0 revenues at 0%. His whole point is that the maximum occurs somewhere between 0 and 100 percent and that moving away from this point [-]increases[/-] decreases revenues.

Try again.

Edit: fixed as per Zombie.

Obviously you can't make the converse argument here. Laffer's the one promoting the bell-shaped curve. If you throw out his argument, then you have to come up with a new one completely to cover the top and the bottom of the range.

Laffer never said lowering tax rates to 0% will maximize revenues. In fact he said at zero tax rate there is zero revenue. He also said on the other hand that a tax rate of 100% also results in zero revenue since people would just stop working.

His point was that taxes shouldn't be too low or too high if the government wants to maximize the dollar amount of taxes it gets from taxpayers.

People who say Laffer was wrong, like the author in the OP, are lying because even they wouldn't raise taxes too high because they know it would result in less money in government coffers. They are all talk but if push came to shove they wouldn't support such high tax rates.

We see smaller examples all the time at the state level. State raises a tax and then scratches their head wondering why the projected revenue didn't show up in the bank accounts. As the taxes got too high more and more people avoided that tax (legally or illegally).

Re: Forbes (and Data): Art Laffer is wrong... consistently.

Moving away from what point? Or were you borrowing your economics from a Brett Easton Ellis title?

Re: Forbes (and Data): Art Laffer is wrong... consistently.

Or he just made a simple error and said increase instead of saying decrease.

I fixed it for you since you're not capable of making the mental fix on your own.

Re: Forbes (and Data): Art Laffer is wrong... consistently.

I just find it amusing when that particular type of error is made during a discussion of economics.

And you're welcome.

I already fixed the "You're welcome" mistake by taking it out. You don't deserve it.

And yet Obama extended them.

No one deserves misspellings of one-syllable words.

It only took one post to generate a snide dismissal from someone who didn't read the article. That ties a WF record held by many.

And yet he speaks the truth.....

I think the Curve itself is very true - it's at what point in the Curve do you maximize revenue while minimizing taxation that is at issue, and whether that's always the correct balance in the first place.

But the Curve isn't Lafer's, it's a very old concept, and of course the last major economist who argued the theory of the Curve was John Maynard Keynes.

So I think the take away is the concept is correct, just the execution is not always something that can truly be known. It looks like it's a multi-variable equation, and multiple things impact it, especially labor supply, and modifying one aspect (the tax rate) also modifies others on the fly.

The result is you get widely varied outputs depending on the assumption of the variables - one European study showed the optimum tax rate for revenue at 70%, one a few years later in the US showed it at 20%.

GIGO.

So, it's the kind of thing that doesn't belong in the hands of pork-faced little ideologues?
Shit, show me something that should be....

After the Republicans filibustered everything that came to them until they were extended.

And I mean everything, including extending health benefits for 9/11 first responders.

Simply not true. In fact, the conservative policy is to grow GDP such that government shrinks as a percentage without actually making politically difficult real cuts in funding.

The quote starts from a premise of "how much government can we afford?" rather than "how much does necessary government cost?"

Honestly, do people work for the government, or does the government work for the people?

BTW, Bruce Bartlett lost his mind years ago.

And if you doubt Art Laffer, then explain why even the stupidest liberals understand that a 100% tax rate will generate zero revenue. Laffer hasn't invented anything, except perhaps a simple way to explain something that everybody already knew anyway.

I'm actually surprised that liberals don't try to use the Laffer curve to justify raising taxes by claiming not enough revenue is making it into government coffers.

Considering the only way to truly reduce the size of the government is to reduce entitlements by huge margins, that's a very pertinent question. The answer is one you might not like.

The biggest issue I see facing the world in the 21st century is employment. Automation and information systems are going to increasingly render labor unnecessary, not to mention making the worker's in 3rd world countries more competitive.

It's a big problem, and while I'd prefer entitlement spending being cut, there's going to be nastiness afoot if that happens. I'd be surprised if the current unemployment rate isn't the new normal - its the precursor of worse things to come.

Geez, maybe your dumb stereotypes are wrong?

Nah, that can't be, layer some more bullshit on top to make it "make sense".