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Date: March 18, 2010
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Mention the name Arthur Laffer, author of the famous Laffer Curve, and it always brings catcalls, coughs and harrumphs from those who will never accept the concept that cutting tax rates for everyone benefits everyone, including government coffers.

Laffer was in Sarasota last week at the invitation of Kelly Caldwell and Caldwell Trust (an old friendship that goes back to Caldwell’s father, Roland, and their days in Cleveland). And for 90 minutes, Laffer delivered an effective, easy-to-understand, extemporaneous lesson in economics that made us wish he were standing in front of every politician in America. They needed to hear him.

They especially needed to hear him on the subject of “stimulus spending” — and why it doesn’t work. Stick with us:

Laffer started with one of the truisms of elected politics: “Every administration from the beginning of time has believed in the tooth fairy — they all want something for nothing,” he said.

With that, we’ll ask you to think of what’s happening in Washington today. Laffer was referring directly to the Obama administration and Congress. Indeed, that’s what Obamacare is all about — giving all Americans more medical care, more roads, more schools and more social services but not paying for it today. They want future generations to pay, after they and we are long gone and can’t be shot for lowering their standards of living.

Something for nothing.

Laffer’s explanation of the stimulus went further than that. He showed its folly by way of illustration. He called his first example “the Larry Summers one.” Summers is one of Obama’s top economic advisers.

Remember the $600 stimulus check everyone received? That was money for which none of the recipients had to lift a finger to get. It showed up in your mailbox — that is, if you received one. Something for nothing.

“The logic,” Laffer said, is that the consumer will spend more and create demand for goods and services and jobs, the cascading effect.”

“So Summers sits down, and end of discussion,” Laffer said.

Voila! Economic stimulus.


“As far as Larry goes, all of what he said is true,” Laffer said. “But it’s just Chapter One of the three-chapter story.

Here’s Chapter Two: “You cannot have a transfer recipient without a transfer payor,” Laffer said.

That $600 had to come from somewhere. Someone had to pay it, or someone will pay it.
This is the Frederic Bastiat allegory, Bastiat being the French economic journalist in the 1840s. He called it the broken window effect and the “seen and unseen.”

Bastiat wrote of the young hoodlum who tosses a rock through a merchant’s window. The merchant must repair and replace his window, which means he must employ a glassmaker, window-frame maker and window installer. They all will benefit from this economic stimulus. This is the “seen.”

But what of the merchant? That money he spends to replace his window is money he no longer can use to buy a new suit and shoes. The suit maker and shoe maker will have less to spend, if not be out of jobs.

This is the “unseen.”

So it is with Laffer’s transfer recipient and transfer payor. “People whose money was taken (to pay the stimulus) will have less money to spend,” he said.

And then he was definitive: “There is no stimulus in the stimulus package.”

Laffer called this the “income effects on an economy.”

“They always sum to zero,” he said. “You cannot give to someone without taking from someone.”

Chapter Three of Laffer’s analysis of the stimulus package is called the “substitution effect.”

The substitution effect is always negative. When the price of one good increases, it causes a buyer to buy less of that good and more of the other good — substituting one for the other.

This means consumers always switch from spending on higher-priced goods to lower-priced ones as they struggle to maintain their living standards. This goes for businesses and the flow of capital as well.

Thus, as the government spends more — whether it’s sending $600 checks to everyone or borrowing $800 billion via the sale of bonds to fund roads, etc. — the money people transferred to pay for the $600 checks or to buy the $800 billion bonds reduces the money available for other productive means.

Said Laffer: “The substitution means it actually hurts output and production.” And he reminded his listeners of the often repeated question: “Have you ever heard of anyone spending himself to prosperity?”

Summarizing this lesson on how the stimulus doesn’t stimulate, Laffer said of the Obama administration geniuses who espouse this stimulus hocum:

“They’re very fine people. They’re honest. But they’re just wrong.”

An audience member told Laffer his explanation of the stimulus sounded logical and simple. Why, then, do such smart people as President Obama, Larry Summers and their associates do not understand the stimulus fallacy?

Responded Laffer: “You have to get another speaker to answer that.”

+ It’s all about incentives
Economist Arthur Laffer said economics is all about incentives — how laws, regulations, scarcity of resources affect behavior. In his own case, Laffer moved a few years ago from Southern California to
Nashville, Tenn. Reason: No state income tax. Incentives.

In the wake of Sarasota County’s school-tax vote, the school district has been given a five-year annuity of about $40 million a year. What incentives are there to put that money to its most effective use? Likewise, what mechanisms are in place to demonstrate periodically the return on those specific dollars? Perhaps the school board can show us.

BOX
Athur Laffer-isms

Here are excerpts from economist Arthur Laffer’s comments last week at a Sarasota breakfast sponsored by Caldwell Trust, a Sarasota County investment management firm:

• On Barack Obama:
“I’ve never seen a president in my life who is more impressive as a person than Barack Obama. He has a gorgeous family. This is an amazing success story. The only problem I have is he is wrong on every issue.”

• On economic incentives: “The whole key to economics is incentives. Never fly in a plane where the pilot has a parachute and you don’t.”

• On economic embargoes:
“Never use trade as a weapon for politics. When you embargo countries, you harden them against you. You don’t defeat the enemy. You never get them to see the light. It’s a rope-a-dope mistake.”

• On off-shore drilling: “They think if we prohibit off-shore drilling, it’s the end of the story. But if we don’t do it, Indonesia will. Let it be done, but let it be done with regulation.”

• On panicky politicians (i.e. Richard Nixon, Gerald Ford, Jimmy Carter, Barack Obama, Ben Bernanke): “Whenever people make decisions when they are panicked or drunk, the consequences are always awful.”

• On professors running the country (as in the United States today):
“In our classrooms, we (the professors) are judge and jury. We are God. Professors never have reality checks. They never have skin in the game. The dumbest thing you can do is let a professor run your country. That’s what we have today. You need grown-ups in government.”

• On the Obama administration letting congressional members design legislation:
“Never let those yahoos design legislation.”

Why cutting tax rates is not a break for the rich
From 1979 to 1981, when individual income-tax rates were 70% for the top 1% of income earners in the United States, these wage earners paid 19% of all income taxes.

As a percentage of GDP, this amounted to 1.5%, Laffer said.

In 2007, with the highest tax rates at 35%, the top 1% income earners paid 42% of all income taxes, and
their share as a percentage of GDP had risen to 3.5%.

Said Laffer: “The only group to increase their tax payments as a percentage of GDP as a result of tax cuts were the super rich.”

BOX
Laffer Forecast

“Over any extended period, no economy can be prosperous if the government is overspending, raising tax rates, printing too much money, over-regulating and restricting international trade. It’s really as simple as that.
“In anticipation of known tax increases the U.S. economy will shift income and output from 2011—the higher tax year—into 2010—the lower tax year. As a result of this income shift, 2010 will look a lot better than it should, and 2011 will be a train wreck.”
— Economist Arthur Laffer
 

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Currently 1 Response

  • 1.
  • Laffer states that professors "have no skin in the game". Well, Laffer himself spent a fair part of his life as a professor, achieving tenure three years out of grad school. Somehow, I take him with a grain of salt, and so should you.

    I do remember that the most prosperous time of my long life was at a time when the rich people were complaining to anyone who would listen about the "ruinous" tax rates they suffered under. Now they have it better, they think, while Laffer points out that the government collects more from them.

    Is that so? There are ways of collecting, however.

    Is generalized support of charity a government good? Well, the charities don't have it better at all where taxes are so low that the charitable deduction is meaningless - and some of the charities have even gone under. Under the bad old "ruinous" tax laws, the rich people gave a fair amount of money to charities to get tax deductions. Now the deduction motivates but a pittance.

    I have also heard the shibboleth about "the rich" "creating jobs", and this is true. But nowadays the rich create most of the jobs in India. The few jobs created here do not replace the jobs lost in either quantity or quality.

    Laffer? Ho, hum.
  •  
  • Pete Theisen
    Mon 5th Apr 2010
    at 10:36pm
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