Populist Daily

Politics, Culture and American Life

Populist Daily header image 1

Laffer Is Laughable…But It’s Not Funny.

February 10th, 2011 · No Comments · Politics, taxes, Wall Street

Does anyone believe that Arthur Laffer, Ronald Reagan’s guru, the author and prime suspect in the catastrophe known as “voodoo economics” is really an economist? He does. And after years of hard work–economics is not bean bags;there are equations and charts and calculations, and sticking your neck out to make projections–he deserves to consider himself a major economist.

After all, Laffer graduated from Yale, got a Ph.d. from Stanford. He taught at both the University of Chicago and at USC. He’s no schlemiel. He’s got a permit, a license, papers, authority. He can carry a weapon and fire it when necessary at any economic conference. But…how often does he hit the mark? We’ll see. Sometimes things become a little distorted when viewed through decades of history and a lot of different people getting in on the act.

Of course, even a distinguished economist does not have the right to make up his own revisionist history. Laffer was wrong. Reagan was wrong. The Conservative economic policy was wrong. It still is. It will always be so long as they believe that you can cut $700 billion from a national budget that is underfunded by about a trillion dollars a year and has a $13 trillion long-term debt, and take that money, hand it over to the rich who merely pocket it and do nothing with it except buy government securities. They will always be wrong when they consider this as a good way to somehow reduce the national debt.

Let’s stop for a second and remind ourselves that people like Arthur Laffer are not stupid. Quite the contrary. They know exactly what they are doing. So why are they doing it?

Laffer is a paid economist working for the Neoconservatives. He is associated with another popular Neocon, Larry Kudlow, who some say has never seen a Wall Street security that he didn’t like. Especially at a time when he should have been telling those in the audience of CNBC to sell, not buy.

Let’s give Laffer his due. The so-called Laffer Curve is quite reasonable…so long as you follow the facts. It basically says that there is a point at which you can tax people too much (100% would obviously be too much) or too little (0% would obviously be too little.) And therefore there is an optimum point at which you can tax…the minimum necessary for government and the minimum necessary from the taxpayer.

The problem came in when Ronald Reagan cut taxes from 74% down to 50%…which worked out well, but then kept going and cut taxes from 50% down to 28%. In both those instances, Reagan did not or could not cut enough spending, and, indeed, did authorize more military spending. The result was that we began the series of excessive,unsustainable national deficits that led to a national debt of $13 trillion.

Laffer, in a recent article, says that among others, Paul Volcker helped to turn a stagnant and inflated economy around in the early 1980s. The fact is that Paul Volcker almost alone among all economists, certainly alone among all Reagan’s economists, put the brakes on the money supply which should have been done under Nixon, Ford and Carter (at least Carter hired Volcker) and that would have caused, yes, a recession, as it did in 1981-1983, but it would have been less serious if it had been done earlier.

Volcker shut down the money supply, which cut off borrowing, shut down businesses, threw people out of work, jumped unemployment up to about 10%, and had the Reagan Administration howling. But Reagan, to his credit, stood bye Volcker and inflation dropped from 13.5% to 3.2% and the economy returned to relative normal.

When Reagan dropped tax rates on the top 1%, Laffer implies that the revenue losses led to greater revenues. Not really true. Here is what he says. He says that the “he highest 1% of income earners paid more in taxes as a share of GDP in 1988 at lower tax rates than they had in 1980 at higher tax rates. This may or may not be true. What we know for certain is this: the rich got richer and the poor got poorer in relation to everyone else.

For example, in 1980, in the United States, there were recorded 574,000 millionaires and only one billionaire. By 1988, given all the Reagan policies, there were 1.5 million millionaires, 100,000 deca-millionaires, 1,200 centamillionaires and 51 billionaires. The reason for that was because Reagan’s policies enabled millionaires to increase their incomes at an average of 243% per year! By contrast the incomes of those who earned $50,000 or less increased an average of 2% per year, actually less than the rate of inflation.

Laffer is right that they were paying more taxes, but a smaller percentage of their income, which is fine. The problem is that the income inequality that we see today that is turning the country into a plutocracy was begun in those days. Yes, they paid more taxes, because Reagan’s other economic policies gave them the opportunity to make hundreds of millions and billions of dollars in second mortgages, in military contracting and in many other ways to make millions on which they paid little or no taxes.

In the meantime the increase in government spending and outsourcing meant that funds were merely being transferred from the taxypayers’ treasury to contractors and friends of the administration. So money was really going from the people at large to the big Republican campaign contributors. It came right out of government revenues. For example, in 1980, when Reagan took over, the national debt was at 32.5% of GDP. By the end of his first term it had grown by ten percent and by the end of George Bush the First’s term it was a whopping 66% of GDP. It went down ten percent under Clinton, but then under Bush II, it went to an astronomical 83.4% of GDP. Under Obama, astonishingly and despite the huge recession, it has remained at the same level.

But here’s the point. the money that all those millionaires and billionaires were making came out of that borrowed 83.4% of GDP, which eventually amounted to about $13 trillion dollars by the end of Bush II’s term. It is no wonder the economy crashed. It was like living high on the hog using some other guy’s credit cards until they ran out.

Laffer says that Reagan increased employment by 21 million jobs. But, in fact, while he did increase jobs, it was only 16 million. Clinton, by Laffer’s own estimate, created 23 million jobs. Bush II, created a net 1 million jobs.

So this is the problem with the Laffer perspective. If you want to cut taxes below the curve, you can do so. You can cut taxes so low that a President, like George Bush the First ends up with a 15% increase in the national debt in four years. That’s huge! He was running deficits in the $400 billion per year range. And when he had to raise taxes just a tiny bit, the Reagan-Laffer-Cheney Neocon Republicans turned against him. So he exhibited some of the Phi Beta Kappa intelligence that he possesses and they voted him out for doing the smart thing.

To give an example of the scope of the problem and why some people are so agitated at the foolishness of Laffer and Reagan and Bush and others, consider this: in 1980, Carter’s last budget, the deficit was $73 billion. Reagan’s first year deficit was $79 billion, but by 1983, he had already spent $411 billion more than revenues and averaged more than $150 billion in deficits for the rest of his two terms. Not only that but he left George Bush the First a budget structure that caused Bush to average over $200 billion a year during his four years.

Why is it important? Because, after Clinton got budgets under control, Bush II came in and he and his Neocon friends in Congress spent another $7 trillion more than we took in…because he cut taxes and went to war at the same time…and now the Neocons do not want to tax the rich. They want to tax the poor. They want to reduce all the securities that the taxpayers themselves put into government and paid for out of wage deductions.

Americans want Social Security. They want Medicare and other things that their taxes, over decades have guaranteed them that they would have when they needed them. Billionaires don’t want or need or use them. That is why a government commission made up mostly of millionaires is going to recommend that they be cut. And the Tea Party members and the multi-millionaire Republican members of the House and Senate are going to vote with the Koch brothers and GE and all the Super-rich to cut your Social Security and your Medicare.

That is the legacy of Arthur Laffer. Not the idea that the Reagan tax cuts made life better. They did not, except for millionaires and billionaires. The Middle Class lost ground and continues to lose ground. The Reagan and Laffer tax cuts have led us down this dark corridor where we now exist. And the future on the other side of the door does not look bright.

Tags: ·····

No Comments so far ↓

Like gas stations in rural Texas after 10 pm, comments are closed.