Different River

”You can never step in the same river twice.” –Heraclitus

February 7, 2005

Arthur Laffer: Myths and Facts

Filed under: — Different River @ 10:34 pm

A friend pointed me to this one today: Bill Steigerwald of the Pittsburgh Tribune-Review has an interview with Arthur Laffer. Laffer is the economist known most prominently for pointing out — using a graph now called the “Laffer Curve” — that it’s possible to increase tax revenues by reducing tax rates. It’s an amazingly optimistic interview, for anyone to give, especially an intellectual of any sort, let alone an economist.

I’ve heard a lot of bizarre things about Arthur Laffer over the years, many of them from economists who really should have known better. Here are some of the real zingers.

  1. Myth: “Hasn’t all that Reaganomics stuff been discredited among serious economists?” Oh, you mean the stuff about how reducing tax rates can increase tax revenues? (“Yeah!”) It’s about as discredited among economists as the non-flat-earth theory is discredited among geographers. If you don’t believe it, consider this: If you were charged 100% of your income as income tax, would you get a job? Of course not — not if you were going to report the income, anyway. So if the tax rate is 100%, the tax revenue actually collected is 0%. If you reduce the tax rate — say, to what it actually is right now in the U.S., you can collect trillions of dollars in revenue. So obviously, it’s possible to increase tax revenues by reducing tax rates. Some people argue about whether a reduction from current rates would increase current revenues, and that’s a legitimate question. Most tax-rate decreases (in the last 50 years, in the U.S.) have been followed by increases in tax revenue, but critics argue that there’s always another cause, and the economy is complex enough that it’s hard conclusively prove them wrong. However, if the “other cause” they cite is “economic growth” (or equivalently, “the recession ended”) then that reinforces rather than discredits the Laffer Curve theory, since increased economic growth due to lower tax rates is part-and-parcel of the theory.

    Remember this next time one politician proposes tax cuts and another asks, “But how are you going to pay for it?” That’s the economics version of one person saying, “I’m going so fly this plane all the way around the world” and another asking, “But how are you going to get back here?”

  2. Myth: “Arthur Laffer never got a Ph.D. in economics.” When I was an undergraduate, I actually heard this from one of my economics professors, who told a story about how another economist (whom I won’t name, because the story is probably an urban legend) kept calling him “Mister Laffer” at some economics meeting so people would ask why and he would have an excuse to point out that he’s not “Doctor Laffer.” Trouble is, he actually is Doctor Laffer, having completed a Ph.D. in economics at Stanford University in 1971. In the age of the Internet, this is easy to verify; just enter his name into the search box at the Stanford University library search page and click on “Author.” His dissertation, “Private Short-term Capital Flows,” is clearly listed among the library’s holdings. (Scroll down; it’s the only item from him authored in 1971.) It’s also listed in Dissertation Abstracts, though you have to be at a university or similar place to access it from that web site.

  3. Myth: “But Arthur Laffer has never really been a real economist.” The last time I checked, which was about 10 years ago (gasp!), Laffer had, from 1969-85, published 13 articles in indexed, peer-reviewed economics journals, including the Journal of Political Economy, the Review of Economics and Statistics, and the American Economic Review, three of the consensus “top 7″ economics journals. He also had prestigious faculty positions — at the University of Chicago Graduate School of Business, as the Charles B. Thornton Professor of Business Economics at the University of Southern California Marshall School of Business, and as a Distinguished University Professor at Pepperdine University. He then started a couple of consulting and investment businesses, but I don’t think that erases his academic career.

  4. Myth: “Arthur Laffer is a complete right-wing ideologue.” According to the recent interview and this article in U.S. News & World Report, after serving in the Nixon-Ford administration and serving as a top economic adviser to President Reagan, and running unsuccessfully for the Republican nomination for the Senate in 1986, Laffer voted for Clinton twice. He also helped craft a tax plan for Democrat Jerry Brown (!!!) when he was running unsuccessfully for the Democratic nomination for President in 1972. (On Brown: “He’s a weird guy, but he would have made a great president.”) He is now meeting with Bush administration officials about once a quarter to consult on economic policy.

His biography for the speaking circuit is here.

If there’s enough interest (i.e., 1-2 requests), I’ll post a list of his peer-reviewed articles in the comments.

One Response to “Arthur Laffer: Myths and Facts”

  1. Different River Says:

    Taxes Cut; Tax Collections Surge
    Conservative polticians and economists often claim that if tax rates are reduced, the economy will grow more than enough to make up for it, and tax revenues — the total number of dollars actually collected — will rise. Liberal politicians and pundit…

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