When economists write, they can decide among three possible voices to convey their message. The choice is crucial, because it affects how readers receive their work.
The first voice might be called the textbook authority. Here, economists act as ambassadors for their profession. They faithfully present the wide range of views professional economists hold, acknowledging the pros and cons of each.
These authors do their best to hide their personal biases and admit that there is still plenty that economists do not know.
According to this perspective, reasonable people can disagree; it is the author’s job to explain the basis for that disagreement and help readers make an informed judgment.
The second voice is that of the nuanced advocate. In this case, economists advance a point of view while recognizing the diversity of thought among reasonable people.
They use state-of-the-art theory and evidence to try to persuade the undecided and shake the faith of those who disagree. They take a stand without pretending to be omniscient.
They acknowledge that their intellectual opponents have some serious arguments and respond to them calmly and without vitriol.
The third voice is that of the rah-rah partisan. Rah-rah partisans do not build their analysis on the foundation of professional consensus or serious studies from peer-reviewed journals.
They deny that people who disagree with them may have some logical points and that there may be weaknesses in their own arguments. In their view, the world is simple, and the opposition is just wrong, wrong, wrong.
Rah-rah partisans do not aim to persuade the undecided. They aim to rally the faithful.
Unfortunately, this last voice is the one the economists Stephen Moore and Arthur Laffer chose in writing their new book, Trumponomics. The book’s over-the-top enthusiasm for U.S. President Donald Trump’s sketchy economic agenda is not ly to convince anyone not already sporting a “Make America Great Again” hat.
Moore and Laffer served as economic advisers to Trump during his campaign and after he was elected president (along with Larry Kudlow, the current director of the National Economic Council, who wrote the book’s foreword). From this experience, Moore and Laffer apparently learned the importance of flattering the boss.
In the first chapter alone, they tell us that Trump is a “gifted orator” who is always “dressed immaculately.” He is “shrewd,” “open-minded,” “no-nonsense,” and “bigger than life.” He is a “commonsense conservative” who welcomes “honest and fair-minded policy debates.
” He is the “Mick Jagger of politics” with a contagious “enthusiasm and can-doism.”
The authors’ approach to policy is similarly bereft of nuance. In Chapter 3, they sum it up by proudly recounting what Moore told Trump about U.S. President Barack Obama during the campaign: “Donald, just look at all the things that Obama has done on the economy over the past eight years, and then do just the opposite.”
It is hard to imagine more simplistic, misguided advice. To be sure, Moore and Laffer can reasonably hold policy positions and political values to the right of those of Obama. (As someone who chaired the White House Council of Economic Advisers during the George W. Bush administration, so do I.
) But the Obama administration was filled with prominent economic advisers who were well within the bounds of mainstream economics: Jason Furman, Austan Goolsbee, Alan Krueger, Christina Romer, and Lawrence Summers, to name but a few.
It is not tenable to suggest that with all this talent, the administration made only wrong decisions, and that they were wrong simply because those who made them were Democrats.
The tribalism of Moore and Laffer’s approach stems primarily from their devotion to a single issue: the level of taxation.
The tribalism of Moore and Laffer’s approach stems primarily from their devotion to a single issue: the level of taxation. Obama pursued higher taxes, especially on higher-income households.
His goal was to fund a federal government that was larger and more active than many Republicans would prefer and to use the tax system to “spread the wealth around,” as he famously told Joe Wurzelbacher, known as Joe the Plumber, a man he encountered at a campaign stop in Ohio in 2008.
By contrast, Moore and Laffer want lower taxes, especially on businesses, which in their view would promote faster economic growth.
The debate over taxes reflects a classic, ongoing disagreement between the left and the right. In 1975, Arthur Okun, a Brookings economist and former adviser to President Lyndon Johnson, wrote a short book called Equality and Efficiency: The Big Tradeoff.
Okun argued that by using taxes and transfers of wealth to equalize economic outcomes, the government distorts incentives—or that, to put it metaphorically, the harder the government tries to ensure that the economic pie is cut into slices of a similar size, the smaller the pie becomes.
this argument, the main priority of the Democratic Party is to equalize the slices, whereas the main priority of the Republican Party is to grow the pie.
U.S. President Barack Obama and Larry Summers, chair of the White House National Economic Council, in Washington, D.C., June 2009 Jim Young / REUTERS
Yet Moore and Laffer aren’t willing to admit that making policy requires confronting such difficult tradeoffs.
Laffer is famous for his eponymous curve, which shows that tax rates can reach levels high enough that cutting them would yield enough growth to actually increase tax revenue. In that scenario, the tradeoff between equality and efficiency vanishes.
The government can cut taxes, increase growth, and use the greater tax revenue to help the less fortunate. Everyone is better off.
The Laffer curve is undeniable as a matter of economic theory. There is certainly some level of taxation at which cutting tax rates would be win-win.
But few economists believe that tax rates in the United States have reached such heights in recent years; to the contrary, they are ly below the revenue-maximizing level.
In practice, the big tradeoff between equality and efficiency just won’t go away.
LESSONS FROM ECON 101
Trumponomics is full of exhortations about the importance of economic growth.
Why, Moore and Laffer ask, should Americans settle for the two percent growth that many economists have been projecting? Wouldn’t every problem be easier to solve with a more rapidly expanding economy? The book quotes Trump as claiming, when announcing his tax plan in December 2017, that it would not increase the budget deficit because it would raise growth rates to “three, or four, five, or even six percent.”
The authors offer no credible evidence that the tax changes passed will lead to such high growth. Most studies yield far more modest projections. The Congressional Budget Office estimates that the Trump tax cuts will increase growth rates by 0.2 percentage points per year over the first five years.
A study by Robert Barro (a conservative economist at Harvard) and Furman (a liberal economist at Harvard) published in 2018 estimates that the tax bill will increase annual growth by 0.13 percentage points over a decade. And that is if the changes are made permanent.
Barro and Furman estimate that as the legislation is written, with many of the provisions set to expire in 2025, it will increase annual growth by a mere 0.04 percentage points over ten years.
It is conceivable that standard economic models underestimate the impact of tax cuts on growth. A research paper by the economists Christina Romer and David Romer published in 2010 examined historical tax changes and found that they had larger effects on economic activity than standard models suggest.
(It is worth noting that these two authors’ political leanings are left of center, so their findings are not the result of ideological taint.) One might reasonably argue that Trump’s tax cuts will increase growth over the next decade by as much as half a percentage point per year.
But that is a long way from the one- to four-percentage-point boost that the president and his associates have bragged of, and that Moore and Laffer quote without explanation, caveat, or apology.
For a politician seeking election, opposing free trade is a lot easier than supporting it.
The authors of Trumponomics do depart from the president on one piece of his agenda: his approach to international trade. Moore and Laffer are ardent free traders; as such, their views are well within the mainstream of modern economics.
Ever since Adam Smith took on the mercantilists in The Wealth of Nations in 1776, most economists have come to believe that international trade is win-win.
They reject the idea that a trade imbalance between two nations means that one of them must be the loser, and they applaud agreements, such as the North American Free Trade Agreement (NAFTA), and international organizations, such as the World Trade Organization, that reduce trade barriers around the world.
Moore and Laffer recognized early in the campaign that Trump rejects this consensus. To their credit, they do not back down from their views in Trumponomics.
They acknowledge that the president is playing a “high-stakes game of poker” and that “if it doesn’t work, the ramifications scare us to death.
” But they also give Trump the benefit of the doubt by expressing the hope that his belligerent approach toward U.S. trading partners will somehow lead to better deals and freer trade.
Hostility to globalization did not, of course, begin with Trump. It may be hard to remember now, but when Obama was a senator, he opposed many free-trade initiatives advanced by the administration of then U.S. President George W. Bush, such as the Dominican Republic–Central America Free Trade Agreement.
When Obama ran for president in 2008, he spoke about the need to renegotiate NAFTA, although he quickly put that goal aside after moving into the White House. Similarly, during the 2016 U.S.
presidential campaign, Senator Bernie Sanders of Vermont made hostility to free trade a central tenet of his platform.
So popular did that position prove among Democrats that he managed to pressure the Democratic candidate Hillary Clinton into opposing the Trans-Pacific Partnership—the very trade deal she had backed as secretary of state during the Obama administration.
The bottom line is that for a politician seeking election, opposing free trade is a lot easier than supporting it. Many voters are more ly to view foreign nations as threats to U.S. prosperity than as potential partners for mutually advantageous trade. Economists have a long way to go to persuade the body politic of some basic lessons from Econ 101.
A U.S. Customs and Border Protection Agriculture specialist checks imported broccoli from Mexico in Pharr, Texas, October 2018 Adrees Latif / REUTERS
To be fair to Trump and other anti-globalization zealots, amid all their mis-information and bluster is a kernel of truth. The United States produces a lot of intellectual property, including movies, software, and pharmaceuticals.
The failure of countries, especially China, to enforce the copyrights and patents that protect intellectual property constitutes a loss to the United States similar to outright theft. The Commission on the Theft of American Intellectual Property puts the loss at up to $600 billion per year.
If Trump were able to negotiate trade deals that solved this problem, the accomplishment would be significant. But in light of how much other nations benefit from not protecting U.S. intellectual property, a negotiated solution won’t come easy.
GIVING THE PRESIDENT A PASS
Perhaps the most disappointing aspect of Trumponomics is the long list of crucial issues on which the authors are largely silent.
They offer no cogent plans to deal with global climate change, the long-term fiscal imbalance from growing entitlement spending, or the increase in economic inequality that has occurred over the past half century. Many reasonable Republicans would support a tax on carbon emissions, for example.
Such a policy would slow climate change by incentivizing the movement toward cleaner energy, as well as provide revenue that could be used to close the fiscal gap or to help those struggling at the bottom of the economic ladder.
Rather than suggesting coherent policies, Moore and Laffer seem to hope that a much more rapidly growing economy will provide the resources to address all these problems, and they seem to believe that this growth will follow ineluctably from the lower taxes and deregulation that lie at the heart of Trump’s agenda. It would be wonderful if that were possible.
Maybe rah-rah partisans really believe it is. But more ly, it is just wishful thinking. Trump appears eager to avoid most of the economic problems facing the nation.
By banking on so much growth from cutting taxes, Moore and Laffer are, in effect, giving him a pass and kicking the can down the road to a future leader more interested in confronting hard policy choices.
Almost everything Republicans get wrong about the economy started with a cocktail napkin
The sealing of America’s fiscal fate began in 1974, over cocktails.
As afternoon faded to evening on December 4, Dick Cheney and a young economist named Art Laffer shuffled into a booth at the Two Continents restaurant in the iconic Hotel Washington—it had appeared in scenes from the Godfather II just months earlier—two blocks from the US Treasury department.
Cheney was US president Gerald Ford’s deputy chief of staff. He and his boss, Donald Rumsfeld, were looking for alternatives to Ford’s plan to raise taxes 5%. Raising taxes was a bad idea, said Laffer.
If Ford really wanted to spur economic growth, and therefore government revenue, he should cut tax rates.
Cheney wasn’t following. So Laffer grabbed a napkin, uncapped a Sharpie, and drew two perpendicular lines and a blimp-shaped curve, halved by a faint dotted line.
With the tax rate on the y-axis and tax revenue on the x-axis, the chart showed that, except at its bend, there were always two points on the curve that generated the same amount of government funds: a higher rate on a smaller base of economic activity, and a lower rate on a larger base of economic activity.
“The conventional wisdom was: You want more revenue, you raise taxes,” Cheney recalled 30 years later, in a Bloomberg interview reenacting that landmark 1974 meeting. “What Art brought to the table with these curves is that if you wanted more revenue, you were better off if you lowered taxes, to stimulate economic growth and economic activity.”
This moment remains one of the most famous legends of modern economic history. Its message—that tax cuts pay for themselves—endures too. (Look no further than president Donald Trump’s budget plan for proof.)
This is even more remarkable when you consider that, except in its very vague suggestion that tax rates alone do not dictate tax revenue, Laffer’s curve is wrong.
Laffer’s curvy logic
Art and his chart in 1981, the year president Ronald Reagan put his ideas into action.
Growth, argued Laffer, depends on how much people work and how much businessesinvest. He believed both those things hinge on tax rates: the more income the government takes away in taxes, the less motivated people are to work and save (leaving businesses less money to invest).
The government that thinks that raising taxes is necessary to pay for social programs and other public services is short-changing itself, argued Laffer. When tax rates are too high—in the “prohibitive range” of his chart—people work less and businesses invest less, stifling growth and shrinking the total amount of income available for the government to tax.
“We’ve been taxing work, output and income and subsidizing non-work, leisure and un-employment,” Laffer scribbled above his napkin chart, dedicating the napkin to Cheney’s then boss at the White House, Donald Rumsfeld. “The consequences are obvious!”
By letting people keep more of their earnings—encouraging work and investment—tax cuts fireupenterprise, he argues. The growth that results broadens the country’s overall income so much that, paradoxically, the government can bring in even more revenue just by taxing at a lower rate.
The problem is, this tidy arc of cause and consequence doesn’t exist in the real world. Sure, extremely high tax rates douse economic activity. But there’s no reason to assume the relationship between tax revenue and tax rates is perfectly U-shaped.
And the equilibrium point at which a government collects the most revenue possible without dragging down the economy is impossible to know—and varies by country.
There was no reason in 1974—or, for that matter, now—to think the US was on the curve’s ”prohibitive” half (many economists put the inflection point for the highest marginal tax rate at around 70%). In fact, without detailed data, you can’t tell where on Laffer’s curve (or non-curve) you are at all.
Laffer’s general idea of supply-side stimulus can sometimes work. Cutting tax rates that primarily benefit rich people shifts wealth from the middle classes to the rich.
That might sound unfair, but in developing countries where there’s not enough money to fund the investment needed to spur growth, a Laffer-style policy could (temporarily) help stimulate economic expansion by channelling wealth to potential investors.
But this scenario is not applicable to the US. Private investment tends to ebb and flow with the business cycle; when demand is feeble, so is investment. Cutting taxes on America’s rich isn’t going to encourage them to invest more—they already have plenty to spend and aren’t spending it.
Worse, by shifting wealth from middle class families to the moneyed few—a group that is able to consume far less than the working masses—this sort of policy suppresses consumption, which in turn discourages investment in productive businesses.
Slowing demand drags on growth, causing debt and unemployment to rise.
The Laffer curve’s strange, seductive power
President Ronald Reagan signing the largest tax cut bill in US history at his California ranch in 1981.
By 1977, Laffer’s idea was emerging as the core tenet of the increasingly popular “supply-side economics.
” At a time when stagflation was suffocating the US economy, and Watergate had sullied the Republican Party, Laffer’s logic offered the GOP an upbeat and understandable plan of action to give to constituents.
“It has been said that the popularity of the Laffer curve is due to the fact that you can explain it to a congressman in six minutes and he can talk about it for six months,” economist Hal Varian once mused.
Even in the late 1970s, most economists disagreed with Laffer’s assertion that the US was in the “prohibitive” range of the curve. But Laffer’s imagery overpowered the arguments of his critics.
”To most quantitatively-inclined people unfamiliar with economics, [Laffer’s] explanation of economic inefficiency was a striking concept, contagious enough to go viral,” says economist Robert Shiller, who studied the concept’s persistent popularity in a recent paper (pdf).
But the idea of tax-cutting your way to faster growth might still have slipped into obscurity if not for Jude Wanniski, a Wall Street Journal editorial writer and long-time Laffer disciple—who just so happened to be the other guy at the Two Continents table alongside Dick Cheney.
Wanniski named the image on the napkin the “Laffer curve”—a term he would also use in his seminal 1978 treatise on supply-side economics, The Way the World Works. Wanniski’s dramatic retelling of the serendipitous exchange between Laffer and Cheney propelled the Laffer curve into the national spotlight—and caught the eye of Ronald Reagan.
Mind you, Reagan wasn’t exactly a hard sell. In fact, the former California governor saw himself as a living testament to the Laffer curve’s logic.
As a B-list Hollywood movie star during the 1940s, Reagan faced the exorbitant tax rate of 91% (rates had been hiked to fund America’s war effort). “You could only make four pictures and then you were in the top bracket.
So we all quit working after four pictures and went off to the country,” Reagan once remarked.
Laffer’s supply-side logic served as the intellectual cornerstone for Reagan’s tax cuts, markinga turning point in conservative ideology. Up until this point, Republican orthodoxy was mostly focused on avoiding fiscal deficits. The GOP was even fine with raising taxes as long as the government covered its expenses.
Economists and liberalpoliticians saw tax cuts as a way to tuck some extra cash into workers’ pockets, encouraging them to consume—which, in turn, boosted growth. But many old-school Republicans scoffed at Laffer’s trickle-down theories. The most famous example of this came during the GOP primary, when George H.W.
Bush dubbed Reagan’s supply-side ideology “voodoo economics.”
Reagan persevered, however, and one of his first priorities as president was putting Laffer’s ideas into practice.
Shortly after taking office, Reagan and Congress macheted the US tax code, bringing the top marginal tax rate to 28%, down from 70%, and slashing corporate and capital gains taxes.
Higher growth was supposed to expand the tax base, compensating the federal government for the revenues lost by the lower rate. Instead, public debt exploded—and continued to grow throughout Reagan’s tenure. The Laffer curve had just failed its first big test.
Laffer chats with Republican governor of Texas Rick Perry in 2008.
Despite the Laffer curve’s 1980s flop, Republicans have steadfastly refused to give up on the theory. If anything, Laffer’s theory seems to have become more popular among GOP candidates.
In 2004, president George W. Bush claimed his sweeping tax cuts would grow the economy and boosted tax receipts. Instead, tax revenue shrank.Undeterred, Republican candidates in the 2012 presidential election fawned over Laffer’s ideas (Michele Bachmann declared herself an “Art Laffer fiend“).
In the run-up to the 2016 Republican primaries, Laffer was once again everyone’s go-to econ guy; on one particular Friday in April 2015, the economist chatted with Rick Perry at 10am, Ben Carson at noon, Jeb Bush at 1.
15pm, Bobby Jindal at 5, and closing out the day dining with Ted Cruz, reported the Washington Post.
President Donald Trump also consulted with Laffer during the 2016 race. “My tax cut is the biggest since Ronald Reagan,” Trump had crowed during his campaign.
And with the debut of his new tax plan yesterday, we can see Laffer curve principles once again in action. The president plans to pay for huge tax cuts for the rich with the growth these tax breaks will supposedly stimulate, even though history has shown time and again that swelling debt is the far more ly outcome.
The myth lives on
Dick Cheney and Donald Rumsfeld—central characters in the Laffer curve napkin myth—in 1975.
If the last four decades left any doubt that narrative is more powerful than fact, the last four months have surely confirmed it. So it makes a certain kind of sense that the idea of a man whose ”genius was in narratives, not data collection,” as Shiller put it, is shaping policy once again.
Tellingly, even in a narrative as compelling as the Laffer curve creation myth, it doesn’t seem to matter that the facts don’t really line up.
Courtesy of the National Museum of American History, American Enterprise exhibition
Economist Art Laffer sketched a new direction for the Republican Party on this napkin, illustrating his theory that lowering taxes increased economic activity. Wall Street Journal editor Jude Wanniski popularized it, and politicians Don Rumsfeld and Dick Cheney carried it out.
Here’s Cheney in 2014, reminiscing about the pivotal scribble in a Bloomberg video:
I remember a white tablecloth and white linen napkins because that’s what [Laffer] drew the curve on. It was just one of those events that stuck in my mind, because it’s not every day you see somebody whip out a Sharpie and mark up the cloth napkin at the dinner table. I remember it well, because I can’t recall anybody else drawing on a cloth napkin.
Laffer himself doesn’t recall the episode at all. ”I personally don’t remember the details of that evening we all spent together, but Wanniski’s version could well be true,” wrote Laffer on 91 of his 2010 book Return to Prosperity (which, incidentally, he co-wrote with one-time Trump economic adviser Stephen Moore).
“My only reservation about Wanniski’s version of the story concerns the fact that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things,” wrote Laffer. “Ah well, that’s my story and I’m sticking to it.”
That’s not quite right, though. Wanniski has always maintained the napkin was a paper cocktail napkin. This is particularly odd because after pocketing it as a souvenir on that fateful night, Wanniski donated the mythic Laffer curve napkin to the National Museum of American History. That napkin is cloth, however, not paper.
Stranger still, beneath the curve, Laffer wrote, “To Don Rumsfeld, at our Two Continents Rendezvous,” even though Wanniski insists Rumsfeld wasn’t at the Two Continents that night (Laffer, however, says Rumsfeld was present).
Even more puzzlingly, Laffer dated the napkin September 13, 1974—two and a half months before the December meeting that Cheney and Wanniski remember so clearly.
Could this legendary event have taken place twice? Quartz asked Rowena Itchon of the Laffer Center about the discrepancy. “Dr. Laffer drew on napkins when he had lunch with many people,” she said.
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