Arthur Laffer

BA, Yale University MBA, Yale University

Cast your mind back to 1974, when Arthur Laffer (who holds a PhD in economics from Stanford, yes, but also a BA and an MBA from Yale) was meeting with DICK CHENEY and DONALD RUMSFELD as well as with right-wing journalist and economics chatterer Jude Wanniski. Laffer grabbed a napkin and drew on it a graph showing how government revenue, which would of course be zero when tax rates were either 0 percent or 100 percent, rose to a certain height and then dropped, as a function of increasing tax rates. There was, therefore, an ideal level of taxation below which government revenue would fall short, but above which economic health and vigor would be compromised.

Yes, workers who don’t have enough money, because they’re overtaxed, would work less. Workers taxed less, and keeping more, would work more. Make sense?

No, but imagine the delight of Darth and Rummy. Everyone gazing at the napkin agreed: tax rates at the time—especially on the wealthy—were too high. If only someone would lower them to Laffer’s ideal level! Then, the “theory” went, workers would work more, expanding the economy, generating more tax revenues, and maximizing the whole schmeer.

The graph became known as “the Laffer curve” (so named by Wanniski) and formed the intellectual basis—such as it was—for “supply-side economics.” Laffer modestly allowed as how the idea wasn’t original to him—he had learned it from the fourteenth-century North African Arab historian Ibn Khaldun (full name: Abdurahman bin Muhammad bin Muhammad bin Muhammad bin Al-Hasan bin Jabir bin Muhammad bin Ibrahim bin Abdurahman bin Ibn Khaldun) and noted economist John Maynard Keynes. Still, they were dead. And Laffer was alive! Alive, we tell you! And thus able to inspire also-fairly-alive Ronald Reagan when he came to office six years later, laying the theoretical groundwork for the economic boom that followed, until it didn’t.

(We’d like to pause here and note that, for all the good and bad things about his presidency, GEORGE H. W. BUSH has never received adequate credit for calling Laffer’s folly “voodoo economics.” It struck us then, as it does now, as a better description than people know. Voodoo, as people do know, is a syncretic religion in which, among other things, effects are visited upon people, for good or ill, via the propitiation of various gods, and the symbolic acts visited upon physical representations of the target—e.g., you obtain a lock of hair of the beloved or behated person, do stuff to it, appeal to Ogun or Whomever with cigars and rum and chicken bones, and—magically—the subject of your concern experiences actual consequences. Same with supply-side economics: Lower taxes and people, spurred by being allowed to keep more of what they earn, will, like propitiated gods, “work more” or “work harder,” expanding the economy and generating an increase in government revenue. Thus, “voodoo.”* Well said, Poppy.)

It didn’t work out that way. Even many conservative economists said that supply-side gains didn’t generate enough revenue to offset Reagan’s tax cuts. As for nonconservative economists, we give you Paul Krugman:

Since the 1970s there have been four big changes in the effective tax rate on the top 1 percent: the Reagan cut, the Clinton hike, the Bush cut, and the Obama hike. Republicans are fixated on the boom that followed the 1981 tax cut (which had much more to do with monetary policy, but never mind). But they predicted dire effects from the Clinton hike; instead we had a boom that eclipsed Reagan’s. They predicted wonderful things from the Bush tax cuts; instead we got an unimpressive expansion followed by a devastating crash. And they predicted terrible things from the tax rise after Obama’s reelection; instead we got the best job growth since 1999.

So thanks for nothing, Arthur Laffer, who, Krugman also notes,

… has a truly extraordinary record of being wrong at crucial turning points.… Laffer was even wrong during the Reagan years: he predicted that the Reagan tax hikes of 1982, which partially reversed earlier cuts, would cripple the economy; “morning in America” promptly followed. Oh, and let’s not forget his 2009 warnings about soaring interest rates and inflation.

Maybe next time we try stimulating the economy with tax cuts, we’ll know enough to add cigars, rum, and chicken bones.