Cross-posted from the Chronicle of Higher Education?s Brainstorm blog
Arthur Laffer is back. There he was holding forth on Fox News the other day, replaying his Golden Oldie about how lowering tax rates increases growth, which increases government revenue. According to David J. Lynch in Business Week, even many top Republican economists find Laffer?s notion absurd:
In practice, the 1981 Reagan tax cuts left revenues about 30 percent below where they would have been if rates hadn?t changed, says Lawrence B. Lindsey, director of the National Economic Council in the Bush Administration. The Bush tax cuts cost $1.5 trillion in lost revenue over 10 years, the Congressional Budget Office estimated last year. ?The notion that a broad decrease in tax rates raises revenue was never taken seriously by professional economists,? says Alan D. Viard, who worked for the Treasury Dept. on tax issues in the George W. Bush Administration and is now at the American Enterprise Institute in Washington?.?It doesn?t make much sense to increase the supply of goods and services at a time of excess capacity,? says economist Bruce Bartlett, a veteran of the Reagan White House and the Treasury Dept. under President George H.W. Bush. ?Under current circumstances, the problem is a lack of aggregate demand.?
That the evidence points clearly 180 degrees away from Laffer does not impress either Rupert Murdoch?s propaganda network or the leading Republican candidates, according to Lynch, who writes:
Among 2012 Republican Presidential candidates, Representative Michele Bachmann has pronounced herself an ?Art Laffer fiend.??Front-runner Mitt Romney ?believes increasing revenues can be a result of reducing tax rates.??Minnesota?s former governor, Tim Pawlenty, touts a Lafferesque growth plan that would cut taxes and, he claims, reduce projected deficits by almost half before cutting spending. ?These Republican candidates are world class,? Laffer says, almost leaping from his chair. ?The whole field?s wonderful!?
Meanwhile, the fact that Alan Greenspan belatedly expressed the opinion that his long-running utopian model of a self-regulating market was ?flawed? does not keep the Financial Times from running his column, in which the world?s most influential Ayn Rand adept recently argued against excessive government precautions (for example, increased capital reserves by banks) on the ground, expressed in his usual orotund fashion, that ?excess reserves thus seem to have taken on the status of a buffer, rather than actively participating in, and engendering, lending and economic activity.? Such measures as guaranteeing that Japanese nuclear plants don?t break down in an earthquake?his example?are, Greenspan maintains, unproductive. They
require the building up of a buffer of idle resources that are not otherwise engaged in the production of goods and services. They are employed only if, and when, the crisis emerges. The buffer may encompass expensive building materials whose earthquake flexibility is needed for only a minute or two every century, or an extensive stock of vaccines for a feared epidemic that may never occur. Any excess bank equity capital also would constitute a buffer that is not otherwise available to finance productivity-enhancing capital investment.
As Reuters? superb economics writer Felix Salmon points out, the Japanese example is grotesque, for earthquake protection has to be built. It creates jobs: “It?s hard to see how the production of goods and services means that the economy is not engaged in the production of goods and services.? As for bank reserves, Salmon adds,
the stated aim of high bank capital requirements is that it will help prevent banking collapses. That?s a good idea, even if Greenspan doesn?t seem very impressed. But there?s another way that high bank capital requirements can help the economy. They start being used when the economy is in crisis?.
But the incompetent, negligent, sometimes greed-crazed bank lending policies that brought down the world economy have not taught Greenspan that banks have other priorities than ?finance productivity-enhancing capital investment.? Greenspan has not learned from mistakes that were made (by him, among others). He doubles down. Like Laffer, he?s in the grip of dogma. For him, regulation is guilty till proven innocent. For Laffer and his fans, tax-cutting, for everyone, is always of benefit.
But when news media go looking for experts, they don?t examine their records. Baseball announcers would be fired for not knowing the RBI records of designated hitters. But editors don?t think it?s their business to vet their experts. They?re not enamored of expertise, they?re enamored of the aura of expertise. They embrace their experts all the way over the cliff.
Some years ago, I wrote about the example of Edward Yardeni, formerly the chief economist of Deutsche Bank, who anticipated a world depression as the likely outcome of Y2K, yet remains on many a go-to list for economic commentary. That he was badly mistaken did not impair his place on the media quotemeister list. Just this month, for example, he shows up not only in the FT but also Bloomberg, USA Today, and a San Francisco Chronicle blog?though one is thankful that he appears mainly to state the obvious.
Yardeni?s errors were, on the scale of consequence, trivial. But the crackpot ideas of Laffer and Greenspan are far from that. It would be hilarious were it not tragic that the same party that denies climate science and sneers at Ivy League professors lends its collective ear to quacks and that journalists take them seriously.