"Keep your stinking monkey paws off my economy, you dirty ape."

Thursday 8th December 2016

  

"Keep your stinking monkey paws off my economy, you dirty ape."  --   A modified quote by Arthur Laffer, with apologies to Charlton Heston in "Planet of the Apes"

ref:- "Reagan's tax guru predicts US nirvana", Interview, The Financial Times

It's not as though there's nothing going on  --  amongst other things we're all waiting on the ECB's policy decisions this afternoon. But we felt we had to point you towards the FT's interview with Arthur Laffer, he of "the Laffer Curve" fame. People like Arthur Laffer don't come around too often, which may be a good or bad thing depending on your points of view both politically and economically ..... which of course in this case amount to much the same thing.

The Laffer Curve links rates of tax to levels of government income. It says that if the government charges no tax, its revenue will obviously be zero and if it levies tax at a rate of 100% its revenue will also be zero because no one would bother to work or they'll avoid payment altogether. Somewhere in between the tax rates of 0% and 100% lies the optimum point for government finances, and because of incentivisation and higher growth, that point is much nearer the lower end of tax than the higher one. It's also why Laffer himself is known as a father-figure in supply-side economics which, since we're doing definitions, can be defined as :

"a school of macro-economics that argues that economic growth can be achieved by implementing tax and fiscal policies which create incentives to produce goods and services and invest in capital  --  in other words, cutting taxes to encourage spending" www.telegraph.com

Anyway, although the theory was never claimed to be original, it became known as the Laffer Curve after he sketched it out to explain how revenue changed with tax levels to Donald Rumsfeld and Dick Cheney when they were working for Gerald Ford's administration in the mid-1970s. It became a linchpin of Ronald Reagan's economic policy in the 1980's and also informed Mrs Thatcher's thinking in the UK. With those sort of names on the list of adherents, you can plainly see which end of the political spectrum Mr Laffer is coming from.

Critics argue that the Laffer Curve is too simplistic and ultimately assumes one rate of tax, which would entail the better-off enjoying the rump of the tax cuts. The argument that ALL would benefit, the (in)famous Trickle-down theory, is one that infuriates liberals. Besides, they might also point out, the evidence suggests that Mr Laffer's conclusions are not actually borne out by the evidence.

It's certainly true that the Reagan era saw a massive increase in trade and budget deficits. But Mr Laffer might respond by highlighting the economic growth rates during that period, and he also poses the question : what successful economy attracting foreign investment would NOT run up a trade deficit ? As to the Budget deficit, he and his supporters seem unconcerned  --  "Deficits don't matter", said Cheney.

Mmm .... perhaps the best that can be said for the Laffer Curve Theory is that , economically speaking, it is unproven. Politically however, its message remains strong and with the emergence of Donald Trump it's right back on centre-stage. You could say that its political attractions have lasted better than the questions over its economic effectiveness.

It's no surprise that Mr Laffer is excited by the rise of President-elect Trump (with the exception of the latter's protectionist trade position). The similarities between the present and the beginning of the Reagan administration are constantly referred to, though there are plentiful differences too  --  not least, tax rates are already a lot lower than they were when Mr Reagan came to office. But in Mr Trump, Laffer has found a president who plainly buys into the thrust of his theories, and one with whom he shares some strident views.

Both men are fiercely critical of the ultra-loose monetary policies of Fed Chair Janet Yellen, and of anyone who would artificially interfere with markets that should be left to themselves to decide values. The "stinking monkey paws" line of the title is aimed at Ms Yellen, and at Paul Krugman (the liberal economist with whom Laffer has been having a ding-dong for years), and to any other "would-be dictators of the economy".

He's a character, all right ..... and you get the impression that you'd never be left in any doubt as to what his opinion was on any subject.