Laffer: the man behind the curve
Palos Verdes, Calif. — To his disciples, Arthur Laffer's ideas are steering America back to prosperity and productivity, toward becoming No. 1 again. To his critics, Dr. Laffer's simplistic notions will make the rich richer and the poor poorer while bringing down the whole economy in an inflationary inferno.
Dr. Laffer is a major prophet in the new religion of economics. The rising faith is economics of the supply side --and he has been preaching it since the early 1960s.
As an economist, and professor who teaches at the University of Southern Californa, Dr. Laffer has either fans or enemies; people like him or ridicule him. There does not seem to be much middle ground. And the chorus of criticism mounts daily. Sen. Edward M. Kennedy (D) of Massachusetts lambastes the Laffer theories as "jellybean" economics as often as he can, and he is joined by big labor, minority leaders, liberals generally, and probably the majority of American economists.
But Dr. Laffer's friends are in high places -- beginning with the Oval Office of the White House -- and that puts his ideas at the center of a revolution in US fiscal policy.
To Art Laffer himself, he is none of the things his friends and detractors claim him to be. "I'm no different from any other economist," he says. "You ask an economist his or her opinions, and they'll be just as frank and open with you as I am. My kids don't suffer from bad economics any more than yours."
The difference between Dr. Laffer and other economists is that, although he has been espousing the same theories for years, the right people have lately been listening. The right people being President Reagan, the director of the Office of Management and Budget, and some top officials in the Department of the Treasury.
He insists that the political tug of war over the "supply side" economics he teaches does not include him, but he kind of likes the "jellybean" metaphor and expands it to suit his own purposes. If economists ran a candy store, he explains, the jellybeans would taste better right now than the other candy in the shop.
Demand is currently quite brisk for Laffer's economics. In addition to a full teaching load at USC, he logs 15,000 miles a week, most of them between Los Angeles and Washington, for the purpose of testifying before congressional committees and meetings with members of the administration. What he talks about was dubbed supply-side economics years ago by a former Wall Street Journal writer, Jude Wanniski, in his editorials, and the label stuck.
To learn a little more about Dr. Laffer and his ideas, I journeyed to the mountain to meet the guru himself, actually, on a hill on the Palos Verdes Peninsula, southwest of Los Angeles. His attitude is about as severe and ascetic as could be expected from a man whose best friends are four large macaws and four children of varying sizes.
Laffer's economic theory, briefly, is this: Rather than reviving a sluggish economy by opening the federal purse, cut taxes to give people and businesses both the money and the incentive to become more productive. His now-famous "Laffer curve" is a calculation that in an environment of high tax levels, a properly executed tax cut could actually stimulate so much more work and income that the extra government tax revenues would exceed the size of the tax cut.
So the rallying cry for the Laffer school of supply-siders is "cut taxes" for business and for everyone who works. On the other side, a chorus of economists says, essentially, that the economy is far too complicated to respond to such a simple approach. Tax cuts, they argue, could not only stimulate more work; the extra income could also prompt many people to take more leisure. To them, Laffer says, "Baloney".
Right or wrong, his vogue now shows in his schedule. In addition to teaching and testifying, he also runs a small consulting firm that includes the government of Puerto Rico among its clients. His secretary squeezed our appointment into the time between his shower and breakfast.
On my way in the front door, two Laffer children dash out, on the way to school, and a slightly harried governess ushers me into the house. It is filled with Dr. Laffer's eclectic collection of antiques, many of them from his trips to the South Pacific. The house is rather expensive by Palos Verdes standards, which means three tiny bedrooms, two crampled baths, with living room, dining room, and kitchen to scale.
The backyard, however, is another story, and, his hair still wet from the shower, Laffer conducts a brief tour. Aside from the four brightly hued macaws, who adore him as an equal, Dr. Laffer devotes his free time to the more than 300 tropical plants and cactuses, mostly the latter, that fill the huge backyard.
"This and the kids are my incentive for doing the work," he says. "It's a way of completely decompressing in 10 seconds. When you're, "sitting here in the greenhouse, with a parrot and a turtle crawling by, can you think of economics? No, You completely blank it out, and you get completely into the cactus and the plants. It occupies you entirely."
Escape comes in handy for a man who constantly raises hackles. Comments such as "The best way to make the poor wealthy is to have a lot of wealthy" do not endear him to the longstanding liberal establishment.
"The progressive income tax is the bane of Western existence. It does nothing to help the distribution of income. It destroys income. The more successful you are, the higher your tax rates, the less incentive in your work for doing it," he says, seated at the dining room table, an urgency creeping into his relaxed demeanor.
"The whole essence of economics is incentives. It depends on how much you make for being more productive. That doesn't mean nothing else matters, but a study of economics is a study of that portion [of society] that is incentive oriented. There are tremendous productivity increases during wars. The incentives are very strong. If you lose, you get bombed. That's not a nice inventive, but . . . .
"The best way to make the poor wealthy is by having a lot of wealthy [people] . The more you make it so that capitalists, entrepreneurs, investors, savers, etc., can earn more, the better off the lower echelons will be."
Then-president candidate Ronald Reagan made the same point during a campaign stop in the Bronx last fall when he told a group of poor blacks that the best thing he could do for them was create an economy healthy enough to give them jobs.
"It makes sense." Laffer punches out the words."If there are 500 elevators in town and six elevator operators, elevator operators' wages are going to go up. You know that. You know that truck drivers' wages are not very high when there are no trucks around to drive. . . . The best way to make the poor well-to-do is to provide them with high-paying, productive jobs."
And the best way to do that, he explains, is remove the disincentive -- high tax rates -- faced by the people who already have jobs, particularly the people who have high-paying jobs. They are more likely to feed any increased income back into the economy via investments.By the same token, the wealthy would no longer seek out the nonproductive tax shelters they now squirrel their money into. Dr. Laffer wants to put the tax-shelter business out of business.
"Take the South Side of Chicago, or the Bronx.If you've got a problem with black unemployment, which we do, and it's getting really bad, then what you want to do is make it so that business comes there, so they have incentives to improve their lot. There's nothing wrong with black unemployment that a good economic policy won't cure.
"There's nothing more immoral than enacting policies, taxes, that destroy the production base -- from which everything grows."
It does seem to make sense, but an oft-hurled challenge to Dr. Laffer is that he makes sense to the wrong people, those lacking the sophistication of economists: journalists, especially businessmen, a football-player-turned-congressman named Jack Kemp, and the movie-actor-turned-president named Reagan.
"He tells people what they want to hear," comments Richard G. Kjeldsen, senior economist at California's huge Security Pacific Bank. "Businessmen love him. I don't think the implication of cutting taxes are that linear and that interrelated."
"He's an intriguing guy," Dr. Kjeldsen says."He's one we agonize over quite a bit, you know." His theories, Kjeldsen says, work on paper but not in politics. "It's all right to have these purist solutions if you're in the academic arena, and you have to take an extreme point of view to be listened to, but it's not the real world. You cannot, in this structured, monopolized, highly orchestrated world, throw the economy open to these sorts of pure, free-market solutions. . . . To cut taxes right now would be insanity. It would add to consumer [spending] and kick inflation up to the clouds."
Dr. Laffer agrees that his theories are only theories on paper, but he argues that they satisfy his role as an economist. Asked about political feasibility, he counters that "I'm not the right guy to ask about that. Ask the politician," adding that he has no desire to become a politician or a policymaker. "I'm very happy with my life here. I have no ambition to give it up. . . ."
He also feels that it is possible to turn the economy around within a single four-year administration. "You just undo want did [it]," he states, "and you do it in four years. If we want growth and low inflation, why don't we go back and do the policies they did when they got it. Which means go back to gold convertibility and cut tax rates."
"My critics say these theories are untried and untested, but the annals of history are loaded with this stuff. Untried and untested," he scoffs. "Give me a break.
"Tell me what happened in the '20s when they cut tax rates from a high of 78 percent to 25 percent, in 1922-23. The roaring '20s and the surpluses every year in the budget. . . . When Harry Truman cut tax rates in '45, we had no postwar recession. In fact, we had enormous private expansion. Inflation went down from 10 to 15 percent to zero."
"Of course I could be wrong. I don't think so for a minute, but I might be. We economists have a lot to be modest about. But I think the old-line demand-siders have a really bad track record. I mean, look at the economy.Do you think it's in good shape?"
Supply-siders often look to the John Kennedy administration for an example of the benefits of a tax cut. President Kennedy told Congress in 1963 that, despite a budget deficit, "reducing tax rates is the best way for us to increase revenues." He did cut taxes and revenues did increase, to the point where there was a $3 billion surplus in 1965.
But some don't think the Kennedy tax cut and revenue increases were connected. "I thought then that it was too large, and history has borne me out, " contends economist Otto Eckstein of Data Resources Inc., an econometrics forecasting company in Lexington, Mass. "The economy was already moving along very nicely, and [the tax cut] proved to be a tremendous consumer boom which was followed by a capital-goods boom during the [Vietnam] war, which gave us the inflation we have now. It stimulated demand, not supply. . . ."
Dr. Laffer will and does debate any and all comers on the potency of his tax theory. "I'd love to say it's brand new and no one's ever thought of it before, but it's not true. I just focus the idea on current issues" -- but he emphasizes, "The only thing that's relevant is that it's being discussed."
The way it is being discussed is somewhat unusual, though. Other economists do not simply enter into academic disagreement with him, they often speak of him with derision. Even Dr. Laffer admits that "my university colleagues don't like me at all. They think I am unscholarly and unscientific."
"Some of these supply-side guys." Otto Eckstein says, "want to believe that a tax cut will [affect only] the supply side, which is totally wacky. I wouldn't let a freshman in my beginning economics course at Harvard leave class with that idea. The conclusion that a tax cut will stimulate the economy is as unsubstantiated as ever. Completely off the wall. . . ."
Here in the eye of the economic storm, though, Laffer's fire-engine-colored macaw. Red, decides my interview has gone on long enough. Red ambles up Laffer's arm and starts to nuzzle him. This bugs the feathers off Molly, a mostly blue-and-yellow macaw, who climbs down from her tree perch and stalks across the yard to let Red know just who the favorite really is.
"Molly's my baby," Laffer says. "She's been with me the longest, and she is very possessive. She doesn't like Red up here, but she also doesn't like you sitting here." We have, by this time, been driven out of the house and onto the patio by an abusive vacuum cleaner.
"I think there are two reason why Art's critics are so harsh," comments Alan Reynolds, vice-president of research at First National Bank in Chicago and a supply-sider himself. "Art's personality can be grating. he can rub people the wrong way when he tells them they are wrong. But you also have to remember that if we are right, then an awful lot of people have been awfully wrong. If we are right, then the theories of the Keynesians have been responsible for the decline in the American standard of living. So the reaction is bound to be pretty harsh."
One often-heard criticism of tax-cut proposals is that they will fuel inflation, because consumers will just go out and spend the money rather than save it. Dr. Laffer dubs that reasoning "lopsided."
"Savings is future consumption, and the only reason people save is to consume in the future. If you prevent them from consuming in the future [with burdensome tax rates], then they'll stop saving. If you cut taxes, consumers will spend more, and they will save more. Don't worry about them. They'll do real well. If you hold everything else constant, this will encourage savings, not guarantee it."
Laffer on some other points:
On Chrysler: "Chrysler should be let go. I wrote a report four years ago that said Chrysler was ready to go belly up. Ford's next." He thinks Chrysler was choked by excessive federal regulations which make it possible for only large companies -- such as GM, with the resources to meet them --to survive. "It's not fair, but why should you pull new businesses down by keeping old ones alive? There's only one way of bailing out Chrysler, and that's by hurting someone else who's alive. We can't indemnify society for past errors."
On auto and steel import quotas: No. "We've destroyed our own auto and steel industries. Why should we try to destroy the Japanese auto and steel industries?"
On federal spending cuts: "They are not the key element of this package. I don't think federal spending should be reduced in the aggregate. I don't want to see welfare people cut off because of a policy of federal spending cuts. I want to see their welfare cut off because they have high-paying jobs. I do, however, think the stuff [Budget Director David] Stockman is doing is great."
On taxes, one more time: "IT is impossible under standard economic procedures we use for a cut in income tax rates to do anything but increase output. It invariably increases work effort."
On a Ronald Reagan report card: "The final exams aren't in yet. He's given a few good recitations in class, and I'm very optimistic that he will stick to his proposals. The bottom line, though, is the policies he has enacted four years from now."
Meanwhile, a visitor from the French Consulate has also journeyed up the hill to consult the tax-cut guru and has been waiting patiently in the living room for about 45 minutes now, so I decide to head back down into smoggier air and less pure economics .