Is Arthur Laffer Setting Up Another Debt Bomb?

Arthur Laffer, the primary architect of Reagan’s debt bomb that we are currently trying to defuse, has now executed a complete 180° turn from his monetary policies that gutted the Midwest industrial base in the 1980s. In a WSJ article on September 22, 2009, he claims the problems of the Great Depression are not caused primarily by tight monetary policy but rather tariffs and taxes. While he gets the facts he mentions right, he ignores the timing of taxes and deficits, tariffs and balance of trade.

He’s right that talk of tariffs may have been the trigger that started the Great Depression. However, we are in a recession now so new trade restrictions are obviously not going to cause it, which was his first timing error. As the actual tariffs were relatively modest by historical standards and did not apply to most products, the tariffs are not considered the most important factor in the collapse of trade during the Great Depression. Laffer’s characterizing tariffs as tax increases is obviously self-serving as they were not intended to primarily generate revenue but to protect domestic industry.

The situation with the balance of trade is what makes restrictions in trade acceptable today when it was stupid in 1929. In 1929 the USA was a net exporter of manufactured goods while today we are net importers (even excluding oil). The fact that our trading partners exercise unfair trading practices is long established and the United States will continue to decline if nothing is done about it.

Laffer is also correct that increases in taxes made the Great Depression worse. However he leaves out the factor of timing to make his point that we should have no tax increases to balance the budget. The budget was balanced by tax increases from 1929 to 1932 while the economy was declining that so that there was no net stimulus from government spending increases during this period. The conservative economist and icon Murray Rothbard detailed these mistakes in his America’s Great Depression.

Hoover’s mistake was in balancing the budget during a time of economic decline. Rothbard claims that without the distortion of this government reallocation things would have been better but there still would’ve been a significant recession and unemployment. Keynes proved that during times of recession the government can run deficits that will minimize the decline in the economy and employment. A key tenet of Keynesian thinking is that during times of full employment the government must not run deficits or it will cause inflation. This is accomplished by a cutback in government stimulus spending and tax increases. The tax increases of the 1990s showed that careful tax policy can increase taxes without slowing growth.

Below is a chart of the budget deficit and GDP growth from 1929 to 1940. From 1929 to 1931 the budget was basically balanced and the economy continued to decline. Recovery started once a significant deficit was started in 1932. In 1938 the budget was again balanced, primarily through the reduction in stimulus spending and the economy dipped into a short but severe contraction. During the Great Depression, tax policy had relatively little effect on overall economy activity as long as a deficit and loose fiscal policy was maintained .

Laffer also makes the claim that there was significant inflation during the middle of the Great Depression, though this appears to be simply to allow him to tip his hat to Friedman by once more stating that “inflation was strictly a monetary phenomenon.” I’m sure Laffer’s numbers on inflation from 1933 to 37 were correct (though I couldn’t figure out exactly where they came from, all of mine are from US Government sources) but they ignore the fact that prices had declined below the cost of production from 1929 to 1932 and had to recover. Below is a chart on Inflation versus GDP Growth. While there was some inflation after growth started in 1932 it did not begin to offset the deflation that occurred from 1929 to 1932.

Finally, Laffer made some comments on gold buying that ignored the fact that banks were collapsing due to the deflation in asset prices. Rothbart recognized this and concluded that Roosevelt had no choice in closing the banks. Gold was nationalized after trust in banks was reestablished by the introduction of FDIC. Gold was taken out of circulation and then increased in price to devalue the currency versus other nations and reestablish international trade. Because gold was no longer used in domestic exchange there was minimal inflationary impact inside the United States.

Mr. Laffer’s final statement: “My fear is that they will misinterpret the evidence (of the Great Depression) and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits” seems to imply that taxes should never be raised to balance a deficit. Running deficits during times of full employment is what got us into this mess and will simply lead into another debt bomb.

Perhaps he’s just not able to say that the current Democratic administration is correct in trying to hold off budget balancing until after the economy is fully recovered. If this is the case, Mr. Laffer is correct in being concerned because a key lesson of the Great Depression is that balancing the budget during a time of economic downturn will have serious negative consequences.

Disclosures: none for this article

Comments

[colodude:]

Whereas Dr Laffer is not in the current administration, it is difficult to see how he preparing anything of consequence. He gets press time because of his name. Where is the economist who matters? He sits as chair of the Fed, and I agree, I am watching intently for the day when the Fed governors persuade Dr Bernanke to take the candy away from the Congress out of fear of utter financial destruction. Regards to all.
colodude

Sep 28 08:32 PM

[Valley Boy:]

It was unfortunate that President Hoover did not have an advisor similar to Arthur Laffer. An advisor like him could have said that it was temporarily unwise to raise taxes during a steep economic decline in order to balance the federal budget. As it happened, the Democratic Congress worked with and/or pressured President Hoover in legislating the tax increases included in the Revenue Act of 1932 in June of that year. The tax increases made the economics of the Great Depression worse for at least another year by routing dollars to the government and away from the people.
The stock market bottomed in July of 1932. That may have been either coincidental to the balancing of the federal budget or attributable to the budget balancing. Perhaps an historian could weigh in on that topic.

Sep 28 09:16 PM

[W.E. Heasley:]

One Eye (aka Patch Man ):

Tony Petroski stated it correctly, succinctly, and covered all of the bases.

Patch Man, apparently Tony doesn’t buy into that Keynesian dribble you espouse.

Consider Tony Petroski your new mentor.

Your response to Tony is: “I agree with the Laffer curve but as implemented by Mr. Laffer it only seems to have one side: tax cuts. Too many tax cuts caused the debt bomb we are in for which I blame Laffer as the starting point“.

Patch Man, Laffer was trying to point out there is a “Equilibrium” along the Laffer Curve where a certain tax rate raises maximum government revenue. To go beyond equilibrium creates lower taxes as the “economic effect” trumps the “mathematical effect”. Further, Laffer will tell you he did not come up with the idea. It goes back to a 14th Century North African polymath Khaldun.

Before you write another article outlining your view of Political-Economy regarding Art Laffer and The Laffer Curve, or basically any other Political-Economy subject, it might be a good guideline to get your facts straight.

Tony, hope you don’t mind, but here is an added point:

The Keynesian Jump Start theory (“Stimulus” which is better signified by the term “debt”) always comes with the lovely diagram of the "bucket".

The bucket represents demand. The bucket's content is household, business, and government demand for goods and services. A recession, according to Keynesians, is a bucket that is not full to the brim. The bucket is no longer full as the demand components of households and businesses has shrunk and hence its the government's responsibility to increase its expenditures (increase its component of the bucket) in order to bring the bucket back to full.

Seems like common sense. However, the increased Government Expenditures that attempts to fill the bucket is really draining the bucket simultaneously. Its counterintuitive. As the government increases spending, Private Capital Formation leaks out of the bucket. Hence you try and try to fill the bucket but it remains below the brim.

Once you stop filling the bucket with Government Deficit Spending, you now must pay for the Deficit Spending. Hence Keynesians raise taxes. The taxes then create another leak in the bucket. Hence the bucket goes right back to the level that you began with before you started this wasted exercise.

Patch Man, you should wear the bucket over your head.

Sep 28 09:37 PM

[rosey99:]

Thanks for an interesting piece, it really demonstrates to me that I am in the wrong profession. Wouldn't it be great to be an economist? I would love to make a living by wrestling historical speculation into the pose of historical fact. It's wonderful, you can never be wrong, at least not until someone invents a time machine. Fortunately for those devoted to the discipline of Counter-Factual History, most people do not seem to understand that these ideological assertions masquerading as science, can never be proven true either.

To assert that Laffer had nothing to do with the Reagan debt bomb is laughable. While he did not create the conditions necessary all by himself, he did offer the rationalizations required to spend more while taxing less. After all, tax revenues were to rise, so why cut spending when cutting taxes? As rationalizations go, it is one every human being can be proud of. Almost gymnastic in quality. Or perhaps contortionist is a better word.

Ideas, like people, do not want to die, as Mr. Petroski's comment spells out. The current state of discourse in the discipline of macroeconomics more generally illustrates this beautifully. Perhaps the behaviorists will get in on the act. Maybe we will salvage some ideas with actual intellectual heft from the wreckage wrought by too many philosophers. I'm not holding my breath. I don't want to turn blue.

I am always astounded that there are people out there promoting the status quo of ideas. As if the budget deficit were some abstraction, a theoretical symbol in an equation, that could grow to infinity. Sadly, both of the twin deficits are real. They are both the creations of human beings, albeit short-sighted human beings. They, like all things human, have their very definite limits. A blind (visually challenged?) man could see from a mile away that taxes have nowhere left to go but up. And yes, that is the real legacy of Arthur Laffer. It is a gift that will keep on giving for a long time.

On the bright side, the pseudo-science of Laffer, much like phrenology, can only thrive in a specific social context. These ideas require a certain sense of entitlement, mixed properly with equal parts irresponsibility and hubris. All three ingredients are becoming mighty scarce these days.

Thanks again for the post. The travails of economists would be really interesting if they weren't so damn tragic in consequence.

Sep 28 09:39 PM

[One Eyed Guide:]

W.E. Heasley (does anyone call you Weasley?),

Thanks for the comments but I thought I said I agree with the Laffer Curve, just not the implementation? Was I not clear? My apologies.

Here it is clearer: Laffer had the right idea, he just did not teach people how to execute it right and it resulted in a debt bomb.

I'd also like to point out that there is no capital formation when capacity utilization is 68% like today so there can be no crowding out of private investment by government stimulus so there is no "leak in the bucket." As utilization increases due to stimulus and the economy approaches full employment things change and Keynesians believe that Government spending should be stepped down so that it does not crowd out private investment. As politicians have a hard time cutting back, when the economy is at full employment taxes should be raised if there is still an inherited deficit and research (by C. Romer, look it up) shows that this will have a positive multiplier effect on growth, possibly because of lower interest rates as the government is not competing for money and causing inflation.

I've got my bucket on and it looks good. Have you got yours on?

The Patch Man (Call me anything you want, just don't call me late for dinner) One Eyed Guide

On Sep 28 09:37 PM W.E. Heasley wrote:

> Patch Man, Laffer was trying to point out there is a “Equilibrium”
> along the Laffer Curve where a certain tax rate raises maximum government
> revenue. To go beyond equilibrium creates lower taxes as the “economic
> effect” trumps the “mathematical effect”. Further, Laffer will tell
> you he did not come up with the idea. It goes back to a 14th Century
> North African polymath Khaldun.
>
> Before you write another article outlining your view of Political-Economy
> regarding Art Laffer and The Laffer Curve, or basically any other
> Political-Economy subject, it might be a good guideline to get your
> facts straight.
>

> ... the increased Government Expenditures
> that attempts to fill the bucket is really draining the bucket simultaneously.
> Its counterintuitive. As the government increases spending, Private
> Capital Formation leaks out of the bucket. Hence you try and try
> to fill the bucket but it remains below the brim.
>
> Once you stop filling the bucket with Government Deficit Spending,
> you now must pay for the Deficit Spending. Hence Keynesians raise
> taxes. The taxes then create another leak in the bucket. Hence the
> bucket goes right back to the level that you began with before you
> started this wasted exercise.
>
> Patch Man, you should wear the bucket over your head.

Sep 28 11:19 PM

[johngonole:]

Reagon was able to force a cut in taxes via his popularity but like all politicians didn't hold the line and let congress deficit spend. The author I think is off base laying all the problems at the feet of Laffer who has never been an elected representative. Obviously cutting tax rates will only optimize tax revenues if you are starting from the high point on the curve.

The problem we have is that the M1 base is what ultimately controls LONG TERM inflation/deflation. M1 is always increasing because Keynesians deficit spend at all times. I'd agree with Keynesian philosophy if I ever thought they would reduce spending during times of economic booms. When the budget was balanced for about two months in the late 90's we should have been cutting budgets and running surplusses. We should have had surpluses again in 2004-2006. This would have prevent the housing boom.

Stable long term prices prevent the booms and bust. Stable long term prices prevent misallocations of resources. Both parties share full responsibility for all the booms and bust since at least the 70's as we go from each boom and bust into ever higher deficits. Eventually all debts will be wiped and so will our dollar.

Beware those of you who are trying to save your way into prosperity. Borrow some money it is the only true protection.

Sep 28 11:53 PM

[W.E. Heasley:]

No offense, but you trashed Laffer in the article with less than a very good Political-Economy argument. Absolutely no offense, but you need to go back and study Laffer more closely.

The bucket over my head may well improve my looks, but I'm sticking with Laffer's Theory.

Equilibrium of Taxation is very important. Laffer's most important point is the total tax revenue consequences, given a tax rate.

The Laffer curve is basically explores going past equilibrium with a tax rate. That the "economic effects" trump the "mathematics" of higher tax revenues, given a higher tax rate, when go past equilibrium.

That an equilibrium within taxes is clearly in play and the economic consequences must be accounted for in the formula.

Go back and study what Laffer said. Interesting and applicable information.

Go back and look at that Theory. Take a look at the "economic effect" vs. "mathematics effect" discussion within the theory.

Signed,

Bucket

Sep 29 12:15 AM

[Carlos Lam:]

Guide, I'm no fan of Dr. Laffer (he still owes Peter Schiff a penny), but the situation today is very different than it was during the 1930s or even the 1980s, to wit:

* National debt/GDP in 1982 was about 19%, today it's 90%

* Unfunded liabilities (SS/Medicare/Rx) today are at $59 TRILLION; I can't find a figure for '82

This means that the risk of default (either outright or via money printing) is higher today than it was in the 80s because the government is too close to its maximum debt carrying capacity (I'd say it was OVER its carrying capacity). To regain credibility among foreign creditors (remember Sec'y Geithner being laughed at by the Chinese students?), we HAVE to reduce our debt or we will suffer a currency crisis.

Sep 29 06:04 AM

[One Eyed Guide:]

W. E. Heasley (AKA Bucket),

The issue with how Laffer taught the Laffer Curve is that a graduated Tax system should be charted in 3 dimensions rather than just one. The simplistic one dimensional analysis of taxes as shown in Laffers "The Laffer Curve: Past, Present, and Future" (www.heritage.org/Resea...) ignores any issue except overall tax rates. You can achieve the same overall tax rate with a much steeper graduated tax rate, get all the benefits and not lead to a debt bomb.

Note that Laffer even quotes Keynes as a proponent of the idea yet he ignores everything else Keynes cautioned about.

One Eyed Guide (AKA Bucket)


On Sep 29 12:15 AM W.E. Heasley wrote:

> No offense, but you trashed Laffer in the article with less than
> a very good Political-Economy argument. Absolutely no offense, but
> you need to go back and study Laffer more closely.

Sep 29 08:46 AM

[Stable Beta:]

Hey, Reagan did his part. He even shut down the government at one point.

On top of that, he started the “President’s Private Sector Survey on Cost Control” — the Grace Commission. This found over $400 Billion in savings.

Unfortunately, even on this, the Congress did not act on the vast majority of it.

Blame Congress, not Reagan. Heck, no sitting president has EVER introduced a spending bill before Congress. All the president can do is use his bully pulpit, sign, or veto.

Sep 29 12:06 PM

[steve8714:]

Pardon me, tax cuts did nothing to grow debt, nor did monetary policy eviscerate our industrial base. Pro-merger mania in the financial sector, abetted by absent anti-trust enforcement since the Carter administration, allowed the manufacturing sector to wither.
How many times have we heard "We don't make buggy whips anymore." or listened to some douche from Goldman talk glowingly about the FIRE economy? Now we don't make autos anymore. We don't build warships anymore. We don't build computers anymore.
We don't make anything anymore. We have forgotten that to build wealth, one must make something, grow something or dig something out of the ground.
Don't be too sanguine about GNP graphs from the '30s; that number includes government "services".


On Sep 28 07:41 PM One Eyed Guide wrote:

> Tony,
>
> Call me Guide.
>
> I agree with the Laffer curve but as implemented by Mr. Laffer it
> only seems to have one side: tax cuts. Too many tax cuts caused the
> debt bomb we are in for which I blame Laffer as the starting point.
>
>
> As far as Keynesian theories being disproven, read Minsky either
> "John Maynard Keynes" (for what the theory really is) or "Stablizing
> an Unstable Economy". The later is amazing in how well it predicts
> the current debt bomb explosion caused by a change in investor confidence
> which reduced the acceptable level of risk and caused a rush for
> the exits.
>
> I predict another rush for the exits but I could be wrong as the
> Keynesian stimulus is pushing money back into the system as shown
> by today's M&A activity.
>
> We'll see. It's only money.
>
> On Sep 28 07:05 PM Tony Petroski wrote:

Sep 29 01:15 PM

[W.E. Heasley:]

One Eyed (Bucket Junior):

Apparently I have your attention. Apparently you are doing more research on the Laffer Curve (good!). However, even the many posters above pointing out the flaws in your argument leave you undaunted.

Moreover, you apparently have seen your unwise ways of posting an article accusing Art Laffer of a Debt Bomb without proof. However, you've posted it for all the world to see and its on the web FOREVER!

Lets go back over this subject one more time:

(1) does the Laffer Curve display a trade off between tax rates and tax revenues? Yes.

(2) along the curve there is an equilibrium that generates maximum tax revenue? Yes.

(3) does exceeding equilibrium reduce taxes as the economic effect/economic behavior trumps the mathematics of ever increasing tax rates supposedly generating ever increasing tax revenue? Yes.

Bucket Junior, in the 1970's and at other times the tax rate has exceeded equilibrium as described in the Laffer Curve.

Moreover, when you exceed tax rate/tax revenue equilibrium then disposable income is out of equilibrium as well as taxes become disincentives to economic behavior.

Hence the argument in the 1970's was that a movement back to equilibrium along the Laffer Curve would increase disposable income as well as increase tax revenue.

Bucket Junior, did the major economic malaise, stag-flation, etc. of the 1970's end in the 1980's? Yes.

Did the malaise, in part, end due to tax cuts? Yes.

Bucket Junior, knowing you would be unhappy in the future, Ronald Reagan had a crystal ball and covered your future Keynesian needs by using Keynesian Deficit Spending as well. However, Reagan elected to use the super Shovel Ready conduit of Military Spending. The military always has 500 projects ready to go in a moments notice. Plus due to national security, most of the items had to be made by American contractors, producers, ect. which cleverly avoided the protectionism argument as the existing law stated the use American items due to National Security.

Signed,

Bucket Sr.

Sep 29 02:44 PM

[One Eyed Guide:]

Zen Bucket Master Sr.

Please explain the debt bomb if not an aspect of a poorly taught Laffer Curve. In your explaination of the wisdom of the great Laffer and mighty Reagan, debt should not have taken off like a rocket but remain controlled. The great senior Bush (BA Economics Yale) looked at what Laffer and Reagan had wrought and called it "Voodoo Economics". Still looks that way to anybody who knows economics. (Note Bush I leveled out the debt rocket until his son came back and reinstituted Laffer economics.)

Awaiting enlightenment
Humble Student Bucket Jr.

On Sep 29 02:44 PM W.E. Heasley wrote:

> One Eyed (Bucket Junior):
>
> Apparently I have your attention. Apparently you are doing more research
> on the Laffer Curve (good!). However, even the many posters above
> pointing out the flaws in your argument leave you undaunted.
>
> Moreover, you apparently have seen your unwise ways of posting an
> article accusing Art Laffer of a Debt Bomb without proof. However,
> you've posted it for all the world to see and its on the web FOREVER!
>
>
> Lets go back over this subject one more time:
>
> (1) does the Laffer Curve display a trade off between tax rates and
> tax revenues? Yes.
>
> (2) along the curve there is an equilibrium that generates maximum
> tax revenue? Yes.
>
> (3) does exceeding equilibrium reduce taxes as the economic effect/economic
> behavior trumps the mathematics of ever increasing tax rates supposedly
> generating ever increasing tax revenue? Yes.
>
> Bucket Junior, in the 1970's and at other times the tax rate has
> exceeded equilibrium as described in the Laffer Curve.
>
> Moreover, when you exceed tax rate/tax revenue equilibrium then disposable
> income is out of equilibrium as well as taxes become disincentives
> to economic behavior.
>
> Hence the argument in the 1970's was that a movement back to equilibrium
> along the Laffer Curve would increase disposable income as well as
> increase tax revenue.
>
> Bucket Junior, did the major economic malaise, stag-flation, etc.
> of the 1970's end in the 1980's? Yes.
>
> Did the malaise, in part, end due to tax cuts? Yes.
>
> Bucket Junior, knowing you would be unhappy in the future, Ronald
> Reagan had a crystal ball and covered your future Keynesian needs
> by using Keynesian Deficit Spending as well. However, Reagan elected
> to use the super Shovel Ready conduit of Military Spending. The military
> always has 500 projects ready to go in a moments notice. Plus due
> to national security, most of the items had to be made by American
> contractors, producers, ect. which cleverly avoided the protectionism
> argument as the existing law stated the use American items due to
> National Security.
>
> Signed,
>
> Bucket Sr.

Sep 29 02:59 PM

[Living4Divi...:]

We do not know whether Keynesian Policies works or not because TRUE Keynesian Policies has not been employed in this country for many decades.

As I have written in my July 09 article on SA:
"Keynesian policies have a tremendous amount of merit. Keynes solution had two steps:
Keynes Step One: Governments should boost spending during a downturn in order to boost the economy. During a downturn, interest rates should be kept ridiculously low, and credit should flow freely while the government takes on massive amounts of debt.
Keynes Step Two: After the recession is over, turn off the credit and money spigot. To prepare to fight the next recession, the excess Federal Debt should be paid down. During good times credit should be tightened in order to sop up the excess.

Over the past three decades, the monetary and fiscal authorities have only followed one half of Keynes solution. The credit spigot has been left on for many decades. Debt levels reached during one recession were never whittled down during the following recovery, it just piled up.

The government merely implemented the most politically popular parts of Keynes' theories (the massive spending part) and neglected to do the clean up work that followed (the saving part). After all, who wants to clean up a mess?

Keynesianism only works when you employ both parts."

I have to agree with Tony P

On Sep 28 07:05 PM Tony Petroski wrote:

> Mr. One Eye. I suggest opening the other eye.
>
> The author:
>
> "Arthur Laffer, the primary architect of Reagan’s debt bomb that
> we are currently trying to defuse, has now executed a complete 180°
> turn from his monetary policies that gutted the Midwest industrial
> base in the 1980s."
>
> Arthur Laffer wasn't "the primary architect of Reagan's "debt bomb,"
> and he certainly had nothing to do with the "monetary policies that
> gutted the Midwest industrial base in the 1980's."
>
> A bit of history. Laffer is famous for his "Laffer Curve," a bit
> of common sense that Laffer and others were forced to preach due
> to the wackiness of the Keynesians in the disastrous late '70's.
> Laffer popularized the idea that there were two tax rates that raised
> no revenue: 0% and 100%. That at other places along the curve,
> like in 1980, high taxes raise less revenue than lower taxes. He
> was proved right as the Kemp-Roth tax cuts led to a booming economy
> with a massive increase in tax revenues. What Laffer did not say
> was that lowering taxes would balance the budget. Obviously if you
> spend money even faster than the increased revenues you are going
> to have a deficit, and that's exactly what the Democrats in Congress
> did in the 1980's. Hardly "Laffer's debt bomb." It took the feckless
> Bill Clinton (quick, describe "Clintonomics" in a paragraph or less)
> and a Republican Congress to balance the budget.
>
> Keynesianism has no successful models in history. Keynesianism never
> works because, while politicians the world over are willing to "stimulate"
> the economy with pork handed out to their supporters during downturns,
> there has never been an actual sighting of the author's description:
>
>
> "A key tenet of Keynesian thinking is that during times of full employment
> the government must not run deficits or it will cause inflation.
> This is accomplished by a cutback in government stimulus spending
> and tax increases. The tax increases of the 1990s showed that careful
> tax policy can increase taxes without slowing growth."
>
> While Keynesianism may make some sense on the chalkboards of academia,
> the Keynesians always have the spending pedal to the metal and the
> so-called "careful tax policy" of the 1990's was nothing of the sort.
> The Democrats succeeded in raising taxes post 1992 (recall: that
> was "the worst economy since the Great Depression") but that's what
> they do. It's in their DNA. It's not the result of "careful" anything
> or fine-tuning this and that. The "peace dividend" collected by
> Clinton had been paid for by Reagan and Bush before him. The economy
> set in motion by Reaganomics continued to produce booming revenues
> into the '90's which was able, thanks to the Republican Congress
> after 1994 to keep pace with the ever-rising government spending
> even though Mr. Clinton assured us that "the era of big government
> is over."
>
> Since then, Republicans became Keynesians so we are once again all
> Keynesians now. Muslim fanatics knocked over several buildings on
> 9/11 waking us up from our peace dividend stupor, and we now desperately
> need more Reagans, Volckers and Laffers and fewer Krugmans, Obamas
> and Geithners. I'm giving Bernanke a pass so far. He's flooded
> the markets with liquidity as he is "a student of the Great Depression,"
> and so begins the easy part of Keynesianism. It will be fascinating
> to watch the unraveling as "the stimulus is removed," the impossible
> political task of Keynesianism.

Sep 29 03:30 PM

[W.E. Heasley:]

Bucket Jr. aka Weed Bucket Hooper:

In supply side theory (aka Voo Doo) you pair tax cuts with the reduction of the size and scope of Government. Would you agree?

Would you also agree that its very difficult to reduce the size and scope of government due to unionized work force, an entrenched bureaucracy, and protection from Congressional Progressives (Socialists)?

Another fellow with an Economics Degree, Ronald Reagan (per your Bush point above) was only able to slow government size and slightly reduce scope.

The constant march of Government Size and consequential cost plays into the size of debt you discuss above.

How did Laffer have anything to do with size and scope of an out of control government which is the debt you mention?

Sep 29 03:34 PM

[One Eyed Guide:]

After reading all the comments above, I think it is time to go thermonuclear:

Clinton managed to shrinking government, increase GDP, increase income, decrease the deficit in spite of raising taxes which should be impossible under Laffer, Monetary and Supply Side theories.

How do you deal with reality?

Sep 29 06:33 PM

[W.E. Heasley:]

Dear Bucket Jr.:

But Weed Bucket Hopper, your new argument has nothing at all to do with accusing Dr. Art Laffer with creating a Debt Bomb.

Also, your most current argument has missing items as well:

(1) Clinton cut Capital Gains taxes which increased tax revenue (Ops!),

(2) Clinton's income tax increases were modest and were merely a movement along the Laffer Curve. It could be further argued the curve itself shifted and a new temporary equilibrium was established,

(3) the government shrunk in size and scope is a highly questionable assertion,

(4) a missing point is that Clinton adopted many supply-side policies,

(5) Clinton reorganized Welfare which is clearly a conservative issue that saved tons of money but the savings merely reduced government size in a temporary fashion. The remaining components continued to rage onward.

Weed Bucket Hopper, how about that reality? Plus don't go Thermonuclear as we have KDI (Keynesian Defense Initiative).

Signed,

Bucket Sr.


On Sep 29 06:33 PM One Eyed Guide wrote:

> After reading all the comments above, I think it is time to go thermonuclear:
>
>
> Clinton managed to shrinking government, increase GDP, increase income,
> decrease the deficit in spite of raising taxes which should be impossible
> under Laffer, Monetary and Supply Side theories.
>
> How do you deal with reality?

Sep 29 08:04 PM

[Carlos Lam:]

On Sep 29 06:33 PM One Eyed Guide wrote:

> After reading all the comments above, I think it is time to go thermonuclear:
>
>
> Clinton managed to shrinking government, increase GDP, increase income,
> decrease the deficit in spite of raising taxes which should be impossible
> under Laffer, Monetary and Supply Side theories.

1. Pres. Clinton largely adopted ideas ushered in by a GOP Congress who was (at first) actually willing to cut spending. Indeed, this is the gripe from some of Pres. Clinton's critics from the left.

2. Pres. Clinton was President during the invention of the Internet (a time akin to the beginning of the Industrial Revolution) and, thus, the economy benefitted tremendously from productivity gains during his tenure.

Sep 30 06:42 AM

[One Eyed Guide:]

I can't resist it: Clinton increased taxes before he cut taxes.

Taxes were cut in 1997 because too big a surplus was being generated, which, according to Keynes, could be predicted to slow growth and was the primary cause of the recession of March 2001.

The fact that capital gains were cut instead of the income tax is due to the incorrect application of Laffer Curve and caused the tech bubble to accelerate. Private debt probably would have been paid off if income taxes had been cut instead of the capital gains tax. The decrease in the capital gains forced more money into the tech bubble. However, it did result in increased tax revenue and budget surplus from the increased speculative churn. This "Laffer Curve" effect was a net drag on the economy if you understand even neoclassical economics.

Clinton did what he had to do to get anything through a Republican Congress. The fact that the economy went basically sideways (or down) after he left shows he was guiding things, not Republicans. In 8 years there should have been a strong recovery from the 2001 recession, instead we are in the Great Recession (or the Greater Depression for fans of Doug Casey.)

Welfare reform as done by Clinton was outline by him in the 1980's and is similar to Minsky's Keynesian based recommendations, not Republicans, who wanted to cut support for the poor, not reform welfare.

Finally, internet usage in the U.S. has gone up 130% since 2000 so Bush benefited the most from the productivity growth due to the internet.

Sep 30 09:00 AM

[W.E. Heasley:]

Weed Bucket Hopper Jr.:

Above you mention "if you understand even neoclassical economics". In several of your arguments above you use phases eluding to "if you know economics". What you are really saying is: if you know economics then your really only know economics if you agree with my (weed bucket hopper) economics. That's your argument.

The problem appears that Keynesian, neo Keynesian, new Keynesian, neoclassical, etc. are all economic concepts we do in fact understand. We also understand Supply-Side and Monetary. We understand Keynes and Friedman.

You, on the other hand, are stuck in a 1975 Columbia University Keynesian Economics class room and are afraid to come out of the classroom door as you know Milton Friedman is laying for you in the hallway.

If you want to talk about debt drag, try the real debt drag: the accumulation of unfunded promises (entitlements) of the Financed Welfare State. Look at the interaction of the Political Class legislating moral obligations upon the Production Class and the consequential promises to the Recipient Class.

Regardless, you are still stuck with your accusation that Laffer created in the past and is still creating, a Debt Bomb. Your argument is a Spruce Goose.

Signed,

Bucket Sr.


On Sep 30 09:00 AM One Eyed Guide wrote:

> I can't resist it: Clinton increased taxes before he cut taxes.<br/>
>
> Taxes were cut in 1997 because too big a surplus was being generated,
> which, according to Keynes, could be predicted to slow growth and
> was the primary cause of the recession of March 2001.
>
> The fact that capital gains were cut instead of the income tax is
> due to the incorrect application of Laffer Curve and caused the tech
> bubble to accelerate. Private debt probably would have been paid
> off if income taxes had been cut instead of the capital gains tax.
> The decrease in the capital gains forced more money into the tech
> bubble. However, it did result in increased tax revenue and budget
> surplus from the increased speculative churn. This "Laffer Curve"
> effect was a net drag on the economy if you understand even neoclassical
> economics.
>
> Clinton did what he had to do to get anything through a Republican
> Congress. The fact that the economy went basically sideways (or down)
> after he left shows he was guiding things, not Republicans. In 8
> years there should have been a strong recovery from the 2001 recession,
> instead we are in the Great Recession (or the Greater Depression
> for fans of Doug Casey.)
>
> Welfare reform as done by Clinton was outline by him in the 1980's
> and is similar to Minsky's Keynesian based recommendations, not Republicans,
> who wanted to cut support for the poor, not reform welfare.
>
> Finally, internet usage in the U.S. has gone up 130% since 2000 so
> Bush benefited the most from the productivity growth due to the internet.

Sep 30 09:58 AM