The Man Who Liberated the Republican Party

Reed Saxon/AP Photo

Economist Arthur Laffer, known as "the father of supply-side economics" and who was an economic advisor to President Ronald Reagan, speaks in Anaheim, California. 

Amid the daily horrors emanating from the White House, one symbolically important one may have missed your notice. Donald Trump recently decided to bestow the Presidential Medal of Freedom on Arthur Laffer, perhaps the single most discredited economist in America. Here’s how the proclamation described him:

Arthur B. Laffer, the “Father of Supply-Side Economics,” is one of the most influential economists in American history. He is renowned for his economic theory, the “Laffer Curve,” which establishes the strong incentive effects of lower tax rates that spur investment, production, jobs, wages, economic growth, and tax compliance.

That’s basically true, if you define “renowned” as “notorious” and “establishes” as “misleadingly asserts.” But about Laffer’s influence there is no doubt. For his service to the Republican Party, he certainly deserves any award the GOP can offer. Because what he really gave them was the ability to govern in a completely different way from what they or anyone else had imagined was possible. Laffer told Republicans, though it took them a little time to figure out the implications, that they were free to act without constraint. It was gloriously liberating, and its consequences reverberate to this day.

Before we get to how this is playing out in the Trump era, a brief bit of history. As the story goes, Laffer sketched out his curve on a napkin at a dinner in 1974 whose attendees included influential Wall Street Journal editor Jude Wanniski (who would go on to spread its gospel) and two Ford administration officials, Donald Rumsfeld and Dick Cheney. The curve purported to show that since if you had a tax rate of 100 percent no one would bother working and tax revenues would be zero, then lowering the tax rate at almost any point must inevitably produce an increase in tax revenue.

It was an idea that despite being idiotic at its core had a powerful appeal. We can cut taxes and raise revenue? The deficit will go down without any hard choices being made? What a spectacular win-win!

Laffer’s gift to Republicans was an assertion, an argument, a justification with which they could anoint their policy fantasies. Never again would they need to worry about the fiscal consequences of doing what they already wanted to do. They were liberated.

Of course, it was utterly and completely wrong, as even a cursory look at history demonstrates. Laffer curve in hand, Ronald Reagan said he could cut taxes, massively increase military spending, and reduce the deficit. The deficit rose when he did the first two, just as his 1980 primary opponent, George H.W. Bush, predicted when he called the idea “voodoo economics.”

Bush’s chief economic adviser when he became president, Harvard economist Greg Mankiw, famously referred to fellow conservatives who believed that tax cuts pay for themselves as “charlatans and cranks.” But there was little patience in the party for that kind of nay-saying. When Bill Clinton raised taxes in 1993, Republicans predicted recession; instead what resulted was a boom that eliminated the deficit. Then George W. Bush cut taxes, with the accompanying prediction that the deficit would decline in line with Laffer’s theory; the deficit exploded again.

Yet Laffer was never deterred, nor were the Republicans who found his theory so attractive. After all, if I told you that eating a pint of Ben & Jerry’s every night would make you lose weight, you’d be pretty tempted to listen to me, wouldn’t you? It’s why Laffer, along with TV “economist” Stephen Moore, got hired in 2012 by then-Governor Sam Brownback of Kansas to show the state how to get that tax cut magic. Brownback touted their plan, a dramatic reduction in business taxes, as a way to supercharge the state’s economy. Instead, it was a disaster, sending tax revenues plummeting and forcing brutal cuts to services as the state underperformed the national economy. In the end, the Republican legislature rescinded most of the cuts.

None of this reduced the esteem with which Art Laffer was regarded in the GOP, for the simple reason that they all know it’s a scam. The point is not to produce good economic and fiscal outcomes, it’s to get your tax cuts.

Then came Donald Trump’s presidency, and once again Republicans began preparing a massive tax cut for the wealthy and corporations, using as the rationale Laffer’s fundamental idea that cutting taxes will produce a lower deficit. Trump’s economic adviser Gary Cohn said, “we can pay for the entire tax cut through growth.” Treasury Secretary Stephen Mnuchin agreed: “Not only will this tax plan pay for itself, but it will pay down debt.” Paul Ryan insisted, “we’re right there in the sweet spot, with economic growth that gives us more revenue with where we need to be.” “I not only don’t think it will increase the deficit, I think it will be beyond revenue neutral,” said Mitch McConnell. “In other words, I think it will produce more than enough to fill that gap.”

You probably know what happened next. The deficit increased in 2018 after Trump’s tax cuts passed, and will increase again in 2019; the Congressional Budget Office projects that it will be $896 billion this year, twice what it was as recently as 2015. Meanwhile, the effective corporate tax rate—the amount they actually pay—has fallen to a mere 7 percent. And according to a recent Congressional Research Service report, the tax cut had almost no impact on economic growth.

But to Republicans, none of that matters at all. Sure, they would have been happy to see growth skyrocket, the deficit go down, and prosperity shared by all. But even if it didn’t, that’s fine with them. They don’t care if they’re wrong about the effect of tax cuts, or even how often they’re wrong. They love Laffer’s lie so much that they trot it out every time they’re in a position to govern, because when they do, it opens up worlds of possibility.

Do you think that people like Mnuchin, Ryan, and McConnell are going to say, “Well, I guess we learned our lesson: Tax cuts for the wealthy and corporations don’t actually pay for themselves. Who knew?” Or that there will ever come a moment when they'll decide not to do something they want to do because it will raise the deficit? Of course not.  

And they must surely look on Democrats with pity. Always so concerned about whether their economic predictions will come true, always obligated to say how they’ll pay for their proposals, Democrats trim their ambitions and erect fences around their ability to act. If they were like Republicans they’d say, “My proposal for universal pre-K will cost nothing; in fact, it’ll make us money.” But they don’t say that, the result being that they promise, and then deliver, at least some measure of pain along with every benefit.

The result is two fundamentally different styles of governing, one restrained and the other unbound. And rest assured, the next time power changes hands, Republicans will immediately cry that we can’t do any of what Democrats propose because it will just be too costly. Then they’ll go back to their offices and have a good hearty laugh. 

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