Arthur Laffer: The Real 'Stimulus' Record

online.wsj.com ^ | 8/5/2012 | Art Laffer

[RoosterRedux]

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

[Portcall24]

An accurate and concise presentation of reality. Thanks.

[randita]

Excellent editorial!!!

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.

[central_va]

What a great place this world would be if John Maynard Keynes had never been born.

[central_va]

What Art doesn’t realize is that this is desirable situation, all part of the Cloward-Piven strategy.

[sickoflibs]

RE :”If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).
Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment. “

Stimulus is a short term political solution to get those elected through the next election. Democrats emphasize spending more and Republicans emphasize tax cuts more than Dems do; but those elected especially in the WH are dependent on stimulus to court voters(everyone LOVES getting FREE STUFF). And there is a whole army of gubment economic experts that will claim that it ‘works’, and Dems can always find a Bush or Mccain economic adviser to back them up.

Stimulus is like the old trick of putting saw-dust in the car engine crankcase to sell it to the sucker before it blows up , the sucker being the voter.

BTW : uber stimulus is a housing or internet stock investment bubble. It looks like uber growth for a while, then boom!

[Graewoulf]

BUMP!

[dalebert]

ping..its a bandaid that all

[ctdonath2]

Salient quote: every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP.

[sickoflibs]

The ABBO are getting annoyed with my pessimism today.

[stephenjohnbanker]

” Stimulus is like the old trick of putting saw-dust in the car engine crankcase to sell it to the sucker before it blows up , the sucker being the voter.”

The REAL problem, is that the current crop of Republicans in D.C. don’t give a rats azz about the country.....only themselves. The R’s are doing nothing.....just hiding, and
hoping to get elected again.

[yefragetuwrabrumuy]

Dr. Laffer has this disturbing, nagging problem of being not just right, but EXTREMELY right.

Yet, for their part, the Keynesians are so determined to do the opposite of his advice that I wish he would tell them to *not* repeatedly hit themselves in the forehead with a claw hammer, lest they hurt themselves.

Some of them would be unconscious on the floor, others after having woken up would be bashing themselves on the forehead again, still others would be unclear on the idea and bashing other body parts, and the rest, suffering grievous injuries would be like the Monty Python “black knight”, rejecting any notion that they were harmed in any way, and in fact, were getting the best results possible by bashing themselves in the forehead.

I suppose it’s not so bad if they do these things to themselves, but they shouldn’t be allowed to keep bashing the economy on its forehead with a claw hammer.

[remember]

Dr. Laffer has this disturbing, nagging problem of being not just right, but EXTREMELY right.

In fact, as economist Lars Christensen states in this post titled Arthur Laffer you’re embarrassing yourself, I think that Laffer has a bad case of President Derangement Syndrome (PDS)! Following is the summary of an analysis that I posted at this link:

In summary, Laffer makes a number of mistakes in his editorial. The first is to compare growth in GDP rates with government spending as a percent of GDP. He is testing for a relationship between two variables but expressing one of them (spending) in terms of the other (GDP). That is, he is linking them by design! As an example of this link, suppose that spending remains constant but GDP drops. By simple arithmetic, this will cause spending as a percentage of GDP to rise and be interpreted by Laffer as stimulus. This seems like an incredibly elementary mistake for a professional economist to be making.

The second mistake is to select one span of data and look at only that data. Laffer chooses to look at GDP growth from 2006 to 2009 and government spending from 2007 to 2009. The tables at this link show calculation for these same variables going out to 2011 instead of 2009. As can be seen, this causes the results to be very different. For example, the 4 nations with the highest drop in GDP growth rates are Slovenia (-23.1), the Slovak Republic (-22.0), Greece (-21.1), and Iceland (-19.7) the span is increased from 2009 to 2011.

It's often a good idea to look at all of the available data in graphical format (such as the one above) to get a look over all possible time spans. Similar graphs for Finland, Ireland, and the Slovak Republic can be found at the aforementioned link.

Finally, Laffer makes the mistake of not giving a precise source that allows his calculations to be checked. This may be as much of a mistake of the Wall Street Journal as it is for Laffer. I believe that all publications should mandate that precise sources be given and, if possible, links be provided to background material that explains the author's calculations. Then, others will be able to check the author's work, especially in the case where the publications chooses not to do so or does a poor job of doing so.

[yefragetuwrabrumuy]

I think there is a basic disconnect between Arthur Laffer and Lars Christensen, in that they are looking at similar things, but from different perspectives.

In Laffer’s case, he is looking at the relationship between government and economics, based on the assumption that policy does impact economics, by changing the behavior of people. But Christensen’s viewpoint is that economics functions on its own, that the influence of government can often not be directly correlated to economics.

Yet this means that both can be substantially correct, yet partially wrong.

But in economics what matters is not theory, but how theory plays out in the real world. Laffer was right, whether he expressed it in a way that Christensen though was proper in economics; but in his time, Christensen’s doom and gloom predictions for northeastern Europe missed by a mile, though in theory they were quite accurate.

[remember]

Laffer was right, whether he expressed it in a way that Christensen though was proper in economics;

Laffer may be correct that some governments implement stimulus programs that are not productive. Personally, I think that the truth is probably much more subtle than stimulus being generally good or bad. Spending on infrastructure that is really needed and will provide benefits to future productivity is likely a good thing. Spending on unneeded projects, like digging a hole and filling it in again, is likely a bad thing. It's a mistake to treat all stimulus the same.

In any event, my whole criticism of Laffer's editorial was his math. Was there anything in my comment above or my analysis at this link that you disagree with? In fact, I have run across a number of similar critiques of Laffer's editorial. Following are a few of them:

Arthur Laffer you’re embarrassing yourself

Arthur Laffer, Anti-Enlightenment Economist

Why History of Economic Thought Is Important: Whack-a-Mole Wall Street Journal/Arthur Laffer Edition

Poor Spokesmen

Arthur Laffer’s Anti-Stimulus Curve Ball is a Foul

There seems to be a general consensus that Laffer math is deeply flawed and that none of it provides any evidence for his contention that stimulus doesn't work. There may be a case to be made but Laffer did not make it. The only case that I think that he made was that all publications should mandate that precise sources be given and, if possible, links be provided to background material that explains the author's calculations. That would have saved a lot of people a great deal of time analyzing his deeply flawed table.

[yefragetuwrabrumuy]

The trouble with many of these criticisms is that they are either Keynesian apologetics or attacks. Laffer, since Reagan, has been seen as the arch-enemy of such people who have gone to lengths to tear him down, often at a personal level. They are desperate to defend their bloated and failed New Deal and Great Society philosophies.

Government stimulus has failed, and pretty terribly, with any seeming improvements coming at tremendous deficit cost. They have the facade of other socialist “successes”, dependent on someone outside the system to subsidize it, yet always demanding more resources, growing beyond sustainability, and seeking cost containment by failing at their stated goal.

The hallmark of the Obama stimulus has been crony capitalism, in which large amounts of money were given to existing companies owned by Democrat supporters, who were told to make a specific new technology. And thus they failed.

Comparatively, when the Pentagon wants a new technology, such as a small UAV, it let the free market innovate a thousand possible varieties, then the Pentagon chooses the successful winners to get the money. No stimulus involved, but both results and stimulus are achieved. Lots of spinoffs to the private sector as well. It is efficient.

With these two ways of doing business side by side, the concept of stimulus fails horribly, so that it does not work is an axiom on which to build. Revisiting, and endlessly trying to justify stimulus achieves nothing other than to delay reform. But that is the objective of those opposed to reform.

So yes, Arthur Laffer merits some criticism over his math, or lack thereof. Had he included it, his critics would have disputed that 1+1=2. Likewise he can be criticized over omitting his sources, which had he done so, would have been likewise eviscerated to no end other than to do so, no matter their objectivity, accuracy, or reality.

As a final note: It is just embarrassing to cite Krugman for anything outside of his very narrow field of study, New Trade Theory and New Economic Geography. Otherwise he is just as incredible as any other White House spin doctor, parroting the Democratic party platform issue du jour.

[remember]

So yes, Arthur Laffer merits some criticism over his math, or lack thereof. Had he included it, his critics would have disputed that 1+1=2. Likewise he can be criticized over omitting his sources, which had he done so, would have been likewise eviscerated to no end other than to do so, no matter their objectivity, accuracy, or reality.

So you're saying that Arthur Laffer did not include his math or his sources because he would have been eviscerated for doing so? Sadly, I believe that may be true. I believe that Laffer already had his desired conclusion and then cherry-picked numbers that would back it up. He likely also knew how obviously wrong it was to test for a relationship between two variables but express one of them (spending) in terms of the other (GDP). He knew that his phony numbers would be eviscerated by any honest analysis of them. But he also knew that they were unnecessary for his true-believers. For them, he could simply say, "Let it be written, the great Laffer has looked at some numbers and they show that stimulus doesn't work". And his believers would all say, "Verily, verily, as the great Laffer has spoken, so it must be".

Seriously, that is why that don't pay any attention to anyone who doesn't provide usable sources. More often than not, they're hiding something. People who have nothing to hide want people to check their work. Once again, if you can find anything you disagree with in my analysis, I'd be more than happy to hear it. Otherwise, I'll just have to go with the numbers.

[remember]

Sorry, I posted the wrong link. This is my analysis.