Wednesday, September 21, 2011

Return to Prosperity: How America Can Regain Economic Superpower Status by Laffer & Moore


It was a little crowded on the trail this week.  I went hiking with Arthur Laffer and Stephen Moore.   Actually, I was out hiking while listening to their book, Return to Prosperity: How America Can Regain Economic Superpower Status.  That sounds like something that we could sure use about now.  So, I was glad to have them along and eagerly listened to their story. 

First, I should introduce them in case you haven’t met them yet.   Moore is an economist who writes for the Wall Street Journal, and you may see him on some TV talk shows.  You may remember Dr. Laffer as being part of Ronald Reagan’s team where he came up with the theory of Supply Side Economics.   That theory is often associated with Austrian economic thought of Ludwig von Mises and Friedrich Hayek. This book is a follow on to their previous book "End of Prosperity" with a series of suggestions for how the United States can escape what is turning into a fiscal nightmare. 

With the US economy flat on its back, unemployment at a twenty-five-year high, housing still in the dumps, and a debt crisis, I am eager to learn how America can become the land of economic opportunity and prosperity again.

Laffer and Moore argue that good economics is simply the application of relatively easy to understand principles to solve problems in political economy. They believe that we have mistakenly followed big government Keynesian economics for too many years.  They advocate free markets and limited government in line with Hayek’s philosophy.

Laffer, who helped design the policies that pulled America out of the low-growth, high-inflation 1970s and put the economy on the track that led to twenty-five years of prosperity, presents a strong prescription for restoring America’s economic health.  Laffer asserted that the Bush and Obama administrations are failures because they have given us trillions of dollars of debt.     Laffer and Moore believe the common sense principles of good economic behavior that they lay out must be made in Fiscal Policy, Monetary Policy, Trade Policy, and Incomes Policy to get the U.S. economy growing again.  They presented an urgently needed road map to recovery.

Laffer and Moore are very disappointed with President Obama’s belief in Keynesian economics and government control of so much of the ecomony.  Laffer believes that Obama is a very smart man, but Obama’s policies are counter productive to his own stated agenda. 

Laffer and Moore offer numerous examples of how Obama's policies frustrate economic recovery.  For example, Obama’s goal of "energy independence" ignores the benefits of trade and the comparative advantages that come from it.  Generally speaking, if some parts of the world are oil rich but consumer poor, it is in the interest of both the US and these other countries to trade.  But Obama's policies compound the problem by actually limiting the productive ways we could achieve greater energy independence.

The Obama administration is actively opposing off shore drilling.  Obama assumes that by doing so he is helping protect the environment.  What he fails to recognize is that oil demand does not diminish just because the United States declines to access its reserves.  If we do not, other countries, many of whom do not have the environmental protections that we do, will drill. Indeed, even as the US has failed to drill off the shores of Florida, the Cubans have done so.

The Obama administration is also opposed to nuclear energy, one of the few forms of energy production with minimal carbon emissions.  Laffer and Moore are neutral on the "science" of global warming, but for the sake of discussion assumes that limiting carbon emissions is a legitimate policy goal.  Nuclear energy could easily be used in the United States to supplant power facilities that burn coal and other fossil fuels.  

And the criticisms that Laffer and Moore offer of Obama's energy policy are extended to Obama’s approach on health care, "job creation," and government stimulus bills. 

However, most of the book concerns tax policy, which is more or less what one would expect of supply side scholars.  Laffer and Moore are adamant that the efforts to increase taxes on the wealthy (those making more than $250,000 a year) and limit or cut taxes on the poor and middle class is counter productive. In classic supply side fashion, Laffer and Moore argue that raising taxes on the wealthy simultaneously reduces tax revenue from them and also short circuits economic growth. Nor do they think a tax increase will result in increased revenue for the government.  

The bulk of Laffer and Moore's book is arguing for substantive tax reform as opposed to merely cuts. Laffer and Moore suggest the US abandon its current tax code in favor of a flat tax on income with almost no deductions. They do make an exception for mortgage interest, but that is about it. They even suggest taxing unrealized capital gains yearly, a modification that would do more to "soak the rich" than even the most extreme demands for a tax increase on "those making more than $250,000." The bill for Warren Buffet alone would run into the billions (which would make me happy).   They believe that a flat tax would have a number of advantages over our current tax code, the most obvious being that it would give the markets a degree of certainty they lack now and would encourage, rather than discourage, growth. Laffer and Moore even propose rolling the payroll tax into the flat tax. 

Laffer and Moore then described in great detail how the federal government can actually receive more money by reducing taxes, a concept obviously not shared by our leaders in Washington DC today.

I was surprised at how non-partisan Laffer and Moore were in their comments and observations.  They looked back to JFK, applauding him for departing from the policies of Eisenhower and slashing taxes. I had assumed that supply side economists have a natural alignment with the political right, and I was surprised by the praise Laffer and Moore give to the presidency of Bill Clinton and even the ideas of Al Gore. They praised Reagan and Clinton alike for their reduction in taxes and stimulation of the economy.

I was also surprised at their recommendations that we need to start trading with North Korea and Cuba.  I was not surprised that they dislike unions, despise stimulus packages, love the flat tax and espouse offshore drilling in the Gulf of Mexico.   

I thought these two authors were fiscal and political conservatives until I read their acceptance of global warming and carbon "credits."  I was not happy to hear that they think the United States needs a so-called "carbon tax."   That was a big turnoff.  That discussion makes the book rather dated as no one is talking about such an expensive tax in this rotten economy.   

At the end of our hike on the trail, I told them that they had made me a strong believer that now is the time for a flat tax.  We parted company, and now I want to learn more about the flat tax.  I think my next hike should be with a flat tax advocate.  Do you know any?

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