Tuesday, January 21, 2014

Art Laffer Deserves and Gets the Praise of Paul Krugman and the Rest of Us

Incredible, an Honest Conservative Comes Forth - Sort Of

Via Paul Krugman’s superb blog in the New York Times we are sent to this 2009 commentary by Arthur Laffer, whose Laffer curve is the basis of the totally and completely discredited view that tax cuts pay for themselves by stimulating economic activity.  Here is Mr. Laffer predicting ruinous inflation over 4 years ago because of the Fed’s monetary policy.

It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.

And to prevent this Mr. Laffer urged the Fed to reverse course, which of course the Fed did not do. (Thank you).

Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion. Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves. Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.

Now if nothing else this writing is deserving some praise because it acknowledge that the proposed action would contract the economy, whereas many other proponents of the same policy felt it would be expansionary, basic economics being somewhat beyond their ken.

But the real story here is Mr. Laffer’s response when confronted with the fact that his prediction was wrong, not just sort of wrong, but horribly, terribly, completely wrong.

arthur laffer
Now if he will just admit the Laffer curve is wrong . . . .

In an interview with Business Insider from his office in Tennessee, Laffer admitted that he was wrong. The old maxim that dictates increasing the availability of cash through lower interest rates will lead to higher prices, he said, may need to be reexamined. 

"Usually when you find the model this far off, you've probably got something wrong with the model, not that the world has changed," he said. "Inflation does not appear to be monetary base driven," he said. 

Wow, a person admitting that they were wrong, that their core policy beliefs were wrong.  Mr. Krugman tips his hat to Mr. Laffer and we do to.  But one final cautionary note.  Inflation can be monetary base driven,  economics is a science where the laws of behavior are not consistent over all scenarios.

And unfortunately our praise has to be tempered by these idiotic remarks.

He now predicts Republicans will take over the Senate in 2014 — and in fact has consulted on recent campaigns. Anger over Obamacare, he said, will push them to victory. He drew a parallel between Jimmy Carter's response to the 1970s' energy crisis, which did nothing to alleviate demand for gasoline and President Obama's approach to expanding insurance.

"You can't give away healthcare and not expect the system to overuse it," he said.

Uh, first of all health care reform is not giving away health care.  Other than Midicaid expansion it is making health care affordable and accessible.  And as for over-using the system, what exactly does he think is happening now.  The U. S. spends much more on health care than any other nation, much, much more.  The hope is that health care reform will move more individuals into prevention rather than treatment mode, and while this hope may not be realized, it is the basis for the reform. 

So we have Mr. Laffer reverting to nonsense and ignorance, and tarnishing his previous good comments.  But the fact that we had those comments is reason enough to celebrate.

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