The Laffer Curve turns 40: the legacy of a controversial idea

quote:

---

It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.

To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)

This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.

In the four decades since, the Laffer Curve and its supply-side message have taken something of a beating. They’ve been ridiculed as “trickle down” and “voodoo economics” (a phrase coined in 1980 by George H.W. Bush), and disparaged in mainstream economics texts as theories of “charlatans and cranks.” Last year, even Pope Francis criticized supply-side theories, writing that they have “never been confirmed by the facts” and rely on “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” And this year, French economist Thomas Piketty penned a best-selling back-to-the-future book arguing for a return to the good old days of 70 percent tax rates on the rich.

---