Laffer-Curve Ideation: No Laughing Matter

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Arthur Laffer and his Curve (Photo Credit:  United Press International)

It is instructive that Bush the Elder derided Reaganomics with the label “Voodoo economics” during the 1980 Republican presidential primary season.  Bush correctly saw as fantasy the belief that large tax cuts would stimulate economic growth and thus increase or maintain tax revenues.  His use of this minority religion — African Vodun filtered through Haitian Vodou and into Louisiana Voodoo — was not arbitrary.   “The word voodoo comes from the word vudu, the Dahomean ‘spirit’, an invisible mysterious force that can intervene in human affairs.”  Bush knew that Reaganomics could not work without the intervention of an invisible mysterious force, the very definition of supernatural agency, and thus was essentially a religious belief system.

Mike’s recent demolition of the Laffer Curve, here and here, demonstrates that Bush’s inconveniently honest characterization was spot-on.  The Laffer Curve now stands exposed as nothing but a totem, not the graphic representation of some empirical reality but a venerated symbol of something already believed.  Like sacred objects generally, its meaning is not representational but emotional, not in the objective information it conveys — essentially trivial and tautological — but in the feeling it inspires.  It has those necessary qualities of belief symbols, ambiguity and plasticity; if you believe that taxes and government are bad, you can read into the Laffer Curve whatever feels good to you.

It’s easy to see why Reagan — a man of notably limited intellectual rigor who was susceptible to the charms of magic over science (see “Star Wars”) — was beguiled by Laffer’s belief system.  But why has this belief lingered?  Clinton raised taxes and the economy prospered while Bush the Younger cut taxes and the economy tanked.  Why does Laffer-Curve Ideation (LCI) persist today when the available evidence not only contradicts it, but suggests that it is at least partly backwards?  The answer to these questions lies in the condition of the wider culture, and it’s not a pretty one.

More and more, we live in a culture that validates feeling over thinking, rather than the other way round.  Strong feelings are admired, or at least tolerated, quite apart from the details of the subject to which the feelings are related.  To a certain extent this occurs across the political spectrum but seems most prevalent wherever faith-based ideation is most openly trumpeted, wherever the source of the feeling is less important than the feeling itself, wherever the bonding that comes from shared feeling is paramount.  All of this occurs most readily in religious contexts.  Since religious ideation is openly and fundamentally about “an invisible mysterious force that can intervene in human affairs,” it can only be expressed through emotion, through feelings whose source is never challenged.

I’m not an economist and I don’t pretend to any expertise in that area.  My sense is that economics is essentially about numbers, that it is a science, dismal or otherwise, and thus  that its propositions are amenable to modification by empirical data.  It certainly purports to make pronouncements about the world we all share.  The question raised by LCI — Under what circumstances do changes in tax rates for different income levels produce more or less revenue? — seems to be wholly an empirical one, albeit perhaps complex.   That question seems to involve testable hypotheses, part of the definition of scientific inquiry; it seems to address the physical rather than the metaphysical.  A neophyte like me expects some measure of expert consensus here, some path to informed agreeement.

That these economic questions are big and multivariate is not an excuse for the persistence of LCI.  There are bigger questions that involve more variables but that seem amenable to expert consensus.  For close to a century now — ever since Edwin Hubble discovered that  the universe is expanding — physicists have taken sides on the essential nature of the universe:  Is it closed, open or flat?  Will it ultimately collapse back upon itself (the so-called Big Crunch) or expand forever at an accelerating rate (until the Big Freeze or the Big Rip) or continue to expand but at decelerating rates, a flat universe?

This is a momentous issue for cosmologists and not a trivial one to any of us, at least philosophically:  What is the fundamental character of this universe we inhabit?  I bring it up here because, unlike economics, the hypotheses, beliefs, sides taken on this issue are all driven by data, by common-ground reality that is accessible to anyone with the education and cognitive ability to assess those data.  Einstein believed in a steady-state universe, not expanding at all, until he became aware of Hubble’s findings.  Each of these expansion possibilities — closed, open, flat — have had and still have their adherents, but each believer here must correlate his or her belief with the data that continue to pour in.  If you assert a belief in a closed universe, for example, you will be called upon to explain, mathematically, how the attractive gravity of the universe will overcome its recently discovered repulsive “dark energy” to stop the currently accelerating expansion.

One of these universe-views will eventually achieve a consensus.  In his 2012 book A Universe From Nothing: Why There Is Something Rather Than Nothing, Lawrence M. Krauss demonstrates that that consensus may turn out to be that the universe is flat.  But whatever and whenever that ultimate consensus, it will arise from the transparent analysis of physical phenomena, from data gathered, checked and re-checked by skeptical peers, transcending the feelings of the participants, without voodoo.

Why is the comparatively simpler discipline of economics seemingly incapable of doing this?  To be fair, economics entails one big source of variables that cosmology does not:  Human Nature.  (And, to be even fairer, is there anything as complex as the human brain?)  LCI makes at least one substantial pronouncement about human nature:  If we tax people too much, they won’t work as hard and the economy will suffer.  Is this pronouncement true?  It certainly appears to be a testable hypothesis, but Mike’s posts, see above, cite references to only two persons for whom that asserted tax disincentive may have operated, one wholly fictional, Nero Wolfe, and one largely fictional, Ronald Reagan.

Upon reading the Reagan anecdote, that when he reached the highest tax bracket he simply stopped making movies that year, my immediate impression was that it was simply not credible, at least as a generalized proposition of human nature.  People work for many reasons.  Mike’s post discusses those at the lower end of the compensation scale who have to work to eat.  They, of course, cannot realistically choose to make a political point by depriving Uncle Sam of his revenue.  And, as another anecdote, in my half century in and around the work force I have never met anyone who limited his or her work efforts for the purpose of achieving a lower tax obligation.  My experience has actually been the opposite of what the Reagan anecdote suggests:  that enhanced status is a powerful motivation for people to work and achieve a higher income.  To work hard and lift oneself up into a higher tax bracket means that one’s status has also risen.

What little I know about the Hollywood scene suggests that the enhanced status of higher income is at least as salient there as in the law offices I worked in.  Press agents reveal how much Actor X will be paid for the upcoming movie; actors do not hide the number of movies they make in a year — high demand increases one’s status even more.  Maybe Reagan’s antipathy toward taxes and government was so great, even during his acting career, that he gladly sacrificed that status in order to express his distaste.  Maybe.  Or maybe he was always as lazy as he was reputed to be in the Oval Office and simply didn’t choose to do more of even the decidedly non-grueling work of appearing in B movies.  If this latter, the anti-tax anecdote certainly makes lemonade out of that lemon.

And some people, perhaps many, actually enjoy what they do for employment.  Most work has a social aspect that people enjoy.  The work itself is meaningful to people, quite apart from the financial compensation for that work.  Work provides a framework, a structure that gives meaning to lives, a way to be a part of something larger than oneself.  In my experience this is a powerful aspect of human nature.  A belief in increased income taxation as a disincentive to work ignores all of this.

Why do people work, scheme, plead, whine, cajole and take on more responsibility to get a raise?  Doesn’t the Reagan anecdote suggest that they should be likely to try to avoid that additional income?  More taxes, after all.  Again, anecdotally, I’ve never encountered such tax-avoidant behavior in employment, mine or co-workers’.

So it seems that LCI depends on an aspect of human nature that is imaginary only:  we’ll work less if we’re taxed more.  This is a lot like believing that we’re all sinful.  Such beliefs feel good to believers, but they do not result in good social or economic policy.  Whenever we import an ignorance of human nature into government, it costs us.  Whenever we let strong feelings trump actual facts, we pay.  Laffer-Curve Ideation does all of that and it harms all of us.

ARC, 3/30/2012

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