Thursday, July 08, 2010

Let's Listen to Arthur Laffer

Arthur Laffer is a conservative economist who is frequently pilloried by the left. He is best-known for popularizing the "Laffer Curve," a graphical depiction of the relationship between tax revenues and tax rates. The curve shows how tax revenues rise as tax rates rise, but only up to a certain point. Once tax rates surpass a critical level, tax revenues actually fall. In other words, when tax rates are already high (as they are now), the government can generate more tax revenues only by reducing tax rates. Many people find this obviously logical conclusion extremely counterintuitive.

In today's Wall Street Journal, Laffer takes on employment and makes a cogent argument as to why more generous unemployment benefits simply result in more unemployment. The facts clearly support his conclusion, yet those who point out facts are often accused of being cold hearted. There are 26 million Americans who are "officially" unemployed, marginally attached to the labor force, or working part-time for economic reasons. Many more are still working, but are extremely nervous about losing their jobs. One of my best friends just joined the ranks of the unemployed. He lost a job he held for 18 years. This guy is very smart and hard working. He would never consider milking the system to collect benefits while he sits at home. Yet the evidence is clear. The more generous unemployment benefits are, the longer people take to find jobs. It may appear to be cold hearted to limit benefits, but it is even more cold hearted to initiate policies that keep people out of work for longer periods of time.

Today, the Department of Labor announced that there were 454,000 initial jobless claims for the week ending July 3. Amazingly, this is considered good news because it is 21,000 fewer than the week before and 6,000 less than what economists expected. The private sector is still paring jobs. So are state and local governments. Yet the federal government keeps employing more and more Americans. These days, a job with the federal government is the only job that offers some security. However, as the government's role in the economy increases, so does the national debt.

Laffer's remedy is radical, but it would have no doubt worked. He says that instead of wasting all that money trying to stimulate the economy, we should have eliminated all taxes for 18 months. Imagine how many jobs would have been created if workers and employers didn't have to pay any taxes. Is it too late to implement this solution now? I say better late than never.