Laffer on Prosperity

Laffer had an excellent opinion piece in the Wall Street Journal yesterday. Laffer points out that our economy and stock market have done better with less government intervention and lower taxes. Reagan's and Clinton's administrations were the best for our economy in recent years. I'm hoping that because Obama has economic advisors from Reagan's and Clinton's administrations that he will follow their advice.

I've pasted the piece below. Hopefully, I'm not violating copyright laws. Here is also a link to the WSJ.: http://sec.online.wsj.com/article/SB122506830024970697.html

By Arthur Laffer

About a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled "The End of Prosperity." Little did we know then how appropriate its release would be earlier this month.
Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."
David Gothard
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.
If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.
Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.
The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.
But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.
These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.
I was on the White House staff as George Shultz's economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.
I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.
The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!
Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.
There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.
Mr. Laffer is chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let it Happen," just out by Threshold.
Please add your comments to the Opinion Journal forum.

Tax Advice for Joe the Plumber

I work with small business owners. Small businesses like the one Joe the Plumber wants to buy can be structured as LLCs, sole proprietorships or "C" or "S" corporations. In each case, the taxes will be different. I think Joe should get a good accountant who will explain to him how he can lower his tax liability. Anyway, when Joe says that the business "makes" $250,000 to $280,000, does he mean that's the annual taxable income?

In my area, plumbers charge $100 to $120 per hour, and they charge for travel time. Most folks around here feel that is way too much. What do people making the minimum wage do when they have to call the plumber for $120 per hour? They try to fix the leak themselves. I don't have a problem with a bit more progressive tax rates when they are hitting people who earn that much. I mean when nursery school teachers make $20,000 per year and public school teachers make $40,000 to $60,000 per year in before tax dollars, why shouldn't Joe's profitable business pay three percentage points more on what he earns over $250,000 to help lower teachers' taxes and enable them to have a bit more money to pay the plumber in an emergency or to pay for heat in winter?

Actually, I'd really rather have a flat tax and no social security taxes for the lowest wage earners. No FICA on anyone earning $25,000 or less. It would be an instant raise for the lowest wage earners and an instant tax break for all companies employing them -- including the self-employed small business owners. Then, make the top earners still pay FICA. That could bail out the social security system and boost productivity.

The funny thing is that Joe the Plumber reminds me of Josephine the Plumber -- the old spokesperson for Comet cleanser.

Paul Krugman Win Economics Nobel

Paul Krugman is a professor of Economics at Princeton and a columnist for the New York Times. I love reading Krugman's columns, but he got his Nobel Prize for his work on international trade. His work simplified much of the complexity inherent in explaining international trade. And it looked at international trade in a new way, explaining why Americans would buy Volkswagens, while Germans would buy Fords.

Here's a link to the lead story in the New York Times. http://www.nytimes.com/2008/10/14/business/economy/14econ.html?partner=permalink&exprod=permalink

Conservatives tend to dislike Mr. Krugman because he has many liberal ideas about how to make the economy work better for all. Even though I tend to be fiscally conservative, I think Krugman makes a lot of sense on many topics. But I did major in economics in college.

Starting a Nonprofit

I'm involved with two groups that are thinking of starting nonprofit companies. One would help seniors with transportation. The other would help them "age in place". Aging in place is a national movement to help seniors stay in their homes as long as possible. The Beacon Hill Village model, made famous by articles in AARP Magazine and The New York Times, is the model most groups are following. The group I'm with doesn't want to follow their model. We're creating our own.

The senior transportation nonprofit could follow a model from New Canaan, CT, called Get About, or the ITN America model.

In any case, even starting a nonprofit, we will need to do the same sort of work that any start-up must do -- ask the right questions about our mission, our goals, our strategies and our tactics. We'll need a plan. I'll contribute the questions I ask all start-ups -- read them on my website: www.upstartbusinessplanning.com.

I have another blog on aging in place, which I don't update often, but you can read some of my research, if you're interested -- www.agingwithgrace.blogspot.com.

Can We Survive?

My daughter and I read science fiction. One of the most common themes in recent books is the world wide great collapse. I'm beginning to think that we are facing the beginnings of that economic collapse. It's spreading around the world. My bigger fear is that as the economies collapse, a few countries will ban together to a war to get us out of it. Think about it.... WWII got us out of the Great Depression.

Or will entrepreneurs get us out of the problem with great new inventions? Will the creative brains go into engineering and science instead of investment banking?

Meltdown Continues

It's looking really bad for small businesses and educational institutions. Money market funds are freezing, preventing schools from making payrolls. Small businesses are having their lines of credit frozen.

The House of Representatives need to take action. They can't dither and act the way they usually do.

See The Wall Street Journal and the New York Times for articles.
www.wsj.com and www.nytimes.com.

Economic Rescue Plan, aka, Bailout

I'm fascinated that after the "$700 billion bailout" for Wall Street failed to pass in the House that it's suddenly acquired a new name -- "The banking rescue plan". The media have jumped on the bandwagon.

The media realize that our nation's credit system is frozen. Small businesses, municipalities, college students, the average folks living in small towns can't get credit. What happens on Wall Street definitely affects Main Street. But folks in small towns and large cities across the nation believed the bailout was only to help people with grossly high compensation packages who live in Greenwich, CT. They called their Representatives and said, "We're mad as hell and won't take it. Vote 'NO!'" They didn't realize that voting "NO" would harm them in their everyday lives. They didn't understand the interconnectedness of the financial system.

Hence, the name change, and some other tweaking to make the bill more palatable. I heard Obama speak in favor of the bill, and he made great points about its importance to businesses and individuals across the nation. I just hope the House of Representatives votes in favor of the plan.

Our economy really depends upon the free flow of capital -- the circulation of money -- and access to credit. I mean, think about it. Painters and contractors ususally get 30 days to pay for their materials. When that credit dries up, they can go out of business immediately.

This rescue plan is for all of us -- not just "fat cats."