Some peo­ple still lis­ten to Art Laf­fer

Houston Chronicle - - BUSINESS - ly­dia.depillis@chron.com twit­ter.com/@ly­di­ade­pil­lis

Shiny SUVs and sleek sports cars spilled out of the River Oaks Coun­try Club’s park­ing lots on Thurs­day, lin­ing the streets for blocks around Hous­ton’s most elite gath­er­ing spot. The draw: a talk by Arthur Laf­fer, the Rea­gan ad­min­is­tra­tion econ­o­mist who is per­haps more strongly as­so­ci­ated with the idea that tax cuts fos­ter growth than any­one else.

Laf­fer is feel­ing pretty chip­per these days. Back in July, when most pun­dits still con­sid­ered Don­ald Trump a long shot for the pres­i­dency, Laf­fer put out a pa­per pre­dict­ing he would win. It might have looked like wish­ful think­ing: Trump’s tax plans hewed closely to what Laf­fer has rec­om­mended for decades.

But Trump did win, and now trickle-down eco­nom­ics is back in the White House. Close Laf­fer as­so­ciates Stephen Moore and Larry Kud­low are among Trump’s trusted ad­vis­ers. Laf­fer sees a lot of par­al­lels be­tween Trump and Ron­ald Rea­gan, whose own long-shot elec­tion he

re­hashed in de­tail.

“You can’t be­lieve the trash talk they said about him. He was ‘just an ac­tor,’ ” Laf­fer said, to the clinks of knives and forks cut­ting steaks. “When you look at these can­di­dates, I think there’s a lot of sim­i­lar­i­ties. The point I was try­ing to make in this pa­per is that it can hap­pen, it hap­pened once be­fore, and I was there, and this is how it went.”

In his hour­long, non­stop, high-ve­loc­ity speech, Laf­fer bub­bled over with en­thu­si­asm for Trump’s plans to slash cor­po­rate tax cut rates, get rid of the es­tate tax and junk the Af­ford­able Care Act. With the ex­cep­tion of tar­iffs on im­ports (“China’s our best friend, not our worst en­emy”) and pour­ing money into in­fra­struc­ture (“stim­u­lus spend­ing is the dumb­est thing I’ve ever heard”), Laf­fer sounded truly thrilled about the changes to come.

The only prob­lem is, he’s been proven wrong about most of it.

Take the most ba­sic cause Laf­fer cham­pi­ons: The idea that cut­ting taxes al­most al­ways boosts gross do­mes­tic prod­uct and gen­er­ates more rev­enue. His­tor­i­cally, that’s not true. In a re­view of the lit­er­a­ture in 2014, the non­par­ti­san Con­gres­sional Re­search Ser­vice con­cluded that “slower growth pe­ri­ods have gen­er­ally been as­so­ci­ated with lower, not higher, tax rates.” One thing tax cuts have cre­ated is 35 years of widen­ing in­equal­ity been the rich and the poor.

The phi­los­o­phy also failed spec­tac­u­larly in Kansas, af­ter Gov. Sam Brown­back cut taxes ex­actly to Laf­fer’s spec­i­fi­ca­tions in 2012; Kansas is now fac­ing a $350 mil­lion bud­get gap, even af­ter deep spend­ing cuts, and job cre­ation has stalled.

Or take the Af­ford­able Care Act. While even Oba­macare’s de­fend­ers have ac­knowl­edged that the law needs fix­ing and put for­ward many sug­ges­tions for do­ing so, Laf­fer in­sists that the whole thing needs to go. And the rem­edy? His an­swer for ev­ery­thing: More com­pe­ti­tion.

“Oba­macare re­minds me of a smor­gas­bord,” Laf­fer said. “You go in there, there’s a fixed sum, and it’s all you can eat.”

But com­pe­ti­tion is at the heart of Oba­macare: The state-based mar­ket­places are de­signed for cus­tomers to com­pare plans and de­cide what works best for their life­style. Many re­searchers have con­cluded that the ACA ac­com­plished that goal and pushed health care de­liv­ery away from a fee-for-ser­vice model to­ward one that in­stead com­pen­sates hos­pi­tals on the ba­sis of out­comes.

As a re­sult, the rapid rate of health care cost in­fla­tion has de­clined, Medi­care is in much bet­ter fis­cal shape, and the rate of in­sured peo­ple in Amer­ica is as low as it’s ever been. If Laf­fer truly wanted to pro­mote com­pe­ti­tion, he would talk more about an ef­fec­tive an­titrust pol­icy that would keep com­pa­nies from get­ting so big that smaller ones can’t chal­lenge them.

I could go on. The point is, Art Laf­fer is not a se­ri­ous com­men­ta­tor on pub­lic pol­icy, and yet his dog­matic pre­scrip­tions ap­pear to be more pop­u­lar than ever. It’s part of the rea­son so many aca­demic econ­o­mists are ter­ri­fied of what the Trump years may bring.

So why are they so hard to shake?

The eas­i­est an­swer is that Laf­fer’s ideas are se­duc­tively sim­ple. Peo­ple want to be­lieve them.

Laf­fer had been in­vited to speak at the lunch in Hous­ton — as well as a break­fast in San An­to­nio and a happy hour in Fort Worth — by Texas-based Frost Bank, which hosted the events free of cost for “cus­tomers and friends.” A Frost spokesman said the econ­o­mist has been a “pop­u­lar guest at other Frost events in the past.”

Julie Sam­son, a mar­ket pres­i­dent with the bank, en­joyed the talk, nod­ding along with some of Laf­fer’s points.

“It’s all log­i­cal,” she said, walk­ing past the long valet line out into the neigh­bor­hood, where she’d parked. “It just boils down to com­mon sense, and we’ve lost that in this coun­try.”

Laf­fer did have a few pieces of ad­vice, how­ever, that many main­stream econ­o­mists would agree with. First: Don’t start a trade war by slap­ping tar­iffs on Mex­ico or China. And se­cond: Don’t be hasty in rolling back as­sis­tance for the dis­ad­van­taged.

“I re­ally beg this ad­min­is­tra­tion not to cut safety nets fast,” he said. “Wait till you get the eco­nomic growth, and once you get that, all sorts of ben­e­fits will start flow­ing back into the sys­tem. Oth­er­wise I think you’re go­ing to lose the is­sue, and you’re im­moral be­sides.”

The ques­tion, of course, will be whether the Trump era truly brings the kind of growth that Laf­fer ex­pects.

LY­DIA DePILLIS

Laf­fer

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