3/24/09 – San Diego, 8:30am PDT: I love an economist with a sense of humor. The ability to bridge complex analytical concepts with good humor always makes for great speeches, and Art Laffer didn’t disappoint in his morning keynote. The “Father of Supply Side Economics” and developer of the Laffer Curve opened by noting he only recently moved from California to Nashville, Tenn. He decided to move after the Governator went to the “dark side,” and Tennessee has no income tax. He then posed a simple question: If you raise taxes in Point A and lower taxes in Point B, what happens? Producers, generators of capital and businesses move to Point B.
“Am I over your head with this?” he asked. “No? Well apparently I was over the head of the California legislature.”
[Editor's note: As if to specifically reinforce Laffer's point, a great editorial on the backwards thinking of California's leaders appears in today's San Diego Union Tribune. It can be found here.]
Then he got serious, noting clients need advisors now more than ever. “It’s an old adage, but true. You make money in bad times, you collect in good times.”
Big surprise. He’s against stimulus packages. Here’s why: In February 2008, a $160 billion stimulus package was passed by Congress. Larry Summers noted at the time that if you receive money unexpectedly, you’ll most likely spend it. It will cascade through the economy, create jobs and benefit us all through the multiplier effect. Of course, the economy has completely tanked since then. Summers justifies it by saying, “Yes, but think of what would have happened had we done nothing.”
“This thinking is like bloodletting in the middle ages,” Laffer explained. “Take out a pint of blood. The patient gets sicker, so the reason must be that we didn’t take out enough blood.”
In any economy, Laffer continued, the income effect always sums to zero. This means if you give someone money, you must take it away from someone else. If the receiver spends the money and creates jobs, the person from whom the money is taken will stop spending and a corresponding number of jobs will be lost.