Five years ago, Arthur Laffer — creator of the Laffer curve and a member of President Ronald Reagan’s Economic Policy Advisory Board from 1981-89 — wrote an op-ed article. It was a grab bag of his pet peeves: opposition to Federal Reserve policies in response to the financial crisis and concern about the “unfunded liabilities of federal programs,” including Social Security and Medicare. And, of course, he decried deficits, which in large part are the result of his thesis that tax cuts often increase revenue. As it turns out, for the most part, they don’t.
The article he penned on June 11, 2009? “Get Ready for Inflation and Higher Interest Rates.” “Alas,” he wrote “I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates.”
At the time, the yield on the 10-year Treasury was 3.86%, and we were in a crisis-driven deflationary environment of negative 1.4% inflation. Today, the 10-year yields 2.65% and inflation is running at less than 2%.
Inflation wasn’t the only thing Laffer whiffed on. He projected a budget deficit of 13% of gross domestic product and warned that it was going to get worse. Instead, the deficit fell dramatically during the next five years and last year it was less than 5% of GDP.
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Pretty much every single warning, every data point, every item Laffer complained about was wrong.
Why does this happen, and why are there no penalties for being so inaccurate?