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Ritholtz: What’s the Penalty for Pundits Who Get It Wrong?

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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.

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?

This isn’t about economics, it’s about politics. Unfortunately, the dismal science has become the vehicle of choice for those who seek to further their own political agenda.

Social Security is a perfect example. Why make misleading claims about unfunded liabilities while ignoring the revenue that will accompany those liabilities? To push for Social Security’s dissolution or to confuse the public?

If you have an issue with Social Security, then fix it. The regressive taxes to fund retirement benefits top out at about $117,000 in 2014. Why not simply raise that to $250,000 next year and $500,000 during the next 20 years. Congratulations, you just made Social Security solvent for the next century.

But these forecasts of doom are never about fixing things; they are about refighting the battles that were lost long ago. The U.S. doesn’t provide the sort of cradle-to-grave welfare benefits that Europeans have insisted upon, but rather a minimum safety net. A large majority of Americans support these programs. The folks who argue against them — like Laffer — have to resort to arguments and forecasts that have consistently turned out to be inaccurate.

We would do well to heed the words of Cambridge economist Joan Robinson, who observed “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

The deceptions need to end.


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