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Is Arthur Laffer Setting Up Another Debt Bomb? (The primary architect of Reagan’s debt bomb)
Seeking Alpha ^ | 9/28/2998

Posted on 09/29/2009 8:53:16 AM PDT by SeekAndFind

Arthur Laffer, the primary architect of Reagan’s debt bomb that we are currently trying to defuse, has now executed a complete 180° turn from his monetary policies that gutted the Midwest industrial base in the 1980s. In a WSJ article on September 22, 2009, he claims the problems of the Great Depression are not caused primarily by tight monetary policy but rather tariffs and taxes. While he gets the facts he mentions right, he ignores the timing of taxes and deficits, tariffs and balance of trade.

He’s right that talk of tariffs may have been the trigger that started the Great Depression. However, we are in a recession now so new trade restrictions are obviously not going to cause it, which was his first timing error. As the actual tariffs were relatively modest by historical standards and did not apply to most products, the tariffs are not considered the most important factor in the collapse of trade during the Great Depression. Laffer’s characterizing tariffs as tax increases is obviously self-serving as they were not intended to primarily generate revenue but to protect domestic industry.

The situation with the balance of trade is what makes restrictions in trade acceptable today when it was stupid in 1929. In 1929 the USA was a net exporter of manufactured goods while today we are net importers (even excluding oil). The fact that our trading partners exercise unfair trading practices is long established and the United States will continue to decline if nothing is done about it.

Laffer is also correct that increases in taxes made the Great Depression worse. However he leaves out the factor of timing to make his point that we should have no tax increases to balance the budget. The budget was balanced by tax increases from 1929 to 1932 while the economy was declining that so that there was no net stimulus from government spending increases during this period. The conservative economist and icon Murray Rothbard detailed these mistakes in his America’s Great Depression.

Hoover’s mistake was in balancing the budget during a time of economic decline. Rothbard claims that without the distortion of this government reallocation things would have been better but there still would’ve been a significant recession and unemployment. Keynes proved that during times of recession the government can run deficits that will minimize the decline in the economy and employment. A key tenet of Keynesian thinking is that during times of full employment the government must not run deficits or it will cause inflation. This is accomplished by a cutback in government stimulus spending and tax increases. The tax increases of the 1990s showed that careful tax policy can increase taxes without slowing growth.

Below is a chart of the budget deficit and GDP growth from 1929 to 1940. From 1929 to 1931 the budget was basically balanced and the economy continued to decline. Recovery started once a significant deficit was started in 1932. In 1938 the budget was again balanced, primarily through the reduction in stimulus spending and the economy dipped into a short but severe contraction. During the Great Depression, tax policy had relatively little effect on overall economy activity as long as a deficit and loose fiscal policy was maintained .

Laffer also makes the claim that there was significant inflation during the middle of the Great Depression, though this appears to be simply to allow him to tip his hat to Friedman by once more stating that “inflation was strictly a monetary phenomenon.” I’m sure Laffer’s numbers on inflation from 1933 to 37 were correct (though I couldn’t figure out exactly where they came from, all of mine are from US Government sources) but they ignore the fact that prices had declined below the cost of production from 1929 to 1932 and had to recover. Below is a chart on Inflation versus GDP Growth. While there was some inflation after growth started in 1932 it did not begin to offset the deflation that occurred from 1929 to 1932.

Finally, Laffer made some comments on gold buying that ignored the fact that banks were collapsing due to the deflation in asset prices. Rothbart recognized this and concluded that Roosevelt had no choice in closing the banks. Gold was nationalized after trust in banks was reestablished by the introduction of FDIC. Gold was taken out of circulation and then increased in price to devalue the currency versus other nations and reestablish international trade. Because gold was no longer used in domestic exchange there was minimal inflationary impact inside the United States.

Mr. Laffer’s final statement: “My fear is that they will misinterpret the evidence (of the Great Depression) and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits” seems to imply that taxes should never be raised to balance a deficit. Running deficits during times of full employment is what got us into this mess and will simply lead into another debt bomb.

Perhaps he’s just not able to say that the current Democratic administration is correct in trying to hold off budget balancing until after the economy is fully recovered. If this is the case, Mr. Laffer is correct in being concerned because a key lesson of the Great Depression is that balancing the budget during a time of economic downturn will have serious negative consequences.


TOPICS: Business/Economy; Culture/Society; Editorial; News/Current Events
KEYWORDS: artlaffer; bloggersandpersonal; bobsmall; debt; htmlchallenged; missingbarfalert; reagan
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1 posted on 09/29/2009 8:53:16 AM PDT by SeekAndFind
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To: SeekAndFind

Bush is out of office, so now are we supposed to say — “Laffer’s Fault!”?


2 posted on 09/29/2009 8:55:38 AM PDT by ClearCase_guy (Play the Race Card -- lose the game.)
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To: SeekAndFind
So Laffer was responsible for excessive spending in the 80s?

I don't think so.

3 posted on 09/29/2009 8:57:46 AM PDT by skeeter (Pterocarya fraxinifolia)
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To: SeekAndFind
Arthur Laffer, the primary architect of Reagan’s debt bomb that we are currently trying to defuse...

Stopped reading his blather right there.

4 posted on 09/29/2009 9:02:17 AM PDT by TChris (There is no freedom without the possibility of failure.)
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To: SeekAndFind

Let’s all kneel in prayer and be thankful Obama is in charge now. SARC/


5 posted on 09/29/2009 9:03:58 AM PDT by BertWheeler (Dance and the World Dances With You!)
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To: SeekAndFind

Hey, Reagan did his part. He even shut down the government at one point.

On top of that, he started the “President’s Private Sector Survey on Cost Control” — the Grace Commission. This found over $400 Billion in savings.

Unfortunately, even on this, the Congress did not act on the vast majority of it.

Blame Congress, not Reagan. Heck, no sitting president has EVER introduced a spending bill before Congress. All the president can do is use his bully pulpit, sign, or veto.

Screw this author.


6 posted on 09/29/2009 9:05:00 AM PDT by ConservativeMind (Liberals have an inability to value good character or to desire it for themselves.)
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To: SeekAndFind

I thought the primary architect of Reagan’s debt bomb was Rep. Thomas P. “Tip” o’Neill (D-Mass.), who pushed pork-laden bills through Congress during the Reagan years.


7 posted on 09/29/2009 9:14:15 AM PDT by Fiji Hill
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To: SeekAndFind
Arthur Laffer, the primary architect of Reagan’s debt bomb

Hunh!? This is so abusrd, I might have to read it...

8 posted on 09/29/2009 9:20:38 AM PDT by the invisib1e hand ("Isn't the Golden Mean the secret to something," I parried? "Yes," Blue replied. "Mediocrity.")
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To: ConservativeMind

http://uspolitics.about.com/od/usgovernment/l/bl_party_division_2.htm

Exactly!
The President proposes, the Congress disposes.


9 posted on 09/29/2009 9:21:19 AM PDT by griswold3 (You think health care is expensive now? Just wait till it's FREE!)
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To: SeekAndFind

Someone set up us the bomb.


10 posted on 09/29/2009 9:22:31 AM PDT by SlowBoat407 (Achtung. preparen zie fur die obamahopenchangen.)
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To: SeekAndFind

I’m sure this author would contrast this with the “fiscal responsibliity under Clinton.” No mention at all of who was in charge of Congress during those years.


11 posted on 09/29/2009 9:23:09 AM PDT by denydenydeny ("I'm sure this goes against everything you've been taught, but right and wrong do exist"-Dr House)
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To: SlowBoat407

Zig.


12 posted on 09/29/2009 9:23:28 AM PDT by Allegra (It doesn't matter what this tagline says...the liberals are going to call it "racist.")
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To: SeekAndFind
I'm not impressed with Art Laffer these days. He voted for Bill Clinton twice. Once before and once after the Republican takeover of Congress.

I do take issue with this - "Arthur Laffer, the primary architect of Reagan’s debt bomb that we are currently trying to defuse". Reagan's debt bomb? The House is in charge of the purse strings. Not the President.

Reagan basically shifted expenditures around. He increased military spending from 22.7% to a high of 28.1% of the annual budget (4.9% to 6.2% of GDP). While spending on Human Resources (ie.SocSec, Medicare, Education), along with Physical Resources (ie. energy, commerce, transportation), went down under Reagan.

The problem is associated with Reagan having cut taxes without the House cutting overall spending. Tax cuts without spending cuts gives you larger deficits and an ever growing debt. Even as it was, Reagan fought the liberal establishment agenda to a standstill and was able to slowdown the growth of the social welfare state.

13 posted on 09/29/2009 9:25:01 AM PDT by Reagan Man ("In this present crisis, government is not the solution to our problem; government is the problem.")
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To: SeekAndFind

Doesn’t the House have the power of the purse? Hasn’t it always been that way?


14 posted on 09/29/2009 9:28:20 AM PDT by b4its2late (Ignorance allows liberalism to prosper.)
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To: Reagan Man
The problem is associated with Reagan having cut taxes without the House cutting overall spending.

Yep.

15 posted on 09/29/2009 9:29:30 AM PDT by b4its2late (Ignorance allows liberalism to prosper.)
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To: b4its2late
Yep.....except the dim-o-rats sheeple don't know that.....that's how phrases like “the architect of Reagan's dept bomb” get regurgitated as factual truth over croissants and coffee at Starbucks.....by these dim-bulbs of humanity.

I oughta know I have a very dim-bulb living across the street who loves to spout off inaccuracies at neighborhood parties and then finds herself being corrected factually and then asked for the source of her information.....btw it's usually NPR (we usually laugh and translate the name to National Propaganda Radio), nuff said.

16 posted on 09/29/2009 9:42:57 AM PDT by thingumbob (Get to work and lets clean up this mess! and (Remember, dead terrorists don't make more terrorists!))
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To: skeeter

There was this little thing called the Cold War. We won. It wasn’t free. Neither were all the vote buying programs our Congresscritters came up with. In economics this is usually called the Guns-Butter debate. Reagan was forced to do both because the Republicrats wouldn’t cut the pork. He did the right thing, but that’s not to say it was the best we could do.


17 posted on 09/29/2009 9:44:43 AM PDT by RKV (He who has the guns makes the rules)
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To: SeekAndFind
Reagan's tax cuts massively increased revenues to the government. They spent all of it and more. The fault lies with the outrageous spending, not the tax cuts. Put the blame were it actually belongs.
18 posted on 09/29/2009 9:54:25 AM PDT by Myrddin
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To: SeekAndFind

this drum is beiong beaten by the current round of oligarchs trying to justify the next rape of the middle class they’re trying to organize.


19 posted on 09/29/2009 9:57:06 AM PDT by mo
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To: SeekAndFind

Laffer is exactly right. The Great Depression was caused, more than anything else, by the Smoot-Hawley Tariff on top of tight money. And there is not a reasonable economist out there who doesn’t know that.


20 posted on 09/29/2009 9:57:23 AM PDT by LS ("Castles made of sand, fall in the sea . . . eventually." (Hendrix))
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