Right-wing economist admits error! (This blizzard must have caused Hell to freeze over.)

[Jim Lane]

In 2009, famed supply-sider and Reagan adviser Arthur Laffer wrote a Wall Street Journal piece that was typical deficit hysteria: "Get Ready for Inflation and Higher Interest Rates". Pointing to the deficit and, even more, to the Fed's expansion of the money supply, he gave his confident prediction:

(S)uch a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

So far, so normal. We've been hearing stuff like this from the right wing for years. It's not limited to Republicans -- I'm looking at you, Erskine Bowles. (See "Bowles, Simpson: Fiscal Crisis Could Come Within 2 Years" from March of 2011.)

What's different about this story is that, unlike most of his comrades in arms, Laffer has looked at some actual facts and revisited his prior prediction in light of real-world data:

Obviously, nothing like that happened.

In an interview with Business Insider from his office in Tennessee, Laffer admitted that he was wrong. The old maxim that dictates increasing the availability of cash through lower interest rates will lead to higher prices, he said, may need to be reexamined.

"Usually when you find the model this far off, you've probably got something wrong with the model, not that the world has changed," he said. "Inflation does not appear to be monetary base driven," he said.

(from "ART LAFFER: I Was Wrong About Inflation And The Fed", emphasis in original)

Now Paul Krugman will have to admit that he was wrong. He's written that these bad ideas are like cockroaches, that can't be eradicated, and like zombies, that continue to shamble about long after they've been killed. Perhaps he'll take heart that his sad observation, while mostly true, isn't completely true.

[Schema Thing]

1. not so fast. Laffer's error will still be repeated and taken as gospel by

those on the right. Cockroach idea indeed - and limited to that only because Krugman and I are to genteel and aware of history to call the people doing the repeating cockroaches themselves.

[louis-t]

2. Inventor of the Laffer Curve, a ridiculous assumption that

if taxes go up, "people will stop paying their taxes" and/or not work as hard because "everything they make will go to the government".

[Nye Bevan]

4. No, the Laffer Curve is perfectly reasonable.

It states that to get the highest revenue from taxes, the optimum tax rate is greater than 0% but less than 100%, because a tax rate of 100% removes any incentive to work. The only debate is about what the optimum tax rate is.

[louis-t]

5. I've also heard people misrepresent the Laffer Curve as

"if you lower taxes, it actually brings more revenue to the government."

[Nye Bevan]

10. That's only true if we are already to the right of the curve's peak

which we almost certainly are not.

Lowering taxes from 90% to 70% would probably increase total tax revenue. Lowering taxes from 40% to 30% would not.

[Benton D Struckcheon]

3. This is actually interesting.

That admission, that inflation isn't driven by the monetary base, is major right wing heresy. That assumption underlies the whole gold bug philosophy, and underlies the logic of Bitcoin, I might add.
Maybe he'll go read Steve Keen now? Not likely.

[reformist2]

6. Is Laffer so stupid that he doesn't realize we would have had deflation without the stimulus?

He's still stuck in the 1970s/80s, fighting the last battle. Hack economist.

[JHB]

9. It's a conservative meme that liberals are "stuck in 1968"...

...but it seems to me that a lot of conservatives are mentally stuck in the late 70s: inflation is high and so are taxes, the Soviet Menace is on the move again, the Bronx is burning, a blackout becomes an excuse for looting (not by everyone, wink wink, just certain people), etc etc etc. That's how they saw it.

They've been milking that picture for 30 years.

[JHB]

7. Admitting error when presented with clear contradictory facts is one thing...

...the real test is whether he changes his tune in the future.

[DirkGently]

11. KNR.