Notes from reading "The End of prosperity" by Arthur Laffer in 2017 or so.
What a revelation! Who else could link US Presidents Coolidge, Kennedy and Reagan on simple economics and tax policy?
Calvin Coolidge (1920s) reduced income tax from 90% to 24%, the largest in American history. Taxes went back to 90% under Eisenhower(1950s). John Kennedy (1960s) brought them down to 70%. Ronald Reagan (1980s) brought them down even further. All tax cuts were followed immediately by economic booms.
This is what Narasimha Rao partly tried to do as Prime Minister of India in 1991.
Laffer also notes the importance of Reagan's union busting. Strikes went down from 400 per year to less than 50 strikes per year, from mid 1980s to 2009. In the 1980s, in the UK, Margaret Thatcher busted strikes and unions, successfully defeating the coal unions. She also privatised several state owned industries including mining, which revitalized the UK economy.
Reagans also drastically lowered interest rates in the US - from 21.5% in 1981 to 8.2% in 1987. Technically, interest rates in the USA are lowered by the Chairman of the Federal Reserve (Paul Volcker during Reagan's presidency). But Reagan's economic changes and lowered income taxes brought down inflation, which Volcker countered with interest rates. I remember inflation around 2 or 3% in the 1990s and interest rates around 4% in the 1990s. That's amazing. (India saw a drop in interest rates, also too, in the reform period from Narasimha Rao onwards.)
The surprise of the book, is the credit Laffer gives to President Carter (1976-1980) and Ted Kennedy for slashing regulations, for which he slams President Richard Nixon (1968-1974), who introduced Environmental Protection Agency, and Clean water and Clean Air acts. I used to think these were great accomplishments of Nixon. I once heard Stephen Colbert, a fanatic leftwing talk show host, a praise them - these guys hate Nixon.
Laffer's contention is that regulations always primarily benefit regulators and strangle growth, because of increasing negative returns.
Railroads, airlines, long distance phones, and energy and financial services were all fully or partially deregulated, some under Carter.
(In India, in 1991, Narasimha Rao delicensed several manufacturing industries, in 1990s. This took about a decade to dramatically improve the Indian economy. But he protected the major ones like railways or telephones, which were considered crucial to managing the Indian economy - which the bureaucrats and politicians wanted in their control. Vajpayee who became PM in 1998 allowed private airlines, and television channels.)
Price decontrol of oil by Reagan was crucial, says Laffer. I totally agree. Ludwig Erhard in Germany and Rajaji in the Madras presidency (both just after WW2) , similarly brought market forces and sanity into play, when they ended war time rations and price controls of food.
Gold, which cost $850 an ounce under Carter, fell to $300 an ounce under Reagan. A one carat white flawless gem, the benchmark jewel, fell from $64000 in 1980 to $21000 in 1982. This was disinflation says Laffer.
From the business side, the entrepreneurial vision of Charles Schwab dramatically lowered the transaction cost for buying and selling stocks, and meant tens of millions of Americans could be investors. The result was the steady increase in the number and percentage of Americans who became worker-capitalists.
Nice notes, thanks for sharing... (am not at all a great fan of this dismal 'science' of economics, but I really like the ideas of human agency and incentives; however in spite of my biases, here's my 2paise query)
ReplyDeleteIIRC, Laffer & co were/are proposing their own version of the flat tax: a 12.1% personal income tax (with a deduction only for rent) & a 12.1% VAT, for a total tax on consumption of 24.2%.
Ofc this proposal is attractive - but won't it eliminate the use of the tax system to achieve social goals? -- particularly saving for retirement & health insurance?