Which Side Of The Laffer Curve.

Greetings, loyal minions. Your Maximum Leader spoke rather briefly with the Smallholder over the weekend. While many parts of that converstation will not interest you, one part would. Here is a fabricated version of the conversation we had (but it is true to the spirit of that conversation):

Smallholder (SH): So, did you read Skippy's post about Allan Greenspan?

Maximum Leader (ML): Yeah.

SH: So are you ready to admit we're on the right side of the Laffer curve now?

ML: What?

SH: The Bush people are admitting that tax cuts will not stimulate the economy enough to make up for the revenue lost by the tax cuts. So we're on the right side of the Laffer curve.

ML: You mean the left side of the Laffer curve.

SH: Whatever. You know what I'm talking about. Are you going to admit you're wrong? Or are you pathalogically incapable of admitting when your wrong biyatch?

ML: You know, I thought that quotation Skippy posted was in the context of escalating costs for Social Security.

SH: That isn't how I read it. You're just trying to wiggle out of admitting it aren't you?

ML: I wouldn't say that. I thought I read something addressing that point on National Review Online or the Wall Street Journal or something. I think there was more to that quote than you think.

SH: I think the quote was pretty darned clear. You're just being difficult because you can't admit it when you're wrong.

ML: I'm not sure I'm wrong on this. If I am wrong I'll admit it. But I think there is more to this than you think.

SH: Come on! You know you're wrong and that we're on the wrong side of the Laffer curve. You just can't bring yourself to admit it.

ML: I'll read up on it and get back to you.

SH: You just need time to figure out how to weasel out of admitting that you're wrong. I will not expect a retraction any time soon. (Muttering: Biyatch.)

So. Your Maximum Leader spent most of his limited free time this past weekend reading the 397 page Economic Report of the President. If you go to page 55 and start reading the section entitled "The Effect of Tax Relief on Interest Rates," you'll find the quotation in context. The full jist of the context is this. The tax cuts, given the size of federal spending and the debt to GDP ratio, are not likely to stimulate the US economy enough to cause federal revenue to increase revenues to their pre-cut levels. BUT (and it is a big but), raising taxes in an effort to lower interest rates (and thereby lower the debt to GDP ration) is also unlikely to work.

You might also want to go on and read the whole chapters entitled "Macroeconomic Performance in 2002" and "Tax Policy For A Growing Economy." After reading those point you may come away, as did your Maximum Leader, believing that the culprit behind federal revenue issues is not tax cutting, but federal spending and debt maintenance. We need to cut spending and reduce the debt to get our financial ship in order.

Excursus: Your Maximum Leader was surprised to learn (via a straw poll of a few of Mrs. Villain's friends over the weekend), that many people are under the mistaken belief that the national debt was paid off when the federal budget was balanced and showing a surplus in the late 90s. During that period, depending on how you wanted to look at it, the federal government was not increasing the size of the national debt. (At least not increasing it due to overspending. They weren't paying it off either so in that respect they were increasing the overall debt.)

So, where does that leave your Maximum Leader and the discussion of the Laffer Curve?

First off, it is good to know that the Smallholder actually agrees with Dr. Laffer's curve. Many (if not most) "liberal" economists do not. So that is a start.

Next off... According to the Administration's economists, we appear to be near the apex of the tax/revenue curve described by Dr. Laffer. We are at that stage were tax increases and tax cuts will start to negatively affect revenue. What the Administration seems to be pushing for now is: 1) keep tax levels the way they are now (ie: make permanent the President's tax cuts); 2) revise the tax code (without increasing or decreasing the overall tax levels); 3) balance the budget; and 4) pay down the national debt.

Now, your Maximum Leader has read the work of other practitioners of the Dismal Science and their thoughts on tax rates in the US. There are some who, like the Smallholder, believe in Supply Side Economics AND believe that the US could afford to raise tax rates without fear of negative affects on the economy. There are some who are Supply-Siders and think that tax rates should be cut further. There are many more economists who are not Supply-Siders and believe a great number of things.

As for your Maximum Leader, his natural inclination is to cut taxes a bit further. But he will concede that according to the Administration, further tax cuts would not have a proportionate stimulative affect on the economy. This isn't quite the same as saying we're on the left side of the Laffer Curve. I don't believe that any Administration economic advisor would agree on the record with the Smallholder that we are on the left side of the Laffer Curve. But one could easily draw that conclusion from reading the President's report.

So, is that a concession? Maybe. In so much as your Maximum Leader would agree with the Smallholder that (after partisanship is stripped away) the Administration may admitting that their tax cuts went a little to far - yes. Your Maximum Leader will concede that a careful reading of Administration documents are saying what the Smallholder is claiming. Does your Maximum Leader happen to agree with that assessment concerning tax rates? Not exactly. He is willing to concede that further tax cuts, without deep cuts in federal spending and debt reduction, will not have the stimulative affect that one would expect. But, if federal spending could be curtailed and a sensible plan for debt reduction be enacted, further tax cuts would have the stimulative effect that a Supply-Sider would hope for.

Of course, are we close to deep cuts in federal spending? No. And are we on the path towards debt reduction? No. The likely follow-up to these points is, "And who is responsible for that?" Congress would be the answer. The Republican Congress needs to spend more time looking after its fiscal responsibility to all citizens of our republic and make some hard choices about how our tax money (and future tax reciepts) are spent. So far they have not proven capable of doing that. If Democrats could find some serious deficit hawks out there, your Maximum Leader would be willing to give them a try. But unfortunately the Democrats seem no more capable of spending cuts than are Republicans. It is sad really.

We need more fiscally responsible politicans in Washington. What ever happened to that balanced budget amendment that Ronald Reagan supported? Of course, even if we had a balanced budget amendment in place; we'd disregard it at this time because of the war on terror. And temporarially, your Maximum Leader could support that. But it is not how we should run our budgets year-in and year-out.

Carry on.