The Reanimator: The Return of Voodoo Economics

By Edward-Yemil Rosario

What we might call, by way of eminence, the Dismal Science.

— Thomas Carlyle (1795–1881) Scottish philosopher on economics

Spurred by the results of the recent mid term elections and what looks like a return to the Reagan Kool Aid, I called my friend who works on Wall St. My friend is a dyed-in-the-wool conservative who majored in economics. His wife, bless her soul, doesn’t like me too much believing that my views should be enough to keep me locked up for life (or at the very least, excommunicated).

Anyway, I’m not very bright when it comes to economics and finances, I believe my ex-wife is correct in her observation that I should never be allowed to handle my own finances, let alone talk about them. Whenever I have a question on economics, I usually call my Wall St. friend. Since the last Financial Meltdown, he hasn’t been returning my calls, but I was able to reach him recently and he agreed to talk to me on condition that I would never tell his wife and if I didn’t interrupt him with my “radical” views. I agreed and even offered to buy him lunch considering the radical state of market makes my “radicalness” look tame in comparison.

We met at a popular Wall St eatery and when we sat down, I immediately blurted out, “Laffer Curve! Tell me all about it!” That prompted a hush over the mid afternoon crowd — nervous glances from others in the restaurant. My friend begged me to lower my voice, “Eddie, things are pretty much volatile around here these days, please don’t start a stampede.”

I promised to be quiet and he began to tell me about this mysterious, all-powerful talisman — the Laffer Curve.

Now, keep in kind my friend, though a conservative, believes supply-side economics to be the biggest con ever perpetrated on the American public. He’s an “old school” conservative: conservatives that concerned themselves mostly about such things as deficits, inflation, and excessive spending; republicans who didn’t care much about cutting taxes and were quite willing (like Hoover and Ford) to raise taxes in order to balance the budget.

I always scoff at the quaint notion of such conservatives but my friend assures me that such men existed, but that they have become an endangered species (extinct?) as the GOP has essentially been hijacked by a cult.

“All sects have their founding myths,” my friend assured me, and the cult in question can trace its roots to a Holy Trio (like in Christianity!) that met in Washington, DC in late 1974. That trio consisted of Arthur Laffer, an economic consultant, Jude Wanniski, a high-strung Wall St. Journal editorial writer, and, yes, Dick Cheney, who was then Ford’s chief of staff.

Wanniski had no formal training in economics, but he had taken Laffer as his mentor. In retrospect, his choice of tutelage was curious. Laffer had been an economics professor at the University of Chicago since 1967. In 1970, a colleague brought him to Washington to serve as a staffer in the Office of Management and Budget (OMB). There he quickly distinguished himself by making a wildly unconventional calculation about the size of the 1971 Gross Domestic Product. President Nixon, always the opportunist, jumped on Laffer’s calculations because it was far more optimistic than other estimates and suggested an economic boom under his watch. Later, it was discovered that Laffer had used only four variables to arrive at his figure. My friend tells me that most economists used hundreds if not thousands of variables — inputs.

When his calculations turned out to be horribly wrong, he became the laughingstock of Washington. He left government in disgrace facing the disdain of his academic colleagues. Still, he stayed in touch with Wanniski, the two having met in Washington, and continued to tutor him in economics.

At this point, I gave my friend a patented Eddie ::blank stare::

My friend shrugged as if to say that no one can ever understand the underpinnings of human motivation and continued his story.

In 1972, Wanniski had an epiphany that led him to believe Laffer was a brilliant economist who had developed a blinding new insight that would turn the economic establishment on its head. Wanniski and Laffer believed that it was possible to simultaneously expand the economy and hold down inflation by cutting taxes, especially taxes for the wealthy. Respectable economists (even conservative ones) considered this laughable. Nevertheless, Wanniski was convinced of its truth. He promoted the doctrine through his high perch on the respected (and uber-conservative) Wall St. Journal Editorial Page and in articles in the equally conservative Public Interest (published by the Godfather of the Conservative Movement, Irving Kristol). Both were highly influential media outlets.

Still, Wanniski’s new doctrine, later to be called supply-side economics, failed to catch on beyond a few loyal devotees.

Then came that fateful Holy Night. Wanniski and Laffer were working hard with little success to explain the “new” theory to Cheney. At this point, Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, there’s no revenue. And if the government sets the tax rate of 100 percent, the government will also receive zero tax revenue, since there will be no incentive for anyone to earn any income. Between these two points — zero taxes and zero revenue, 100 percent taxes and zero revenue — Laffer drew an arc (the “Laffer Curve”). The arc suggested that at higher levels of taxation, reducing the rate would produce more revenue for the government.

At this point, Cheney could have raised several questions. First, he could have noted that the Laffer Curve was not… ummm … correct? Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100 percent tax rate would produce zero revenue was categorically false. I mean, c’mon, I tell my friend, Cheney had to be familiar with communist Soviet Union, with its 100 percent tax rate.

My friend sighed, paused a moment, and patiently trudged on. While he assured me he’s no socialist, the soviet revenue scheme may not have been the model of efficiency, but it still managed to collect enough revenue to maintain an enormous military, enslave half of Europe, fund ambitious projects like Sputnik, and so on. Secondly, Cheney could’ve pointed out that even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve. My confused look prompted my friend to explain: that is there was no proof that rates were then high enough that tax cuts would produce higher revenue.

But Cheney didn’t do either of these things. Perhaps, in looking back, like most conservatives he liked theories that confirmed his ideological stances. You can almost picture Donald Rumsfeld drawing a Laffer Curve showing that only a small number of troops would be needed to occupy Iraq.

Whatever the case, Cheney saw the light and became an immediate convert. For Cheney the Laffer Curve provided an easy to understand frame for the messianic power of tax cuts. The significance of that Holy Night wasn’t that Cheney was converted, its importance was in the creation of a powerful symbol with which to spread the gospel of supply-side economics. The mantra was irresistible:

Lower taxes! Higher revenues!

The Laffer Curve swept through the republican ranks like wildfire. Irving Kristol would write later, in almost religious terms, of the conversion of Ronald Reagan. And in that way, the totally untested and totally ideological notion that cutting taxes for the rich is always a good idea came to life. Call it an economic Immaculate conception.

That is how what Bush the Elder presciently termed “Voodoo Economics” came to being and it would go on to dominate U.S. economic policy for the next 20 years.

So, my friends, the next time one of the zombies start blurting crap about the “Laffer Curve” please know it was something that was literally pulled out of a failed economics professor’s hairy anus.

There’s more to this story, but this is already too long, but I love stories — especially myths. More to come…

Love,

Eddie

18 Comments on “The Reanimator: The Return of Voodoo Economics”

  1. This one is difficult for me. I read about the Laffer Curve and thought one simple thing. This isn’t economics; it’s a political plan to enhance the rich while enslaving the poor. I would imagine before trying to prove to the public that it worked they spent a lot of effort, time, and money on selling it. Why prove something is true when selling a lie is cheaper and much more profitable.
    Now since you know me Eddie, you know that I LOVE POLITICAL MANIPULATION! Even if its pure evil to its core, I love to see how it works, the process is more important than its intent. Especially, when the process generally proves the intent.

    But that’s me. I can see the player and the game for what it is. For so many others to say “yeah, it’s a smart idea” then vote for those that wish to do it…that is scary.
    Your friend is a very rare breed.

    Great post!

  2. Dick Cheney and Donald Rumsfeld. Two men never voted into office (I suppose you could say Cheney was but that’s picky) and who have had tremendous influence on policy both foreign and domestic. They transcend adminstrations and are all over the place. Add Karl Rove and you have a truly unholy trinity.

    This was a fascinating story and I believe every word. Love it.

  3. Saynt: that’s why I wrote this a little tongue-incheek (at least I hope the humor was evident! LOL).

    still, there are many, many people who defend supply side economics and the first ish out of their mouth will be some crap like the “Laffer curve.”

    I’m trying to get my “friend” to break down (in plain language) an even more insidious defense of neoliberal economic policies:

    The “efficient Markets Hypothesis”

  4. Benni: After watching “Fair game” I’ve come to the tragic conclusion that this criminal, Cheney, will never get what he deserves. As it is, he walks around bragging about having ordered torture on American soil. SMH

  5. Jesus H. Christ on an effing pogo stick, Eddie! I had to google Laffer Curve to be sure you weren’t making this all up. My brain is still yelling inside my head: “Nobody is this stupid. NOBODY! Nobodynobodynobodynobody….”

    Forget the Soviet Union. The idea that, if 100% of earnings went to taxes no one would work presupposes that 1. No one would get anything in return for their taxes (or at least, nothing more than if no one worked) and 2. Everyone is all about money, even though we see that many people volunteer their time, many retirees take new jobs from boredom, and some people take lower-paid jobs than they get because the jobs they take offer things they value more, like more free time, a better working environment, a shorter commute, or a sense of doing meaningful work. But never mind that; that’s stupidity light, three greedy guys sitting around thinking everyone is like them, valuing the ownership of money more than anything else.

    Here’s the real stupidity. To say that there was no evidence America was on the downward slope is way too kind. In order for the idea that lower taxes would produce more revenue to be true, two conditions would need to apply:

    1. The amount of additional earnings would have to high enough to produce more revenue at a LOWER rate. To keep it simple, because I am not a math whiz, I’m going to work with 10s. If a person makes $10,000 a year and the tax rate is 10%, the government gets $1000 from that person. Slash the tax rate to 5%, and that person must now earn $20,000 to produce the same amount of tax revenue. His or her salary would have to more than double to produce MORE revenue. Slash the tax rate less, to 7.5%, and that person pays $750 a year. To get back to $1000, he or she must earn an additional $3333 and change a year, which is a better, but it still means earning 30% more for the government to break even. For the government to make more revenue, salaries have to go up an average of over one third. It doesn’t really matter what the numbers are, because when you take less of more, there must be a lot more to make that less you take come out to more than you took before.

    2. The majority of Americans would have to be unemployed or choosing to earn a lot less than they could earn. Now, as I pointed out above, some people do make that choice, but they are the very people who would not be likely to say, “Yee-HAH! Now that I can keep an extra five percent of what I earn, I’m going to take that soul-destroying job 90 minutes from home that requires me to work 60 hours a week.”

    And the idea that cutting taxes on the rich would bring more revenue is even more ridiculous, because it presupposes that rich people, on the whole, are choosing to earn less than they could, to bring in less money than they could, to be less rich than they could. That is not how the rich get rich. If anything, the way to get the rich to earn more would be to tax them at higher rates, so they’ll have to find ways to bring in more money in order to HAVE as much money–but even that presupposes that the world is full of rich people who are neglecting to maximize their incomes.

    The two basic assumptions here are that everyone is all about money and that everyone is earning less than he or she could, that higher salaries are available to all, but most people simply choose not to take them. And they choose that even they’re all about money and would not work if they had to pay 100% in taxes, no matter WHAT they got in return for those taxes.

    So, mythical Cheney could have spit his polymalt scotch (which is what *my* mythical Cheney drinks) all over that cocktail napkin in a wild burst of laughter and walked out, muttering, “Nobody is that stupid, nobodynobodynobodynobody…”

  6. @ Eddie,

    If Cheney (or any other member of the political class, for that matter) is going to get what you believe he “deserves” (a term I don’t use much in conversation, as it implies that existence is somehow “moral”), it will have to come to him through a vehicle society does not approve of – such people are all but totally insulated from the “law” they create to subjugate the rest of us, thus the only way to deal with them is outside that rigged system.

  7. By the way, I didn’t mean to imply that you or your readers don’t already see the reasons I gave for supply-side economics being stupid–and probably many that I don’t. The whole thing just sort of boggles my mind. It always has, but this Laffer Curve? Wow.

    Sayntj may be right, of course. If such a meeting ever occurred, it may have been very different, but “three guys got together and concocted a ridiculous story to sell the public so that politicians could keep their wealthy donors happy” is a lousy foundational myth.

    The idea of a real, old-fashioned, fiscal conservative on Wall Street seems pretty mythical, too. But what the hell; I’m a real, old-fashioned radical in red-state suburbia.

  8. @Christopher: LOL! You’re incorrigible.

    @Karen: I didn’t take your first comment as being negative. I know you were making points — some of which I will probably steal is I ever repost this :;grin::

  9. BTW, there are even more heinous “theories” undergirding neoliberalism (supply-sdie economics, Reagonomics, Thatcherism). One, the “Efficient Markets Hypothesis” I already mentioned above and refers to the belief (I say “belief” because there has never been any empirical proof of its validity) that prices generated by financial markets represent the best possible estimate of the value of any investment, the other is “Dynamic Stochastic General Equilibrium”: the idea that macroeconomic analysis should not concern itself with trade balances or debt levels, but should be solely derived from microeconomic models of individual behavior (much like my take on Hayek, et al.)

    My “friend” isn’t returning my calls again, but the great Nuyorican sage, Don Pedro, has agreed to elaborate on a little-known bill that started the whole damned thing.

  10. Eddie, over the years of clashing with nearly every political contender i’ve had the misfortune of coming into direct or written contact with, i kept trying to understand how they could deliver flawed philosophies that were obviously engineered to favor a select few, and keep people accepting them. I finally realized how they do it. They shame you. When arguments boil down to absolute logic, they use scare tactics and name calling. If you work with the more unfortunate, you are enabling them to continue being bums. If you disagree that the poor should be monitored in what they eat any more than anyone else, you are contributing to the poor health of the nation. If you try to create a prison system slanted more toward rehabilitation than punishment, you are pampering prisoners.

    While they are shaming you, nothing is ever their fault. This came home to me the other day at work. It didn’t escape my notice that the first thing the new Republican empowered Congress did was veto an extension on unemployment benefits. I mentioned this to one of the customers who was complaining about the high prices of everything, and how everyone was having a hard time making ends meet. He answered, “welcome to socialism.”

    Now, i could have told him if socialism had taken place, the exact opposite of what we are experiencing what have happened. There would have been a freeze placed on energy rates so the costs of production and transportation would have been lower. There would have been more subsidized and low cost housing. Real estate agents would not have been able to get away with their scalper prices in the interest of fair resource management. We would already be working to create renewable energy resources. I neglected to tell him this because he would not have listened. He would rather believe our failure is due to a socialist party that in reality, has become as despised as the communists were before the Iron Curtain. He would rather not know that America was socialized to a large extent, even during Nixon’s presidency. When gas prices rose too high, Nixon put a freeze on them so the rest of the economy had a chance to catch up. It worked.

    The New Republican, which holds its sway by declaring it’s protecting our rights, are concerned with one agenda; they want the freedom to exploit without boundaries, without restrictions, without fear of consequences for their actions; the masses. When we say, “we the people”, we are talking about a socialized entity. In order to make a more perfect union, we recognize the need to treat each other with respect and dignity. We recognize each others need to seek gainful employment, homes and families. The corporate manifestation removes the respect and dignity of we the people and makes us reliant on its ability to give or take away our homes and employment. This is not socialism but the anti-social manipulations of special interest lobbying.

    Sorry, i don’t mean to usurp your article, but i’m currently on a rant against all Laffer mentalities.

  11. No need to apologize, my friend. I might post a “Zombie” article once a month. right now, i can;’t stand to listen to the so-called “strict constitutionalists.”

    What disheartens me is that these ideas are all making a comeback. It’s insane. The Teabaggers, who are the modern equivalent of the “Silent Majority” of Nixon’s heyday, may (or may not) becrazy, but one thing’s for sure: they are a relic fighting a 1960s battle in a world run by 21st-century crooks.

    And they are dupes.

  12. People are stupid. This is just another example of how simpleminded people really are. Dick Cheney “gets it” after a drunk pictionary game? Following that our country buys an economy with the word Voodoo included in it? I hope all the nasty Loa have their way with these folks in the in-between.

  13. @ Eddie,

    This looks like an interesting film – I’ll check it out ASAP. Based on what I’ve read on the link you posted, this Machetaro fellow is much like some of the people in my own militia.

  14. @Chrsitopher: Los Macheteros was part of a Puerto Rican Independence group.

    @Grainne: My take is that all this was a pretext in order to play one of the biggest con games in history.

  15. I got that – I just couldn’t remember the fellow’s name at the time, so I addressed him by the group he identifies with. Nonetheless, I know a few people with similar attitudes and actions: one of them was even a mentor to me when I first signed up.

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