Arthur Laffer’s Alice-in-Wonderland economy
12:38 pm November 12, 2010, by Jay
Arthur Laffer is a famous economist with a PhD from Stanford. He is also, to some, a guru of sorts.
I, of course, am none of the above.
On the other hand, I also didn’t write the silly, myopic, Alice-in-Wonderland piece by Laffer published in yesterday’s Wall Street Journal in which he offers the following analysis of our jobless situation:
“Employment is low because the incentives for workers to work are too small, and the incentives not to work too high. Workers’ net wages are down, so the supply of labor is limited. Meanwhile, demand for labor is also down since employers consider the costs of employing new workers—wages, health care and more—to be greater today than the benefits.”
Interestingly, in Laffer’s explanation of how we got into this mess and how we might get out of it, the word “housing,” as in the bursting of the housing bubble, is never mentioned. Nor are the words “derivative” or “mortgage” or “Wall Street” or “foreclosure”.
The word “consumer,” as in the collapse of consumer demand and confidence, meaning companies have fewer people to sell to, is also never mentioned.
Instead, we get strange assertions such as:
“Employment is low because the incentives for workers to work are too small.”
That’s technically true, I suppose. If no one will pay you to work, I guess you could say your incentives to work “are too small”. But I’m not sure that fully captures what’s going on out there.
“The supply of labor is limited.”
I suppose that’s why companies seeking to hire have 500 or a thousand job applications for each opening, and why job fairs typically have lines that wind out the door and around the block and down the street.
I wonder: What would it look like if the supply of labor were ample?
“… the incentives not to work (are) too high”
Yes, I’m sure that the maximum unemployment benefit of $330 a week in Georgia offers a comfortable living, which explains why all those jobs are going unclaimed out there. (There ARE a lot of jobs going unclaimed out there, right? Right?)
In the piece, Laffer then goes on to recommend ways of fixing these problems. His very first proposal is the permanent extension of the Bush tax cuts, which according to Laffer’s theory should have led to a huge burst of employment since 2001 but in reality did nothing close to that, which is of course why those tax cuts must be made permanent even at the cost of mortgaging our future to China.
In his final recommendation (”saving the best for last,” he explains) Laffer proposes to introduce “incentive pay for politicians,” AKA “putting the politicians on commission”:
“Politicians must be held personally responsible for their actions. In business, firms align the incentives of decision makers with the incentives of shareholders to ensure that they take the best course of action. Washington must begin doing the same by creating an incentive structure that pays elected officials according to factors such as stock market performance and economic growth.”
Because you know, that approach has worked so beautifully in private industry, where corporate officials have manipulated earnings and managed their companies for short-term numbers rather than long-term health in order to maximize their own paychecks and bonuses. Imagine what members of Congress could accomplish with a similar mindset.
Personally, I think Laffer’s proposal credits government with a degree of control over the economy that it does not and should not have. In fact, such a system would give politicians a powerful financial incentive to intervene much more aggressively in the economy and goose it artificially, either through tax cuts or spending sprees, so they could collect their bonuses.
In other words, it seems to me that Laffer’s proposal would incentivize the very government interference in the economy that he claims to abhor. But hey, what do I know? He’s the one with the PhD from Stanford. |
