133. "Is Laffer Throwing Us a Curve?" The Washington Post (February 8, 1981).
Arthur Laffer should be brought before a court. Not hauled by his hair, but politely invited. Not before a regular jury, but before a jury of his peers -- what has been called a science court.
Science courts offer a way to accelerate and spotlight the normally slow and invisible process of passing judgment on new theories. The idea of forming science juries, usually credited to Dr. Arthur Kantrowitz of AVCO Everett Research Laboratory, has been endorsed by the heads of 28 scientific associations. Science courts could not condemn anyone to be burned at the stake, but they might declare a theory bare of any supportive evidence or logical basis.
The reason I favor running Laffer's curve -- the equation linking tax cuts to economic growth -- before a science court is not that I am confident it will be laughed out of court, but that it deserves a closer examination before 226 million Americans -- and, indirectly, the world -- are subjected to a public policy which to a surprising extent is based on this theory.
It seems bizarre that a nation which has erected a vast array of screening tests for any medication before it is marketed, and set up whole bureaucracies to protect human subjects of minor experiments, will allow the whole society to be injected with an economic Laetrile without even minimal systematic screening. If Laffer had planned to try his theory on the economy of, say, one prison, he would have had to go before a human subjects committee first; if he had sought to market a new stimulant pill, years of animal testing and FDA approval would be required. Though these precautions may be excessive when it comes to headache compounds or diet pills, should new economic theories not receive at least some scrutiny?
The need for a closer look at Laffer's work is particularly keen because, unlike any other conception in recent memory, it jumped from hypothesis to public policy with very little written statement; it exists almost exclusively in Laffer's talks, newspaper accounts and a journalist's book. Laffer has published but a few pages discussing it.
Having listened to Laffer, and read all he has published on the subject, it seems to me that Laffer is uncritically adding anecdotes to valid, widely recognized general principles to reach the conclusion on which public policy is to be based. The basic principles are incontestable: There is a supply side to an economy -- the "other half" of any suply/demand pair of curves. Equally unquestionable, the level of taxation does affect incentives to work, save and invest -- and hence, the supply.
But it does not follow from this at all that a tax cut of specific proportions (such as 10 percent three years in a row) will generate a specific amount of new economic activity, supply, and hence tax revenues. How much new revenue will be generated or "lost" (due to the cut in tax rates) depends on a large variety of fctors -- obsolescence in industrial equipment and plants, dependence on imported oil, the work ethic and others -- which Laffer neither specifies nor studies.
Instead, he deals in analogies. He points out that a tax cut by the Kennedy administration increased tax revenues, without asking about the specific circumstances of this tax cut (high unused capacity, shortage of demand and a comparatively low-inflation environment). Laffer argues: Bermuda has no taxes, Jamaica does; there is no unemployment in Bermuda, it is rampant in Jamaica; ergo, taxes cause unemployment. He ignores all other differences between those two economies, as well as the scores of other countries which do have tax laws and have widely different rates of unemployment.
A crucial question for the theory and for public policy is the possible delayed effect of a supply-side tax cut. It would be much less inflationary if the economic growth almost everyone agrees will follow is forth-coming in short order than if a tax cut in Year A yields new revenues largely two, three or more years later. Laffer's answer is: "How long does it take you to pick up a $50 bill?" In other words, he expects an almost instantaneous feedback effect. Such a facile answer might sway a science court less than it does the media and the politicians. Where is the evidence that, say, a new steel mill can be built or renovated, and a market share recaptured, as quickly as all that?
It would be naive not to recognize that Laffer's curve has been advanced by a political movement in need of simple upbeat concepts; by any light, Laffer's curve qualifies for that purpose. But successful political leaders who win election campaigns soon are faced with the tougher duty of governing. It is here that teories which win voters must face a quite different test of reality.
It is at this juncture, before the public is wounded, that a science court would be particularly helpful. Let the C ouncil of Economic Advisers set upa public hearing; let Laffer submit in writing his ideas and data; let a bunch of experts unmoved by political ambitions mull them over; let's hold them up to reasonable examination. The science court need not pass on the last footnote or chi square; it could merely indicate whether there is any reason whatsoever to believe that a supply-side tax cut in 1981 will have the promised effects or whether it is more likely to cause much regret, by adding inflationary stimulant to an inflationary fire.