Laffer Loses His Mind


At least he had one in the first place…. but it’s definitely gone now:

While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.

Oh wait.  That’s correct.  So where’s the “loss of mind”?  Right here:

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Oh Christ.

We’ve not blown enough bubbles, right?

We haven’t seen enough results from them?

What causes bubbles?  That’s simple, in the end analysis:

False signals of demand in the economy, which then cause actors in that economy to increase the supply of goods and services beyond that which the economy can support on a sustainable basis.

Excessive credit issuance sends a false demand signal in the economy.  Giving McDonalds’ burger-flippers loans to “buy” $500,000 houses when they can’t afford a $150,000 one on a sustainable basis is one such false signal.  This encourages the building of lots of $500,000 houses, it drives the price of the materials (including land) sky high and it drives up the demand for labor beyond sustainable levels.

Stock prices shoot the moon too, especially any firm related to housing.  Home builders, Lowes, Home Depot, lumber companies, all go to the moon.

But this only works so long as you can continue to send that false demand signal.  In the case of credit you must continually increase it on an exponential basis by granting it on looser and looser terms in ever-increasing amounts in order to keep the bubble growing.

The same applies here.  You’d have to indefinitely extend this practice forever.  But Government has real expenses and must somehow pay them.  Right now our interest rates are very low, but they wouldn’t be for long if the government was to “forget about” all taxes for 18 months.  Our creditors would (correctly) presume that we would likely never pay them, and as a result they would refuse to roll over our debt. 

Hello Greece!

Everyone, including Laffer, is looking for a free lunch.  They all want some desperate way to keep the party going.  But the keg has run dry, and the brewery was looted and burned last night by the revelers.  There is no more beer.

Ultimately, the drunk must either detox or die.  Those are the only two choices.

If the drunk does not stop drinking before the damage reaches a critical level, he will die. 

But for each bottle before that point is reached, the detox – the DTs and similar maladies that come from withdrawal from his addiction – becomes worse.  Yes, “just one more hit” produces a brief respite, but not only does it make the withdrawal more difficult and painful, it runs an ever-higher risk that this bottle may truly be the last bottle.

Laffer needs to wake the hell up and stop with the Ponzi crap.  We ran that game in 2003 and got this mess.

The next bottle we guzzle may be the last drink we take.

The Market-Ticker