Arthur LafferArthur Laffer, a prominent national economist and one of the architects of the 1981 Reagan tax cuts, spoke to a packed house of clients and friends of Frost Bank at their annual luncheon meeting at the Dallas Country Club on Wednesday, November 30^th. Jim Johnson, Chairman of the Dallas Region of Frost Bank, introduced Laffer as a leader of the supply side economic movement and author of the "Laffer Curve" which maintains that a lower tax rate will increase revenues for the government by encouraging business investment and job creation. Laffer, is credited (along with former Congressman Jack Kemp, conservative economist Paul Craig Roberts, and the late Jude Wanniski), for making the economic case for the Reagan tax cuts of the early 1980s.

In his speech to his Dallas audience, Laffer was surprisingly upbeat about the future of the U.S. economy. He dismissed concerns about the "housing bubble", trade and budget deficits, and loss of manufacturing jobs to China as problems that won’t hold back a U.S. economy which, in Laffer’s words, was "so far above the next bet that it is absolutely astounding".

Laffer cited a number of statistics to back up his view that the U.S. is the only developed country in the world whose economy is growing. He compared unemployment in the U.S. which is running at a 5% rate with a 12½% rate in Germany. He noted that the new coalition is raising taxes, not lowering them, just the wrong thing to do in a stagnant economy from Laffer’s perspective.

Laffer went on to say that we are experiencing a 3-4% real growth in the U.S. economy and that corporate tax returns show that "profits in the U.S. are the highest they have ever been, exceeding the profits of the go-go ‘60s." He maintains that "there is no inflation in the U.S." due to the fact that monetarists at the Federal Reserve from the days of Paul Volcker through the tenure of Allan Greenspan have "controlled inflation". (Laffer is a follower of the University of Chicago school of economists whose intellectual leader is Professor Milton Friedman.)

Laffer went on to add that taxes on ownership of equity have never been lower than they are today in the U.S. Taxes on capital gains and dividends now are at 15%. Compare that with a 91% tax rate on dividends and a 35% tax on capital gains prior to John F. Kennedy’s election in 1960. Kennedy lowered the dividend tax to 70% and the capital gain tax to 28% during this Administration. Bush has given us the current low rate of 15% on dividends and capital gains which has helped the equity markets, according to Laffer.

"This economy is really roaring, and I don’t see it changing," said Laffer who disputed the notion that there is a bubble effect in housing. Laffer maintained that "housing prices have risen where they should be", and he doesn’t see any serious threat of a crash in the housing market like we saw in the stock market in 2000.

Laffer was very positive about economic development in China. As he put it, "without China, there is no Walmart", and "China is our best friend in economics". Apparently, what he meant by his latter comment is that China holds $700 billion in short term U.S. Treasuries which helps to keep our interest rates low here in the U.S. Nor was he worried about the loss of jobs to China: "outsourcing to China is not a problem. It is a solution."

Laffer briefly touched on a few other subjects. On immigration, he clearly favors an "open borders" policy. He did express concern about the growing political corruption in Washington and made the point that Republicans are acting like an "entrenched power" not like they did during the Reagan Presidency.

When asked about the school finance crisis in Texas, Laffer made the point that the problem isn’t a shortage of money, but the lack of proper incentives for teachers and principals, to produce a quality education. He pointed out that schoolteachers in California are the highest paid in the country while California is the second lowest performing state in public education in the country. He said that he would rather have large classes with good teachers rather then small classes with poor teachers.

I asked Laffer after his talk about the competitive disadvantage our current business tax system puts us in with respect to businesses of other countries, such as China. He agreed with that concern and was generally supportive of replacing our current corporate income tax with a border-adjusted tax (or VAT) along the lines proposed by Austin businessman David Hartman.

Paul Craig RobertsJust like on American foreign policy, conservatives no longer are united when it comes to the seriousness of the problems of the American economy – and the appropriate solutions. Laffer’s fellow supply side economist from the Reagan days, Paul Craig Roberts, has a completely different take on the state of the American economy (as do many of the followers of the great Austrian economist Ludwig von Mises) than that articulated by Laffer in Dallas this week. Roberts has written extensively about the hollowing out of our U.S. manufacturing base, the loss of good jobs in the U.S. and the dangers of our huge budget and trade deficits.

Other conservative economists of the Mises school see the housing bubble as a major example of the "credit excess" which afflicts the current U.S. economy. They maintain that the asset inflation in housing, combined with the high level of consumer debt in general, will cause the U.S. economy to suffer a major reversal in the not too distant future.

There is quite a debate going on among some very intelligent American economists, many of whom were in basic agreement on economic issues during the Reagan era, about what lies ahead for the U.S. and world economy. Arthur Laffer made an eloquent case for those who see this economy in great shape, poised for even greater growth. Roberts makes an equally compelling case that "the U.S. consumer market (will die) from lack of income and purchasing power" and that the U.S. economy is in a downward spiral.

Laffer and Roberts were once allies on economic policy as "supply siders" supporting the Reagan tax cuts. Now, they are diametrically opposed to one another on virtually every issue Laffer discussed in his Dallas speech ranging from deficits to the China issue along with the immigration policy. As this story unfolds, one will be proven right and the other wrong in their respective analyses of the state of the American economy – and its future prospects.

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