By John L. Chapman, Ph.D. Washington, D.C.
Amidst the sturm und drang that is the global economy at the moment, Las Vegas-based entrepreneur, developer and casino operator Steve Wynn (of Bellagio and Mirage fame), who is a lifelong Democrat and voted for President Obama in 2008, summed up the business climate this week in startling fashion during an interview with Neil Cavuto. So revealing were his words, that they are worth quoting at length:
The policies of this administration have destroyed the …living standard of the working class in America….. What is ostensibly the base of the Democratic Party is taking the worst hit in history because of these unbelievably uninformed policies of this President and his colleagues, who have fostered this ridiculous class warfare, these nonsensical policies that have been proven to be ineffective and unsuccessful everywhere they have ever been tried in the world.
[For example, health care costs] were escalating before at a rate of about 8 percent a year. And the devastation of ObamaCare, we estimate it now to be north of 12 percent. That is to say, the rate of escalation of health care costs has increased by 50 percent because of what they did. And what’s incredible —
….[On the future in this country], I can’t see the light. I am frightened to death about the future of business and job formation. …. the policies [outside the United States] are much more steadfast, much more carefully considered. You know what to expect, at least in Macau. People matter in Macau. And working folks there get primary consideration. President Obama gives lip service to this sort of thing. And his speeches are absolutely enthralling. But so much of what this is all about today is not what they — is what they do as opposed to what they say. The speeches are great. The actions are horrifying. I mean, it’s almost impossible to believe they don’t know that what they are doing is destructive, but they do it anyway. Ya know, my friend Harry Reid hung up on me the other day for the first time in 40 years. That’s what it has come to. I supported a Democratic congresswoman named Shelley Berkley. I called her during ObamaCare. I said, Shelley, what are you doing? How do you do this? This is killing the unions and all of us that are supplying health care to our employees. And she said to me — quote — quote — now this is not hearsay. Shelley said to me — and she is running for the Senate [in 2012] — “Steve, I know it is terrible. My husband is a doctor. He hates it, too…… But if I don’t vote for it, she will punish me,” she being Nancy Pelosi.
And I said, Shelley, every politician that has ever sold out their constituency has had a lame, terrible rationalization like the one you just gave me. Don’t ever call me again.
She says, I am sorry you are disappointed in me. I still love you. And we ended the conversation. That is politics in America today. And if any businessman or any working person doesn’t understand that this is a turning point in American history, then I’m afraid we’re gonna get what we deserve.
Mr. Wynn’s statement is brutal in its frankness, and remarkable for what it reveals: among other things, for one of the world’s richest men, a lifetime supporter of Democrats, to evince such fear now about business prospects in the U.S., is quite telling. Because above all else, Mr. Wynn is a future-oriented, risk-taking investor who makes his money in an entertainment business that’s dependent upon a level of discretionary income being strong enough to support the demand for leisure services that he provides. That he sees this in Asia now, but cannot in the U.S., is telling in terms of what it portends for the next several years here.
It’s telling, too, for investors, that Wynn Resorts’ U.S. assets are now parked in cash, along with the other $2 trillion in corporate liquidity currently side-lined here. For it is a collective vote of “No Confidence” in the present U.S. policy mix that surely places an upside limit on U.S. equities at the moment, and for the foreseeable future, too, absent any policy change. Additionally, given the Federal Reserve’s current dour outlook, low consumer confidence, and concerns about the Eurozone, to where, exactly, can the world repair for succour? Fortunately that answer is easier than at first appears: however unlikely, salvation of American prosperity may yet arise from Austin, Texas, the home of the Laffer Center for Supply-Side Economics. It is here that the repassage to American greatness through a vibrant economy may well be hatched.
The Laffer Center is a brand new think tank dedicated to promulgation of Arthur Laffer’s life’s work, and especially the variant of the laissez-faire paradigm for which he is justly famous, the policy mix known as supply-side economics. Based in Austin, the Center’s mission to inject supply-side ideas into the national debate is both timely and urgent, given the exigencies that have caused Steve Wynn and the entrepreneurial class such marked consternation. For indeed, in a real sense Mr. Laffer was the author of American renewal once before in life, and now may reprise that role once again: the emerging Republican debate on economic policy that will form the party’s Presidential identity in 2012 now points toward the inclusion of fundamental tax reform, with the distinct imprimatur of Mr. Laffer’s core ideas being central to the party platform. Indeed, the three boldest tax reform plans that have been proffered by Republican contenders (Messrs. Cain, Gingrich, and Perry) are all deeply imbued with supply-side themes (Mr. Laffer in fact endorsed the 9-9-9 plan of Herman Cain), and would likely shape the proposals of any eventual Republican nominee next fall.
Understanding why this is so, and why it matters for economic growth, offers a hopeful counter-thesis to Mr. Wynn’s assessment of the near term future for the U.S. economy, and is therefore useful for all investors to carefully consider.
Mr. Laffer is most well-known of course for the Laffer Curve, first drawn on a napkin over dinner in 1974 wherein he complained to two senior Ford aides (whose names, Cheney and Rumsfeld, would themselves later become famous in another context) that the President’s anti-inflation policies were ill-conceived. The argument at the time was whether or not raising taxes would lower the inflation rate and cut the deficit, as Keynes had posited: if correct, this would imply a more or less linear relationship between marginal tax rates and the government’s tax receipts (or “tax take”). But Mr Laffer famously drew the figure below at his dinner table, arguing that at a marginal 100% tax rate, there would be no incentive to produce at all: by definition, there is a point of optimal taxation where marginal rates are concerned.
Figure I. The Laffer Curve: Total Government Revenues are a Function of the Tax Rate
Mr. Laffer added that history bore this out: government revenues had not suffered and indeed economic activity had boomed after cuts in marginal tax rates in the 1920s and again in the 1960s in the United States. The reason this was so is because even at relatively low rates of marginal taxation, shrinking what Laffer calls the “tax wedge” — that is to say, minimizing the loss of production caused by incremental goods price increases which are due to taxation — through cuts in marginal rates, induces greater productivity and higher levels of output. And in turn, this greater level of output yields, happily, both more tax revenue from a broader tax base as well as lower relative prices (that are anti-inflationary) that imply increasing real incomes.
This discussion of the incentives to greater output and higher productivity via lower levels of marginal taxation formed the core of what came to be known during the 1980 campaign as supply-side economics, in obeisance to the policy’s emphasis on expansion of production, as opposed to the then-dominant theory of Keynesian “demand-side” policies, which focused on increasing spending as the way to effect economic growth. The fathers of the supply-side paradigm are rightly considered to be Mr. Laffer and 1999 Nobel Laureate Robert Mundell, the intellectual godfather of the 1960s Kennedy tax cuts. But the supply-side policy mix is actually far more than just a prescription for production-inducing tax policy: indeed, the Laffer-Mundell policy set offers a comprehensive architecture for a pro-growth program steeped in the ideals of laissez faire. In addition to low marginal tax rates on personal income, capital, and profits to encourage saving, job-creating investment and increase output, the Laffer/Mundell supply-side paradigm calls for:
- A strong dollar in order to buttress the formation of capital and efficient resource allocation (via prices that are “correct”, and not falsified due to credit inflation);
- Less government spending throughout the economy in order to minimize government’s usurpation (viz., “crowding out”) of resources available to the private sector;
- Sensible regulatory policies that encourage entrepreneurial risk-taking, business expansion, and new start-ups;
- Unrestricted trade to promote an optimal international division of labor
This policy mix was central to the 1980 Reagan platform and formed the over-arching economic theme to the entire Reagan Presidency. As such, it was, as Robert Bartley stated succinctly in The Seven Fat Years, the underlying philosophy of the Reagan Revolution that was largely responsible for the ensuing 25-year global economic boom led by the United States. While not all aspects of the supply-side formula were ever enacted, either during the Reagan years or subsequent to them, their enunciation as a coherent and integrated policy mix has, ever since, been the intellectual platform for adherents of pro-growth, limited-government, and laissez-faire economic policy in the United States.
And so it should come as no surprise that, after nearly four years now of being bombarded with news of the demise of the Chicago School’s paradigm of free market stability and concomitant resurgence of Keynesian economics — and importantly, after the manifest failure of Keynesian, demand-side stimulus programs to blunt the pain of the global Great Recession — that we are once again seeing a renewed interest in supply-side policies, that have proven themselves successful in promoting strong growth wherever they have been implemented. Indeed, if it be said that Milton Friedman led the Keynesian counterrevolution in the 1970s, it may well be true that Mr. Laffer will now lead the counterinsurgency to the Keynesian resurgence of 2008-2012.
For the unremitting fact is, the U.S. economic recovery is extremely fragile, at a time when the global economy teeters on the brink of another extended downturn. And some $4 trillion in fiscal stimulus in the U.S. in the last three years has not alleviated a U6 unemployment rate that has hovered in the 16-18% range, a near 10% decline in real incomes, nor the continuing gap in U.S.-based investment that has sustained the still-yawning $6 trillion loss in household wealth since 2008. But recent policies have succeeded marvelously in one respect: gross U.S. debt as a percentage of GDP is now above 100%, at its highest peace-time level ever, guaranteeing slow growth if not corrected. Given the structural threats in the Eurozone, China, Japan, and Latin America, however, there is little prospect for that: the recipe for recession is still in place, and all of this has led to the fear of which Mr. Wynn spoke per the above.
Sadly, Keynesian adherents have no coherent answer for why their demand-stimulating spending programs have so uniformly failed, other than to say that their various government interventions were not big enough. But at least ten separate stimulus programs totalling over $2 trillion in government spending have not helped in Japan, either, where the last two decades have resulted in a declining standard of living in a relative sense, and a loss of ten percentage points, from 80% to 70%, in a benchmark comparison of per capita income vis-a-vis the United States.
Re-enter Mr. Laffer onto the scene, however, as pro-growth Republicans such as Messrs. Cain and Perry seek a reprise of the long boom engendered by supply-side policies after Mr. Reagan’s historic 1981 tax cuts. For Mr. Laffer understands better than most that the core problem with Keynes was that he attacked the wrong problem. It is not a lack of spending that plagues the U.S. and global economy: it is a lack of capital. All of the many and varied stimulus spending programs have succeeded only in leading to real capital decumulation in recent years, only deepening our structural problems, and exactly the opposite of what needs to happen for the economy to heal.
Further, supply-side economic policy is but the 20th century echo of Say’s Law, which Keynes claimed to have repudiated in his 1936 book, but which subsequent history has only confirmed: consumption and government spending are not a cause of economic growth and prosperity, as Keynes and his modern adherents assert: instead, spending is an effect of growth. For we must first produce in order to then consume, and hence a policy regime encouraging saving, capital accumulation, and growth in output supply is the proper antidote to the extended quasi-recession that plagues us, and has only succeeded in immiserating much of the world the last few years via record levels of debt, high unemployment, and declining incomes.
The 2012 campaign has yet to play out, of course, and the Administration in place in January 2013 is a further distant development. But given our modern torpor, now in some ways worse than what faced the United States in 1980, the election next year is every bit as much of an historic inflection as that of 32 years ago. How fortunate we are then that Mr. Laffer is still very much alive and dedicated to the sublime cause of prosperity under freedom, with a talented team in Austin ready to propagate the knowledge of what worked so well back then, and can be ready in reprise once again. As Mr. Laffer is fond of saying, prosperity is a choice — a matter of choosing the correct policies. An economic growth rate averaging 3.2% in the United States since 1950 can be achieved once again: there is nothing fore-ordained about today’s GDP growth at half this long run historic rate. Look for Austin’s Laffer Center to be carrying this message to the American people in 2012 and beyond, to a public that, fortunately, is ready to hear it.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at firstname.lastname@example.org.
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