In his WSJ piece, Laffer sets out a simple enough argument: In the current troubled world economy, he claims, the countries that have relied the most on fiscal stimulus — Estonia, Ireland, the Slovak Republic, and Finland — have done the worst. Why? Because, Laffer argues, the money for the stimulus has to come from somewhere, and therefore “every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP.”
A rather elementary fact about fiscal stimulus, however, is that it doesn’t “wipe out” private spending in the present. Rather, it borrows money from the future. By relying on deficit spending, stimulus programs are designed to pump more money into the economy during downturns, when private spending and tax revenues are soft. The temporary deficits can be reduced, at least in theory, once the economy is back on its feet and tax revenues perk up.
But you don’t have to be a raging Keynesian to have trouble with Laffer’s argument. On his blog The Market Monetarist, Danske Bank Chief Analyst and self-described “right-wing economist” Lars Christensen
suggests that Laffer has joined a number of other right-wing economists in the U.S. who “seem to have forgotten everything about economics — mostly as a result of an apparent hatred of President Obama.” Laffer, he argues, “is embarrassing himself” with his WSJ op-ed by pretending that Estonia, Ireland, the Slovak Republic, and Finland have been ruined by an excess of Keynesian zeal.
In fact, as Christiansen points out, Estonia, the Slovak Republic, and Finland are among “the most fiscally conservative countries in the EU,” while Ireland’s been spending its money on banking bailouts, not stimulus.
How did Laffer get things so backwards? Christensen suggests the following:
Economist Arthur Laffer, patron saint of tax cuts, is back, with an op-ed in the Wall Street Journal that he hopes will put the kibosh on future plans for government stimulus. But his latest excursion into the public debate has drawn harsh criticism not only from liberal economists, but also...
business.time.com
