Set aside your feelings for Chait and TNR. His review of the crackpotization of DC is a must-read.

[BurtWorm]

I didn't know Crackpot Dick Cheney was present at the creation of the Laffable Curve, did you?

http://www.tnr.com/docprint.mhtml?i=20070910&s=chait091007


How economic crackpots devoured American politics.
Feast of the Wingnuts
by Jonathan Chait
Post date: 09.03.07
Issue date: 09.10.07

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Photo Courtesy Walter Bennett/Time & Life Pictures/Getty

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All sects have their founding myths, many of them involving circumstances quite mundane. The cult in question generally traces its political origins to a meeting in Washington in late 1974 between Arthur Laffer, an economist; Jude Wanniski, an editorial page writer for The Wall Street Journal; and Dick Cheney, thendeputy assistant to President Ford. Wanniski, an eccentric and highly excitable man, had until the previous few years no training in economics whatsoever, but he had taken Laffer's tutelage.

His choice of mentor was certainly unconventional. Laffer had been on the economics faculty at the University of Chicago since 1967. In 1970, his mentor, George Shultz, brought him to Washington to serve as a staffer in the Office of Management and Budget. Laffer quickly suffered a bout with infamy when he made a wildly unconventional calculation about the size of the 1971 Gross National Product, which was far more optimistic than estimates elsewhere. When it was discovered that Laffer had used just four indicators to arrive at his figure--most economists used hundreds if not thousands of inputs--he became a Washington laughingstock. Indeed, he turned out to be horribly wrong. Laffer left the government in disgrace and faced the scorn of his former academic colleagues yet stayed in touch with Wanniski, whom he had met in Washington, and continued to tutor him in economics.

Starting in 1972, Wanniski came to believe that Laffer had developed a blinding new insight that turned established economic wisdom on its head. Wanniski and Laffer believed it was possible to simultaneously expand the economy and tamp down inflation by cutting taxes, especially the high tax rates faced by upper-income earners. Respectable economists-- not least among them conservative ones--considered this laughable. Wanniski, though, was ever more certain of its truth. He promoted this radical new doctrine through his perch on The Wall Street Journal editorial page and in a major article for The Public Interest, a journal published by the neoconservative godfather Irving Kristol. Yet Wanniski's new doctrine, later to be called supply-side economics, had failed to win much of a following beyond a tiny circle of adherents.

That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.

At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue.

But Cheney did not say either of these things. Perhaps, in retrospect, this was due to something deep in Cheney's character that makes him unusually susceptible to theories or purported data that confirm his own ideological predilections. (You can almost picture Donald Rumsfeld, years later, scrawling a diagram for Cheney on a cocktail napkin showing that only a small number of troops would be needed to occupy Iraq.) In any event, Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts.

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[ludwigb]

1. Chait is a gifted writer

His piece on Bush-hatred remains a classic. But he frequently lets emotion and his economic interests (ie loyalty to Marty Peretz) get in the way of the hard work of analysis. I was watching a Bloggingheads segment the other day with him and Yglesias. It became so clear how little he actually knows or reads foreign policy--his viewpoints are all reactive, just following along with trends. And the normally perceptive Yglesias kept agreeing with his banal CV viewpoints! It was frustrating.

[Dr.Phool]

2. Krugman on Chait's book.

http://www.tpmcafe.com/blog/bookclub/2007/sep/11/crank_politics

And some more
http://bookclub.tpmcafe.com/

[BurtWorm]

3. Thanks!

:toast: