“More recently, the emphasis has been on government expenditures as a balance wheel. Unfortunately, the balance wheel is unbalanced.” — Milton Friedman
One of the big debates at this week’s FreedomFest is on supply-side economics and the Laffer curve. It pits Ben Stein against Art Laffer.
In fact, the debate will take place today at 1 p.m. PST. You can watch it live on Fox Nation: www.nation.foxnews.com. Use the code FREEDOM30 to get a 30-day free trial. Veterans don’t pay anything for a year.
Ben Stein is an actor, lawyer and economist who is skeptical of supply-side economics. In his classic role as a boring high school teacher, he asks students about the Laffer curve. He also quotes George H. W. Bush, who called the Laffer curve “voodoo economics.”
Here’s the funny clip from Ferris Bueller’s Day Off.
Stein apparently thinks supply-side economics and the Laffer curve are bunk, and he is critical of the supply-side tax cuts under Presidents Reagan, Bush (the second) and Trump.
He blames the huge federal deficits on tax cut fever. However, by looking at the history of deficit spending, we see that living beyond our means started before Art Laffer explained the benefits of tax cuts on a napkin in the late 1970s.
Historically, classical economics like Adam Smith taught that government should run deficits only in times of war. Otherwise, they should balance the budget.
But that all changed after World War II. For the first time, governments started running in the red year after year. Why?
In my history book, “The Making of Modern Economics,” I blame deficit spending on John Maynard Keynes and Keynesian economics, which was popularized by Paul Samuelson’s textbook. According to Keynesian theory, if a country suffers from chronic unemployment, the government should deliberately run a deficit.
The backdoor of the barnyard of sound fiscal policy has been left wide open ever since.
Fiscal Madness: Democracy in Deficit
Theoretically, during a period of full employment, the government should have a balanced budget or even a surplus. That theory has been thrown out the window. Today, we have a labor shortage and an unemployment rate under 4%, and yet the government continues to run $1 trillion deficits. The national debt now exceeds $30 trillion.
It is interesting to note that the deficits have gotten worse, but that’s due in large part to the financial crisis in 2008 and the pandemic-linked lockdowns in 2020.
The supply-siders are partly at fault, because, like the Keynesians, they don’t seem to think that “deficits matter.”
So, they are both to blame.
Economists Find a Solution
The only way to return to fiscal sanity is to pass a “balanced budget amendment” to the Constitution.
Otherwise, as Nobel economist James Buchanan wrote, we are destined to live in a “Democracy in Deficit.” Buchanan turned this argument into a book that he co-authored by Richard Wagner at George Mason University.
Without a constitutional amendment, politicians will always prefer to spend money, especially on local pet projects and earmarks. They are reluctant to raise taxes. Since spending is popular and taxes are not, the result will be chronic deficit spending.
Congress has tried to pass a balanced budget amendment over the years, but it has never succeeded. Deficits are just too popular. Even Republicans like Ronald Reagan and Donald Trump — who promised to reduce the deficits when in office — never could.
Deficit spending without a gold standard also contributes to inflation. We see, historically, how inflation was not a problem except in times of war. But again, that all changed after World War II, when we went off the gold standard, and the government adopted Keynesian economics.
Today, deficit spending and inflation are the twin relics of excessive fiscal and monetary policy.
We have adopted Adam Smith’s policy of free trade. Now, we need to return to Adam Smith’s vision of sound money and balanced budgets.
How to Reestablish the Sound Principles of Finance
If more students and citizens were exposed to the sound principles of finance, as advocated in my two books, “Economic Logic” and “The Making of Modern Economics,” we could turn the tide toward economic stability and ever-increasing prosperity, instead of the crisis-prone boom-bust cycle we experience practically every decade.
For more information on these two books, go here.
To buy either or both books at a substantial discount, go to www.skousenbooks.com.
Good investing, AEIOU,
You Blew It!
Wealthy Capitalists Are Leaving States Controlled by Democrats
A few Nobel-Prize-winning economists, such as Peter Diamond, Joseph Stiglitz and Paul Krugman, are convinced the high progressive tax rates don’t deter productivity and the chance for wealthy business leaders to make billions. They advocate for federal income tax rates as high as 70%, not counting state and local taxes.
Yet, the reality is that wealthy entrepreneurs and capitalists are leaving high-tax states in droves.
Elon Musk has moved his headquarters to Austin, Texas. Fund manager Rob Arnott has shifted his operation to Miami, Florida. Both Texas and Florida have no state income tax.
Hedge fund manager Paul Tudor Jones left Connecticut and took his business and earnings to Florida, denying the state of $40 million of revenue in the state budget.
Now, the billionaire founder of Citadel Capital, Ken Griffin, is moving to Florida. He is one of the richest and most philanthropic residents of Illinois.
“Griffin has given more than $600 million to organizations in the Windy City since arriving in 1989.”
“His name adorns a hall at the Art Institute of Chicago.”
“The entire Museum of Science & Industry plans to take on the billionaire hedge fund manager’s name in 2024.”
“The University of Chicago is home to the Kenneth C. Griffin Department of Economics.”
“In June Griffin donated more than $130 million across 40 Chicago organizations.”
“The 40 latest recipients [of Griffin’s donations] represent ‘the fabric of Chicago,’ among them Northwestern Medicine, the Field Museum and the Chicago Symphony Orchestra.”
“Griffin also gave $10 million to Fourth Presbyterian Church, where his children were baptized. The money will help endow meal distribution and other programs.”
Oh, and Ken Griffin, who is sometimes portrayed as a greedy Republican hedge fund fat cat “alone paid more than $200 million in taxes in Illinois in each of the past two years.”
Griffin is primarily leaving because of the growing crime problem in Chicago, but the tax break he will get by moving to Miami could be a factor.
The odd thing is that the governors of these states don’t seem to care about either high tax rates or crime. The best thing to do is to throw the bums out of office.