When Arthur Laffer left Stanford University in 1967, he was on a swiftly rising professional trajectory. He finished his dissertation and received his Ph.D. in 1972, but, between 1969 and 1972, he published eight papers in top economic journals, including the distinguished American Economic Review and Journal of Political Economy. He spent a year plus at the Brookings Institution and was one of the youngest people ever tenured at the University of Chicago. Only the rarest of talents achieve such instant success. Laffer's top-tier publication output in his first years out of graduate school was about double that of the highly regarded Christina Romer, the current chairman of President Obama's Council of Economic Advisers.
But while he was taking the academic profession by storm, Laffer made an unusual choice for an economist so young and promising. He decided to work for a Republican, accepting President Nixon's offer to become chief economist for the Office of Management and Budget. There, his charisma, sharp intellect, and willingness to debate lifted him to almost instant political fame. To put that fame in perspective, and to provide a proper measure of the man, I challenge even the most politically obsessed reader to name another person who has ever held that post.
What happened next forms the riveting introduction to Econoclasts, historian Brian Domitrovic's landmark new history of the supply-side revolution. While at the OMB, Laffer developed a novel model for forecasting GDP. His model suggested a somewhat more optimistic future than was the current consensus. The Left, recognizing its opportunity, pounced. Paul Samuelson of MIT, the dean of the American economics establishment, visited the legendary economics department of the University of Chicago and delivered a lecture with a title that astonishes to this day: "Why They Are Laughing at Laffer." Domitrovic quotes Reagan adviser Martin Anderson on what happened at that lecture. Samuelson was, Anderson said, "small and he was mean. But what he did to Laffer that day in Chicago, even by academic standards of morality, was an extraordinary example of intellectual bullying."
Yet Laffer's forecast ended up being, in Domitrovic's words, "borne out perfectly." Indeed, a look at the methods Laffer employed suggests that he was a pioneer in the analysis of time-series data. The model that Samuelson considered a laughing matter was an early and perhaps the first example of the type of advanced econometric model known as a "vector autoregression." These are now commonly relied upon. But the lecture was an important turning point in history: That such a senior member of a profession could attack so viciously a cub right out of graduate school, and could do so without incurring the displeasure of other academics who purport to defend a climate of open and civil debate, established once and for all that the rules for conservatives were henceforth going to be different. Today, Paul Krugman plays the role of Samuelson twice a week in the New York Times.
Clearly, it could not have been a faulty forecast that elicited such an astonishing breach of collegiality from such a giant as Samuelson. As if economists had never made a bad forecast before. No, the problem must have been that Samuelson foresaw the existential threat to American liberalism embodied in the free-market views of Laffer. Just as the Left anoints its champions with MacArthur genius grants and Nobel prizes, it seeks to marginalize its opponents with the accusation that they are cranks. As bad as the treatment of Judges Bork and Thomas was, the treatment of Laffer was worse.
The remarkable thing about the story is that it does not end there. Laffer may have been successfully blackballed from the polite lunchrooms of academe, but he was not so easily derailed from his task. Domitrovic's restrained prose brings us into the room at the New York restaurant Michael 1 where Laffer and Bob Bartley of the Wall Street Journal collaborated with Jude Wanniski to develop a new worldview that would alter the path of U.S. history.
Without the dogged devotion of that small group, a reader of this book can only conclude, Reagan would never have been possible. Laffer's legendary napkin drawing demonstrating that higher tax rates need not produce higher revenue would have been tossed out with the leftovers. Before low taxes and smaller government could revive a moribund nation on a path to socialism, someone had to make the case that they could, and stick with it while being ridiculed by the academic establishment. Until I read Econoclasts, I had never fully appreciated the heroism of the supply-side revolution's founders.
It is indeed ironic that this book should arrive at almost precisely the same moment as former Reagan administration economist Bruce Bartlett's new book, The New American Economy. Bartlett is the author of a bestselling book about George W. Bush with the inflammatory title Impostor, a book he claims cost him his job at a conservative think tank. There is perhaps no man so praiseworthy in "elite" circles as the prodigal conservative who has "seen the light." Bartlett has been practically blinded by it, and has, accordingly, become a media darling.
In his new book, Bartlett argues that "just as Keynesian economics went off on the wrong track and became discredited, I think supply-side economics has also reached the end of its useful life." Bartlett goes on to make a depressingly convincing argument that, in the U.S. at least, this is the case.
The problem is that the supply-side formula requires lower taxes and smaller government. You cannot, Bartlett correctly argues, have one without the other. In the U.S., government spending has advanced steadily under both Democratic and Republican administrations. The difference between Republicans and Democrats appears to be that Republicans, who oppose higher taxes in almost every form, pursue policies that end up being unsustainable.
As bad as it is today, when one looks ahead to an America that shortly will have the same age distribution that Florida has now, one can only conclude that it is going to get much worse. The health bills of our senior citizens alone may well exceed the current size of government in a few decades. Bartlett starts a difficult conversation. If we cannot constrain the growth of government, are we going to try to run a Ponzi scheme, or are we going to pay for it? If we choose the latter, how are we going to raise the money? Bartlett's answers are well researched, drawing on a massive literature.
An intransigent conservative will be disappointed that Bartlett does not address the facts that are most at odds with his assertion that supply-side economics is dead. Even as Samuelson's equally political nephew, Larry Summers, and the rest of President Obama's team appear to be engineering the final triumph of academic quasi-socialism, many countries around the world, from Sweden to China, have embraced supply-side views and seen positive results. Low tax rates have achieved a cachet in Europe that Laffer never would have dreamed of. So why is supply-side economics dead for the U.S.?
In correspondence with me, Bartlett has argued that our form of democracy is incapable of reducing spending efficiently because the ruling party in America has much less power than the ruling party in a parliamentary democracy. We are, he concludes, going to spend more, and we might as well face it and raise taxes to pay for it. He may be right, but the battle is certainly not over.
After reading both books, a conservative cannot help but be troubled by the parallels between the lives of Bartlett and Laffer. Laffer spoke truths that were unpopular with liberals, and they sent out Hercules to slay him. Bartlett challenged sacred tenets of Laffer's teachings, and similarly was ridiculed and cast out.
It is impossible to say how the American future will play out, but one can say with confidence that a team that casts out heretics has lost its way, and has stooped to the kind of thought control practiced so efficiently by the Left. Bartlett's book is short but weighty, and any honorable descendant of the pioneers who launched the supply-side revolution should welcome him to the dinner table--and bring a clean white napkin.
Kevin A. Hassett a senior fellow and the director of economic policy studies at AEI.