President Trump on Wednesday will bestow the Presidential Medal of Freedom, the country’s highest civilian honor, on economist Arthur Laffer. It’s a move that will almost certainly spark controversy between those who view the Yale and Stanford-educated economist as a visionary, and those who see him as the economic equivalent of a snake-oil salesman.
Laffer’s biggest claim to fame is the so-called “Laffer Curve” — an economic concept that he famously sketched out on a cloth napkin in a Washington, D.C. restaurant in 1974, while having dinner with future Vice President Dick Cheney, future Defense Secretary Donald Rumsfeld, both then serving in the Gerald Ford administration, as well as Wall Street Journal reporter Jude Wanniski.
The central insight of the Laffer Curve — one that Laffer himself was the first to claim did not originate with him — is that in a simplified economy, there is a theoretical tax rate that maximizes government revenue. If the tax rate were 100%, nobody would work and the government would collect no taxes. If it were zero, people would work diligently, but the government would still collect no tax revenue. Somewhere in between was the perfect balance.
The real challenge was determining what that revenue-maximizing rate was. What made Laffer popular with conservatives, and particularly Reagan-era Republicans, was his vigorous argument that U.S. tax rates in the 1980s were above the revenue-maximizing level.
The implication was that tax cuts would pay for themselves. It was an argument with staying power and would be used as justification for multiple plans to slash federal taxes over the next four decades. It persisted despite mounting evidence, some amassed by other conservative economists, that tax rates were already below the revenue maximizing level, and that rate cuts would only reduce tax revenue.
The Laffer Curve became one of the foundation stones of supply-side economics, the idea that tax cuts and deregulation power economic growth and job creation. Laffer himself went on to advise presidents and candidates of both parties on the virtues of low taxes and deregulation, and saw many of his ideas translated into federal policy by Republican administrations. Deep tax cuts and slashing regulations became a bedrock of Trump’s economic policies over the past two years.
But as time went on, Laffer’s star dimmed. In 1997, conservative economist N. Gregory Mankiw, who would go on to serve as chairman of President George W. Bush’s Council of Economic Advisers, published a popular economics textbook that remains in print today. In it, supply-side economics and its proponents are dealt with in a chapter titled “Charlatans and Cranks.” In 2005, a study by the Congressional Budget Office, led at the time by another conservative economist, Douglas Holtz-Eakin, conducted an exhaustive study of the likely impacts of a 10% across-the-board tax cut. Contrary to the predictions of supply-siders, CBO found that it would result in significant revenue losses for the government.
The controversy surrounding Laffer’s economic theories has not diminished his appeal to many conservatives, and he is still treated as an important voice in economic debates by many conservative Republicans.
Earlier this year, in an interview with Fox Television, he said that it was his analysis that former Democratic President Barack Obama’s victory in the 2008 election caused the Great Recession. “As he got closer and closer to winning, the markets collapsed,” Laffer claimed.
The Great Recession, according to the National Bureau of Economic Research, began in December 2007. At that point in time, Obama had the support of only 27 percent of voters in the Democratic primaries. He would not be elected president for almost a full year.
Trump’s presentation of the Presidential Medal of Freedom to Laffer comes less than a year after the economist partnered with another controversial conservative economic commentator, Stephen Moore, on the book Trumponomics, which lauds the president’s economic policies.
After the book was published, Trump used his Twitter account to promote it, writing, “Stephen Moore and Arthur Laffer, two very talented men, have just completed an incredible book on my Economic Policies, or, as they call it, TRUMPONOMICS. They have really done a great job in capturing my long-held views and ideas. This book is on sale now―a terrific read of a really interesting subject!”
Trump tried to appoint Moore to a seat on the Federal Reserve Board in early 2019, but the proposed nomination failed amid questions about Moore’s qualifications. His co-author is scheduled to receive the country’s highest civilian honor in a ceremony at the White House.