Arthur Laffer's Supply-Side Gloom

Author Q&A: The economist says higher taxes still threaten our prosperity.


Arthur Laffer is feeling a little alone. The genial father of Reagan-era supply-side economics says the toxic mix of a mortgage crisis, frightened policymakers, and America's ailing fiscal health means the upcoming election is setting the stage for a new tax regime that threatens to reverse more than two decades of U.S. expansion. His new book is The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen, with Stephen Moore and Peter Tanous. Excerpts of a chat:

Has opinion turned against Reagan-era economics?

The politics have. We don't have a dog in the fight. We've increased prospective future taxes enormously in the last seven years. This is probably the biggest increase in the national debt since World War II, and it's not coming from increased productivity and output. It's coming purely to redistribute [wealth], which is not a pro-growth policy. Are you feeling isolated?

Yes. I felt very isolated in the '70s...but our era came. You saw what happened with Reagan and Clinton. Now, they're going back the other way. When I see Jack Kemp, Steve Forbes, and Newt Gingrich going off the ranch, it is crazy frightening. They are acting in a panicked mode and squealing like 5-year-olds at a scary movie. Do taxes go up no matter who wins the election?

I think they're going a lot higher. When the federal net debt goes from 35 percent of GDP to 50 percent in seven years and you add on these [bailout] packages, I don't see how they avoid massive tax increases given [the candidates'] political leanings. And if you're going to try to raise revenue, you've got to do it on broad-based taxes that hit low-income people as well—sales taxes, income taxes, payroll taxes. Those are your big revenue raisers. It's not as though Obama is bad and McCain is good. They still don't get pro-growth policies. Like what?

You need four things: fiscal restraint and low-rate flat taxes; sound money so the value of the dollar over long periods of time remains pretty constant; the least amount of impediments to the free flow of goods and services (and people) across national boundaries; and minimal regulations that achieve their objectives but don't go beyond them to destroy economic activity. We're going off track on all four. Are the bailouts a bad idea?

The policy mistakes are classic. It reminds me of doctors in the Middle Ages. They're bloodletters. When the [patient] gets sicker, they ask if they didn't take enough blood.