Sam Morris

Economist Arthur Laffer speaks during the Nevada Development Authority’s annual luncheon Thursday at the Bellagio.

By Brendan Buhler (contact)

Sun, Nov 16, 2008 (2 a.m.)

Anyone who spent the past three years even casually watching economic news on CNBC probably got to know Arthur Laffer a little bit.

In summer 2006, he told the audience of “Kudlow & Company” the “United States’ economy has never been in better shape,” it was not all tied to housing and “there’s not going to be a crash.”

A couple of months later, the foreclosure and credit crises started.

In the beginning of 2007, Laffer was back on “Kudlow,” saying, “We’ve had a great economy. Profits, income, jobs — everything has been going right.”

And so when the Nevada Development Authority held its annual luncheon at the Bellagio last week, whom did it invite to speak over the stuffed chicken and salmon? Arthur Laffer.

He opened with a couple of jokes, including one about an Indian chief who broke the world record for most tea drunk, only to be found dead the next day “in his tepee.”

Then he told the audience of Nevada business and political luminaries the state is on the right course.

“You people seem to have discovered the basic equation that if you have two locations, A and B, and you raise taxes in B, then producers and manufactures and people are going to move to the other,” Laffer said.

He did not go on to cite examples of manufacturers that have moved here from California, possibly because there aren’t a lot of them.

“Harvard professors don’t get it,” he added.

There is much in Laffer’s theories and opinions that economists, and not just the ones at Harvard, don’t get.

Consider Laffer’s claim to fame, the Laffer Curve, which he sketched on a napkin in 1974. It’s based on an old insight that at some point, high taxes discourage people from generating wealth (or at least from telling the government about it). In Laffer’s version, this means that you can cut taxes and actually raise tax revenue because the pool of wealth (as reported to the government) is larger.

And how has the Laffer Curve held up, according to economists?

“No serious economist would make that argument,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “It certainly doesn’t apply now.”

(The first thing Baker said when the Sun told him Nevada was getting economic advice from Arthur Laffer was, “Oh, no.”)

“I think nobody believes in the strong version of Laffer’s claim that cutting taxes could raise revenue” said Raj Chetty, a public economics professor at the University of California, Berkeley. “Quantitatively, no one thinks that is the case.”

Both economists, though, allowed that cutting taxes can stimulate the economy.

OK, but what about Laffer’s explanation to Nevadans that the current financial crisis was caused by “panic in the liquidity market, pure and simple, that’s it” — a situation he blamed on the Federal Reserve fighting inflation for too long?

“Well, interest rates were pretty low,” Baker said. “I think you’d have a hard time making that case.”

“I don’t think that’s the general consensus, but obviously he’s entitled to his opinion,” Chetty said. “No one has nailed down one cause for all of this.”

The rest of Laffer’s advice to Nevada:

Any bailout is a loss because it taxes money away from one part of the economy to put it somewhere else and you have to pay middlemen. Bailouts are bad.

(No reaction from the audience.)

Teachers unions are bad for education.

(Applause.)

The United States would be best served by a flat tax.

(Bigger applause.)

And, finally, he offered this piece of advice to Nevada, a state with high and rising unemployment, that has lead the nation in foreclosure rates for nearly two years, that is slashing its budget a third time and has drained its rainy day fund dry:

“You people in Nevada have done a beautiful job in your state policies,” Laffer said. “If you stick to your guns and focus on your good state policies, you’ll have less damage done to you than anyone else in the country.”

(Biggest applause.)