Napkin Economics

Earlier this year I submitted two 650 word op-ed pieces to the Denver Post as part of a contest they were running to find some new writers for their pages. The results were just announced and I was not among the winners. It was a long shot, as Denver is a big city with many talented writers, but I gave it my best. This is one of the pieces I submitted:

Napkin Economics

I am an accountant. To outsiders, my profession is boring and obtuse. For insiders … ditto. It takes a person with a special tolerance for gobbledygook to do this job.

Even given my bent for specialized jargon, I find economics incomprehensible. Economists chart our behaviors and predict the future, but are so rarely right that their official symbol ought to be the dart board. They don’t even agree among themselves. For every political philosophy from Karl Marx to Ayn Rand there is a “school” of economists to support it.

Even though economists don’t offer sound advice or agree among themselves, they don’t seem to suffer professionally. When advice turns up bad and predictions wrong, they simply move on to new predictions and advice.

I was a good college student and studied hard. But economics seemed detached from reality. The theories did not hook up with the real world. If economics was a nail, my head was concrete. The teachers were smart and sincere and hammered hard, but it did not matter. Those courses (and Greek) were a drag on my GPA.

For the last thirty years, we have been governed by people who offer us “supply side” economics. It is the idea we should live in a low-tax environment with few government regulations. This, they say, fosters growth and prosperity.

The economics behind it is best illustrated by a graph called the “Laffer Curve,” drawn on a napkin in 1974 by economist Arthur Laffer. Lunching with him that day were Jude Wanniski, Dick Cheney and Donald Rumsfeld, who would later implement the napkin solution.

The Laffer Curve is a simple thought experiment: Two tax rates yield zero revenue: zero and one hundred percent. As rates move towards one hundred, revenues decline. Therefore, tax rate cuts will produce additional revenue for government.

Of course, it would be good to know where we are on the curve before implementing drastic tax cuts, but the men lunching that day have never suffered from lack of certainty. Cheney and Rumsfeld came to power under Ronald Reagan and the Bush’s, and the theory was put into practice.

It didn’t work. Reagan cut taxes for the wealthiest among us, and what followed was decades of massive deficits. He was constantly caught short, and after implementing the cuts had to sign into law tax increases in six of eight years (including a massive tax hike on low-to middle income working people via the Social Security tax).

But the failure of the theory in practice doesn’t matter. The only cause-effect that seems to correlate with the Laffer-based tax rate cuts for the wealthy is an increased concentration of wealth in the upper strata coupled with a shrinking middle. It doesn’t take much surface scratching to find economic distress among the rest of us. People are suffering. In addition, we are prone to more (and more extreme) boom-bust cycles. Our public institutions are starving, and our bridges and levies collapsing.

In a staff lunch one day in 1998, the writers of the TV show South Park came up with their own economic theory: The Underpants Solution. It was business model sketched on a napkin:

1: Collect underpants
2:???
3: Profit

It works every bit as well as the Laffer Curve.

Instead of napkin (or underpants) economics we need a theory that works for all of us. We had it once. It was based on the lessons of the early twentieth century: Our economy is an engine capable of generating incredible wealth. But like fire, capitalism can either serve or destroy us. It must be tempered to minimize excesses. Regulation of economic activities serves as a damper.

And there’s no magical economic mystery to taxes. We should tax higher earners at higher rates, but give them socially beneficial ways to avoid those high taxes, like investment credits and charitable deductions.

It’s not complicated. We should concentrate on what has worked, and ignore what has not.

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