Arthur Laffer is famous as the economist who created the “Laffer curve,” a sad rip-off of basic Keynesian analysis that formed the basis of “Reaganomics.” Keynes argued that a vibrant economy would naturally lead to more revenues for the government, part of the counter-cyclical nature of government. During boom years, the government receives more in revenues than in spends, and during bad years, it will spend more than it receives in revenues. Keynes also argued that at a certain point taxation could become high enough to become prohibitive.
Laffer turned this into a nearly religious dogma — no level of taxation could be low enough. Even today, with tax rates half of the level they were at during the Kennedy administration, Laffer still trots out his curve to prove that lower taxes will increase revenues. Most economists have begun to ignore him. Glenn Hubbard, Romney’s economic adviser and the impetus behind the Bush tax cuts, has distanced himself from Laffer's ideas. For those interested in empirical work, here’s a study showing that the U.S. is nowhere near Laffer levels of prohibitive taxation (where higher taxes would cut off growth). So where does an economist who is no longer relevant go? Why, to promote the American Legislative Exchange Council’s crazy policies.
ALEC and Laffer released the "Rich State, Poor State" rankings last week, and unsurprisingly, states with low a minimum wage, little or no union presence, and rock-bottom taxes top the list. But in truth, the list is little more than coded ideology. To take a simple example, the most recent ALEC report ranks Mississippi as number 10 for economic outlook (even though its past performance puts it in 40th place). Its high rank comes from low taxes, a low minimum wage, and poor unions. But contrast the rosy outlook from ALEC with the recent Census data showing that Mississippi has the highest poverty rate and lowest income rate in the entire country. As an aside, Vermont, ranked 50th by ALEC, was the only state that saw a decrease in poverty and increased income growth. Not only are the ALEC rankings wrong, they are almost diametrically so. Further, the folks at the Mississippi Center for Policy Research and Planning aren't too excited about Mississippi's prospects either.
Since ALEC's report has been around for six years, we can actually tell how highly-ranked states perform. Not well. For instance, a recent report by Peter Fisher finds that ALEC “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”
As an example, this year’s BEA numbers show Washington, Oregon, California, and Utah growing at about the same rate. So why on earth does ALEC rank Utah as number 1 while ranking Oregon as number 44, California as number 47, and Washington as number 36? There’s no good reason for the rankings, other than a general belief in “liberal malaise.” Utah is bolstered by its anti-unionism, low workers-compensation payments, low minimum wage, and regressive tax system. The other states, although growing just as quickly, are held back by liberal policies. Washington, for instance, ranks 10th in past growth while Oregon ranks 11th. Why would we expect this to change over the next year?
The answer is: We don’t. The purpose of these rankings is to push the ugly legislative agenda of ALEC, which gives a state like Wisconsin, which has grown terribly but whose governor has shown a penchant for union-busting, a gold star while other union-friendly states get hit with low marks. The Laffer-ALEC index assumes that taxes drive wealthy people out of state, decreasing tax revenues. That’s false. The Laffer-ALEC index assumes that lower taxes will bring in more revenues (an idea for which Laffer is famous, a central tenet of supply-side economics). That’s false. The Laffer-ALEC index assumes that the estate tax reduces growth. That’s false. The Laffer-ALEC index assumes that a lower minimum wage increases unemployment. That’s questionable. Unsurprisingly, with these variables, only states with a Republican governor are in the top 10 of the analysis.
The worst thing about the rankings isn’t even the partisanship masquerading as “fact-based analysis.” Sadly, state governments take these rankings seriously. When Peter Fisher analyzed how states that followed ALEC’s prescriptions performed, he found that the states were more likely to see a decline in median family income and an increase in poverty! The purpose of ALEC’s rankings are not to promote growth, but rather to give rabid conservatives backing when they try to ram their ideology down the throats of Americans. Positive reviewers include Ted Cruz, Rick Perry, and Rand Paul.
But ALEC is also symbolic of an even deeper malaise at the heart of American politics. ALEC’s lobbying goes unopposed because the American labor movement has been decimated. OECD data for 2008 (the most recent year for which all countries are available) show that the unionization rate for America is far below average. This means that in America we have two parties beholden to corporate interests and no counterbalance. Is it any wonder that Larry Bartels found in 2005 that politicians respond almost exclusively to the desires of wealthy voters and ignore the desires of poor voters?
As Barbra Sinclair writes in Boston Review, “Encouraging organizations that inform the less affluent and that speak for their interests would be a top priority. Labor unions have the best track record of doing just that. Unions have not declined so drastically in other industrialized countries and, with friendlier labor legislation, could well be revived in the United States as a powerful instrument of reform.” There should be no surprise that lower unionization rates correlate with higher levels of inequality.
If the union movement in American remains suppressed by powerful corporations, it’s hard to expect anything other than shameless Laffer-ALEC posturing. With no one to hold them accountable they will continue pumping out partisan analysis and pressuring politicians to decimate the social safety net. Until then, reports like these will contribute to stagnant growth, intractable poverty, and an increasingly feeble union movement. That certainly isn’t laffable.