Art Laffer's Chinese Curve Ball
God bless Arthur B. Laffer, the author of the eponymous curve. If statesmen are hedgehogs (with one big idea) or foxes (with many little ideas), Art is the mayor of Hedgehog City. His big idea is that lower taxes give you more economic growth. Along with my former business partner Jude Wanniski, Wall Street Journal editor Robert Bartley, and a handful of other economists and publicists, Art sold the idea of dramatic tax cuts to Ronald Reagan and thus stood midwife to the greatest U.S. economic boom of the past century. All of them were the intellectual children of the great Robert Mundell, but that’s another story. Years ago I had the honor to write the occasional paper for Art's consulting service. He's an American treasure.
Art had one magnificent idea. I took his economic service when I ran research groups at Credit Suisse and Bank of America, and he stopped by once a year for a talk. In 2001 he stopped by at Credit Suisse. American manufacturing jobs were disappearing and America’s trade deficit was exploding, but Art wasn’t fazed. Americans shouldn’t manufacture anything, Art averred: We would do the design, like Apple, and foreigners would dirty their hands making the actual goods.
In 2007 he was still bullish on U.S. stocks. I told him that the financial system was about to crash (at the time I was working in the bowels of the hedge fund world, manufacturing some of the toxic waste that would blow up in 2008). He thought I was mad; after all, taxes were low and the Republicans were in office. How could anything go wrong? On July 18, 2007, I appeared on Larry Kudlow’s CNBC show and warned of a “trillion-dollar AAA asset bubble” that would bring down the banking system. Larry didn’t believe me, either.
Neither Art nor Larry will believe me now when I tell them that all the tariffs the U.S. can devise won’t derail China’s economy. Under the title “The Great Fall of China,” Art warned July 30 that “China’s prosperity is now at risk and why China’s economy is highly vulnerable to harm from the tariffs that have either been proposed or already been enacted.” This report was closely read in the White House, according to press reports. President Trump appears to be of the same mind. This week he declared that China is no longer on a rapid trajectory towards parity with the U.S. economy.
Art vastly overestimates American economic strength and Chinese economic weakness, and his mistakes amplify the Administration’s mistaken view that tariffs will occasion intolerable economic pain for China. This is a strategic error of potentially fatal magnitude, on the order of the Russians at Port Arthur, the British at Singapore, or the French at Dien Bien Phu. Western observers speak ignorantly of a “Chinese economy,” when there really is no such entity: There is a past economy and a future economy which are quite different from each other. What we observe at any given time is the destruction of the old and the creation of the new. Averaging the two together is pointless.