Tuesday, September 13, 2011

How to Fight Black Unemployment

Arthur Laffer writes in the WSJ to resuscitate a 1980's idea associated with Jack Kemp: enterprise zones.  Pity we didn't try them thirty years ago.  They couldn't have failed any more miserably than the social welfare state.  Today we're dealing with an even bigger problem in minority communities than we were the first time this idea was bandied about.
African-Americans are suffering inordinately in the Obama aftermath of the Bush Great Recession. While overall U.S. unemployment stands at 9.1%, black unemployment has jumped to 16.7%. Black teenage unemployment is bordering on 50%, and that figure doesn't even take into account "discouraged" workers, "involuntary" part-time workers and "underemployed" workers. 
But even these numbers don't tell the real story. They represent real people who are suffering deeply and have been suffering for a long, long time. 
Behind these numbers are millions of lives discouraged and despondent. People who've lost their self-esteem and pride. The young who have given up on America and some of whom have even turned to crime. Scars are being made across a whole ethnic subset of America. Unemployment, underemployment and involuntary part-time employment represent the loss of a precious natural resource that can never be recouped. No one can feel good about himself if he's living on handouts from Uncle Sam. We as a nation can't wait until 2013 to address this issue.
Enterprise zones along Lafferian lines would require abolishing employer's and employee's payroll taxes; suspending minimum wage laws; performing an expedited review of all building codes, regulations, restrictions, etc.; and taxing all profits at one third the regular rate.  All proposals strike at the core of Leftist ideology, which views the government, not private initiative, as the engine most likely to bring about social justice.  The government needs lots of money, laws and regulations to achieve utopia.  Democrats are worried that somebody, somewhere would enjoy a freedom that didn't make him more dependent, less resourceful.

Laffer's is a dangerous proposal for Democrats because it might work, which would raise a discomfiting question.  If enterprise zones turn around conditions in veritable combat zones, why not try them out elsewhere, perhaps even everywhere?  Of course, if they fail, Democrats would finally have hard evidence to kill his policy initiatives after thirty-plus years of trying.  Laffer asks only to to put the issue to the test under the most severe conditions: America's inner cities, the hollows of Kentucky and West Virginia, the barrios in California and New Mexico, in short, geographically defined areas with exceptionally high concentrations of poverty, underachievement and unemployment; places given up for lost.

Laffer has spent a career demonstrating that when government relaxes its pursuit of ever more tax revenues--by lowering marginal rates on income, for instance--it broadens the tax base and actually increases revenues to the government.  In layman's terms, the government scares money into hiding by grasping after it; government encourages its productive use by allowing people to reap the rewards of its application.  The productive use of money is what breeds more of it.  The more we have, the more the government gets.
This mirrors the more academic point made in John Kay's "Obliquity" that major goals in life and business are often best pursued by not pursuing them.  (See review in Noman Says: A Timeless Management Insight, April 13, 2011).  It is true for business that the best way to maximize profits is not to try to maximize profits.  By the same token, the best way for government to maximize its receipts is not to try to maximize them.

Laffer's  theories rest on a sound anthropological insight, that people respond to incentives and change their behavior to accommodate them.  His work demonstrates the wrong-headedness of simple arithmetical assumptions (the only kind heard in today's contentious policy debates) about the effect of tax cuts or increases, e.g., lowering tax rates by x% will lower tax receipts by taxable income times x; raising tax rates by y% will raise tax receipts by taxable income times y.  Human behavior is dynamic, not static.  People produce more when allowed to keep the fruits of their labor.  They produce less when they are punished by taxes.  This is geometric, not arithmetic logic.

In "The End of Prosperity" (2008) he tells a delightful anecdote about a Congressional Budget Office study commissioned by then Senator Bob Packwood of Oregon (the woman-mashing Republican that Democrats knifed in the back after years of faithful service to their abortion cause).  Packwood asked the CBO to estimate the extra tax revenues a 100% tax on annual earnings over $200,000 would generate.  The CBO arrived at an astronomical number that was even projected to increase in years two and three.  It didn't occur to its number crunchers that zero would be closer to actual answer than their estimates would, especially in later years, because people would cease to make effort at the margin to earn income they couldn't keep.  Why bother?  So that government might grow bigger and place yet more shackles on personal initiative?  So that Left-voting government employees could live equally well or better with none of the headaches or risk?  No thank you.

Laffer's much-derided curve is merely a parabolic depiction of the fact that there are two tax rates at which government will receive zero in tax revenues: 0% because there will be no tax, and 100% because no one will produce anything to tax.  Sounds reasonable to Noman.  People would not generate supply, no matter what the demand for goods and services, if their profit were simply confiscated.  The notion that supply will arise to satisfy demand regardless of conditions is naive and historically falsifiable.  Hence, the term "supply-side economics," because it proposes incentives to stimulate the supply of goods and services rather than their demand.

To Laffer's mind, permanent tax cuts on income, capital gains and dividends provided the incentives that spawned the miracles of Silicon Valley, and of automobiles and railroads before that.  Consider that at a 50% tax rate, a venture capitalist seeking a 10% return on investment would be limited to funding investments promising 20%.  Why impede investment?  Certainly not to create more jobs.  Ultimately, not even government jobs can sustainably be created without investment.

Besides tax ideas, Laffer's broader policy prescriptions include free trade, stable prices, sound money, light and efficient regulation, welfare reform, generous immigration, and less costly government.  Under these policies, the rich get richer.  So do the poor.  The middle class ascends the ladder of wealth in droves.  Moreover, the highest income earners pay a commensurately greater share of total taxes.  All of this is copiously documented in "The End of Prosperity," and "Return to Prosperity" (2010) though less so in the latter volume, which was written for a distinct purpose: to vociferously denounce President Obama's policies and counsel their reversal.

One of Laffer's supply-side heros is Democratic President John F. Kennedy.  Another is Republican President Ronald Reagan whom he served as an advisor.  Laffer's supply-side economics are bipartisan.

In case your wondering, Laffer advocates the adoption of a 12.13% flat-tax rate on personal and corporate income, and replacing the current income tax system with a post-card method of the type presently enjoyed in numerous countries around the world with less entrenched interests than in the US. Wouldn't it be nice to file taxes on a post card?

Critiques of Laffer's economics abound.  Most of what Noman finds is mockery of his ideas, which is usually a sign that critics lack good arguments, and evidence.  He's presented the empirical support for his policy prescriptions in the books mentioned, which Noman encourages you to review.  With respect to his extant suggestion, it's worth a try.  Even if the President can wrangle another few hundred billion out of thin air (debt), intellectual curiosity would favor limited application of Laffer's challenge.  He's thrown down a serious gauntlet and Noman would like to see it taken seriously.

Noman says we have nothing to lose but our chains, and illusions.

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