Art Laffer's Editorial In Today's WSJ

Economist Arthur Laffer wrote a notable editorial in today's Wall Street Journal entitled, "The Age of Prosperity Is Over."

It would be difficult to understate the sense of gravity that Laffer conveys in this piece. There's no way to adequately quote just a few of the passages and do the piece article justice.

Perhaps one way to begin is to let the graphic accompanying the editorial, seen nearby, speak for itself. If I'm not mistaken, it is meant to portray the familiar 'Monopoly Man' in tatters.

Just the same, here are a few passages from Laffer's piece, to give you the main points in his argument,

"When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.

These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again.

Yikes!

Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity."

Strong stuff, to be sure. And make no mistake, Laffer is an economic heavyweight. It is chillingly easy to see his predictions coming true with sickening results for the next 15 or so years.

Then, on the other hand, we have Brian Wesbury calling attention to 'internet time,' as I discussed in this recent post, which links to my original piece on Wesbury's observation, here.

To me, the question is whether Wesbury is correct, and voters will stop a second round of the socialization of the US economy- and society- which will make FDR and LBJ look like fiscal and social conservatives.

Or is Laffer correct, and US voters will cling to fear and government handouts, causing a long winter of economic sluggishness and the temporary- we hope- vanishing of the risk-taking, innovative economic behavior that so distinguishes the US economy?

I don't see Laffer's comparison of the current situation with Hoover from 1929-32. A much better one would be with FDR's NRA and, to some extent, the over-regulation of the US economy in the early 1970s- precisely when Laffer served in George Schultz's OMB. Perhaps, too, with elements of LBJ's large-scale, expensive social programs of the mid-1960s.

Laffer's piece does one really good thing. It reminds us of a possible, extremely bad economic result if the current financial and economic situations are resolved badly, with too much government control and spending.

Hopefully, reality will stop far short of Laffer's chilling prediction of doom. Perhaps due to the effects predicted by Brian Wesbury.

As I noted in a discussion with my business partner yesterday, no two financial or economic crises are ever identical.

In this case, the easily- and freely-available information both to and from average Americans, and, thus, among them, via the internet, short circuits much of the ability of government or a favorable, liberally-biased press to hide the truth.

Wesbury believes that this will create "real political pain" for the politician who gets it wrong.

Let's hope he's correct, so the full extent of Art Laffer's gloomy prediction never comes to pass.