Art Laffer: Napkin Artist and Most Influential Economist of the ‘80s
Everyone hates taxes. Everyone who gets a paycheck, that is. There are few experiences as universally gut-wrenching as the disgust one feels when the government skims away income before it even sees a bank account. We know that the government has legitimate uses for our money, but, at the same time, we wish they could take less of it away from us. Fantastical as it might seem, a man named Art Laffer once proved how the government could do just that: take less of your money in taxes and still increase government revenue, and he did it using a napkin.
The story begins with Art Laffer studying mathematics at Yale in the 1960s. During the course of his studies, he took an opportunity to study abroad for a year in Germany at the Ludwig Maximilian University of Munich, and while at LMU he took his first courses in economics. According to his grandson, Art Laffer, III, he immediately fell in love with economics and changed his major upon returning to Yale (Personal interview). He graduated with a B.A. from Yale in 1963 and continued to pursue economics at Stanford, where he focused on international economics (Encyclopaedia Britannica). Laffer continued in academia while pursuing a Ph.D, becoming a member of the faculty at the University of Chicago in 1967 and serving as an Associate Professor of Business Economics at the University of Chicago from 1970 to 1976 (“Arthur Laffer.”).
While Laffer would also go on to hold distinguished positions at the University of Southern California and Pepperdine University, it was during this time that he built his career in government. He served as the first Chief Economist for the Office of Management and Budget under Secretary of the Treasury George Schultz from 1970–72, where, according to the Encyclopædia Britannica, he began promoting economic theories that would later define a school of economic thought known as “Supply-Side economics.” From there he served as a consultant for Don Rumsfeld, Secretary of Defense, and William Simon and George Schultz, both Secretaries of the Treasury (“Arthur Laffer”). Laffer had experience in politics as well, serving as an economic advisor for the 1972 Nixon campaign (Laffer III).
Such was the setting for the most influential napkin sketch in history. Sometime during the transition to the Ford administration in 1974, Art Laffer consulted with Don Rumsfeld, Chief of Staff under President Gerald Ford, and Dick Cheney, Rumsfeld’s deputy, along with journalist Jude Wanniski (Geffen). During the meeting, Laffer strongly advised against Ford’s proposed 5% tax increase. Laffer’s main objection was that the tax hike would not actually generate the assumed presumed boost in revenue. Instead, Laffer tried to explain how increasing taxes would disincentivize production, constricting the very economic output they were trying to tax (Geffen).
In a personal interview, Art Laffer’s grandson, Art Laffer III, explained his grandfather’s thought process. For Laffer, the world was governed by incentives. When certain behavior is incentivized — by the potential to profit, for example — people participate in more of that behavior. When that behavior is disincentivized, people participate in it less. Laffer argued that taxation disincentivizes labor. Thus, when the government increases taxes, it discourages the very behavior from which it collects its revenue (Personal Interview).
Cheney struggled to grasp the concept so illustrate his point, Laffer took a napkin from the table and began to sketch out a curve that looked like a drawing of a hill turned on its side (Horsley). The curve related the tax rate on one axis to government revenue on the other. At the bottom of the curve, everything behaves as one would expect: as taxes increase, so does government revenue. In the top half of the curve, however, the trend reverses; increases in taxation cause decreases in the revenue collected.
The “Laffer curve,” as it was later dubbed and promoted by Wanniski (Horsley), had multiple implications. First, it predicted that the relationship between taxes and revenue was not linear, but instead was governed by the law of diminishing returns: each additional increment of taxation produced less revenue than the increment before it (Geffen). Second, the curve demonstrated that past a critical maximum point, taxation so disincentivizes labor that the government collects less revenue by dollar amounts than it did previously. Finally, in some situations, the Laffer curve suggested that by decreasing taxes, governments would actually increase the amount of revenue collected (Horsley).
The “Laffer curve” is perhaps the most recognizable symbol of the school of economic thinking that Laffer himself pioneered over the course of his career: Supply-Side economics. While Keynesians sought to boost the economy by increasing the purchasing power of consumers (or in other words, demand), supply-side economists advocated for incentivizing — or at least not disincentivizing — supply. Supply-siders argue that supply generally dictates the overall output in the long run and claim that it is more beneficial in the long run to increase supply than it is to increase demand (Harper). During the ’80s, supply-side economics climbed to prominence, predominantly because of the influential presidency of Ronald Reagan (Berman).
Laffer was a crucial member of Reagan’s Executive Advisory Committee for the 1980 campaign, a member of the Reagan/Bush Finance Committee during the 1984 campaign, and a member of the Economic Policy Advisory Board during Reagan’s entire tenure in office (“Arthur Laffer”). In other words, Laffer was one of Reagan’s most trusted voices on economic matters throughout his presidency. But Laffer was not just a useful advisor to Reagan; as Art Laffer III, Laffer’s grandson, described it in a personal interview, Laffer and Reagan were very close friends (Personal Interview).
During the time Reagan and Laffer worked together, Reagan worked to implement many of the Supply-Side principles that Laffer had been developing, such as tax cuts that incentivized economic output (Encyclopaedia Britannica). While the economic policy of Reagan was not without controversy, none can deny the significance or influence of Laffer’s ideas and Reagan’s policies on the American economy and culture during the ’80s (Berman).
A biography of Laffer provided by the Premier Speakers Bureau provides a brief glance at the impact Laffer had on the world of business, finance, and economics. He has been recognized by publications like Time, Bloomberg Businessweek, and The Wall Street Journal, as one of “The Century’s Greatest Minds” and one of “the Greatest People Who Influenced…Daily Business.” The Laffer curve became known as one of the “Most Disruptive Ideas In…History” and an advance “that powered this extraordinary century.”
The impact and influence of Art Laffer goes far beyond one single graph. Since his work with the Reagan Administration, Laffer founded the economic research and consulting firm Laffer & Associates and spent his career providing financial and economic advice to individuals, corporations, and policy makers (“Arthur Laffer”). He has written a number of books and continues to provide analysis and policy recommendations on major public issues. In one case, he worked with Dr. Larry Van Horn to research the healthcare industry, an effort that became an executive order under that made healthcare costs more transparent (Laffer III). In recognition for his long and influential career, President Donald Trump awarded Laffer with the Presidential Medal of Freedom in 2019 (Horsley). Still, the famous Laffer curve represents Laffer’s ability to take common sense principles and apply them in a groundbreaking fashion, all on the back of a napkin.
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Appelbaum, Binyamin. “This Is Not Arthur Laffer’s Famous Napkin.” The New York Times, The New York Times, 13 Oct. 2017, www.nytimes.com/2017/10/13/us/politics/arthur-laffer-napkin-tax-curve.html.
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Berman, Elizabeth Popp. “Analysis | Trump Is Giving Arthur Laffer the Presidential Medal of Freedom. Economists Aren’t Smiling.” The Washington Post, WP Company, 2 June 2019, www.washingtonpost.com/politics/2019/06/01/trump-is-giving-arthur-laffer-presidential-medal-freedom-economists-arent-laughing/.
Encyclopaedia Britannica. “Arthur Laffer.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., 10 Aug. 2019, www.britannica.com/biography/Arthur-Laffer.
Geffen, Haley. “The Napkin Doodle That Launched the Supply-Side Revolution.” Bloomberg.Com, Dec. 2014, p. 1. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=99810784&site=ehost-live&scope=site.
Harper, David R. “Understanding Supply-Side Economics.” Investopedia, Investopedia, 9 Sept. 2019, www.investopedia.com/articles/05/011805.asp.
Horsley, Scott. “From A Napkin To A White House Medal — The Path Of A Controversial Economic Idea.” NPR, NPR, 19 June 2019, www.npr.org/2019/06/19/733779337/from-a-napkin-to-a-white-house-medal-the-path-of-a-controversial-economic-idea.
“Laffer Curve Napkin.” National Museum of American History, The Smithsonian, americanhistory.si.edu/collections/search/object/nmah_1439217.
Laffer III, Arthur. Personal Interview. October 18, 2018.
Reagan, Ronald. “Executive Order 12296 — President’s Economic Policy Advisory Board: Ronald Reagan Presidential Library — National Archives and Records Administration.” Executive Order 12296 — President’s Economic Policy Advisory Board | Ronald Reagan Presidential Library — National Archives and Records Administration, Ronald Reagan Presidential Library, 2 Mar. 1981, www.reaganlibrary.gov/research/speeches/30381a.
Turner, Camilla. “Who Is Arthur Laffer?” The Telegraph, Telegraph Media Group, 14 June 2014, www.telegraph.co.uk/finance/economics/10895078/Who-is-Arthur-Laffer.html.