Arthur B. Laffer

It isn't often that a book's thesis is dramatically confirmed within weeks after its publication. The End of Prosperity, completed just after the Presidential nominations in 2008, argues that America's (and most of the world's) unprecedented quarter century run of economic growth was the product of free market policies and that resurrecting the high taxes, trade barriers, monetary excess, government expansion and regulatory overkill of the Johnson-Nixon-Ford-Carter era will inevitably resurrect that period's stagflation and sense of malaise.

The authors devote most of their space to a much-needed history lesson, showing how Lyndon Johnson's tax hikes, aggravated by Nixonian price controls, negated the promise of John F. Kennedy's proto-supply-side economics and led to one of the longest runs of stock market underperformance in our country's history. By the late 1970's, it was conventional wisdom that the economy would never grow again and that Americans ought to adjust to a future no better than the present.

Then came the amazing turnaround under Ronald Reagan. Maybe it was all voodoo economics; if so, invest in witch doctors. In the 300-month period from the trough of the 1981-82 recession (the hard but necessary corrective to embedded inflation), the economy grew 96 percent of the time. The historical average is about two-thirds. The authors clearly admire Reagan's accomplishments, but they are not mere cheerleaders. Nor do they make the mistake of concentrating solely on Reagan's (and their own) signature issue of low taxes. Prosperity has more than one father, and it is even possible, as under Bill Clinton, to raise taxes without catastrophe, so long as one is simultaneously reducing government spending as a share of GDP, entering into free trade agreements, and reforming the anti-growth welfare system.

During the long expansion, there had been two brief, shallow recessions. In 2008, it became evident that a third was under weigh. The unresolved issue, as The End of Prosperity was being written, was whether the economy would bounce back vigorously, as it did after the twin blows of the bursting of the tech bubble and the 9/11 attacks, or languish in a Carter-like coma. The authors worried that one Presidential candidate flatly rejected the prosperity formula, while the other was, at best, a halting defender. A year later, their fears appear to have been well-founded.

As a refresher on the recent history of economic policy, The End of Prosperity is more than adequate, notwithstanding some faults. The style is often annoyingly breezy and cliché-ridden, and the authors are sometimes unfair to their intellectual adversaries. Their caricatured liberal economist, who doesn't think incentives matter and has unlimited faith in the wisdom of government, is a vanishing species.

If current trends continue, the next several years will complete a "natural experiment" in economic policy. We pursued one set of policies and enjoyed 25 fat years. Now a diametrically contrary philosophy reigns. The comparison will be of great interest to the next generation's historians. It's a pity that those of us living now must be the guinea pigs.… (meer)