Laffer highlights state of US economy

Jared Felkins • Updated Oct 11, 2013 at 12:52 PM

A modest group of Pinnacle Bank clients, investors and business owners met Thursday at Five Oaks Golf and Country Club and left with an education in economics from one of the most renowned minds in the trade.

Art Laffer, founder and chief executive of Laffer Associates in Nashville, spoke to the group about state and national economics, along with a look into the future and the evolving political landscape.

Laffer, self-proclaimed chairman of the Pinnacle Bank advisory board, investor and client, began his remarks with an overview of current relations in Congress. He said little progress would take place until at least 2017, the next chance for a power shift there.

“If the House was lost to the Democrats, obviously we would see some things happen, but that's likely not going to happen,” Laffer said.

He said Congress was in a state of stalemate since Republicans gained control of the House. Laffer also said the current government shutdown would have little effect on the U.S. economic state.

“Turning on the news and seeing them say all these bad things is really depressing,” Laffer said. “There's never any good coming out of this type of conflict. 

“Whatever continuing resolution that comes out of this disagreement, it's not going to affect anything. Please don't let yourselves become upset with all this. It's really a lot of smoke and not a lot of content. 

“I hope it's not something that continues, but markets are not going to crash, and the economy is not going to go over the cliff.”

Laffer said the shutdown is basically so members of Congress can “pin something on the others so it can be used in upcoming campaigns.”

Laffer then turned his attention to state economics, referring to four studies he’s done in the past 15 years comparing economics in California with Texas. He said he moved from California, where he was an economics professor at the University of Southern California and Pepperdine University at times, to Nashville to enjoy the absence of income tax and lower tax rates in general.

“That is just straightforward common sense,” he said.

Laffer said there are four stages of tax structure in any state. He said it starts with tax rates, goes to tax revenues, then government spending and finally provision of government services.

“When I look at Texas and California today, tax rates in California are about 65 percent higher than tax rates in Texas,” Laffer said. “Because the tax rates are so much higher in California, people tend to move into states with lower tax rates. Because the tax rates are so much lower in Texas, people tend to move into Texas.”

He then described the two states’ tax rates.

“California's tax rates are about 65 percent higher than Texas,” he said. “California's tax revenues are about 25 percent higher than Texas. That's leakage No. 1. 

“The second leakage is that when you get the money in, you have to turn it over to government spending. You have all these regulations that make it very difficult to turn money over to government spending. The government spending in California is about even with government spending in Texas.”

Laffer then compared the states’ provision of government spending, which he found to be significantly higher in California.

“When you get to the provision of government services, Texas way outperforms California,” Laffer said. “All these arguments are for raising taxes to provide better services. I'm here to tell you that's not the case.

“I wanted to take you through this and tell you why you should be so proud to be a Tennessean. That's why I moved here.

“I found out if you rent a UHaul in Nashville for 10 days unlimited miles, it's about $1,800. If you rent a UHaul in San Diego for 10 days, unlimited miles, it's about $4,000. That shows you where people are moving.”

Laffer concluded his remarks with a summary of the political climate in states across the U.S. He said there are 33 Senate seats up for election in 2014, which were all last voted on in 2008.

“A lot of those Democrats were elected on the coattails of Obama,” Laffer said. “The Republicans are in good shape to take over the Senate in 2014.

“This is where the battle is going on politically, and it's really exciting. My best guess is that it's comparative to the 1970s. What I believe is going to happen is bipartisan is going to be the standard rather than the exception.”

Laffer also talked about the Affordable Health Care Act’s effects on the U.S. economy during a question-and-answer session.

“I think the Affordable Health Care Act will have a big impact on the economy,” he said. “You cannot give away valuable resources and not expect it to be overused. You've got to limit the amount of health services people get. I'm hoping the health care act is repealed. It probably won't, but I'm hoping it will.

“We should have free clinics, but beyond that, get the heck out of the industry. I don't understand why health care is more important than food, clothing, education, housing.”

Laffer Associates is an economic research and consulting firm based in Nashville. He is also a founding member of the Congressional Policy Advisory Board, was a member of former President Ronald Reagan’s Economic Policy Advisory Board for both of his terms and was chief economist at the Office of Management and Budget under then-Secretary of the Treasury George Schultz.

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