More steps for the state

Economist Arthur Laffer says state and local governments should be cutting expenses now.

By Matt Walsh
| 7:00 a.m. April 1, 2020

Longboat Key
Opinion

Surely by now, no one needs to be told the obvious about Florida’s economy:

Brace yourself.

But let’s start here this week attempting to emphasize the urgency of the point we tried to make last week in this space.

This past Monday, we connected with noted economist Arthur Laffer. You remember him — author of the Laffer Curve back in the Reagan years. You know: Voodoo economics, his critics called it.

To this day Arthur Laffer espouses with great enthusiasm what he showed on a napkin to Dick Cheney at the Washington Hotel in the early 1970s and what proved to be true: If you cut taxes, your economy will grow — and so will government revenue. It works every time.

Figuring he might have a few good ideas for Florida’s economy, we asked him on this call what Florida’s government officials can do to help us through this economic crisis.

Mind you, we understand the magnitude of the health crisis. But we will continue to argue the economic crisis that’s spreading will affect more people than the health crisis.

The wrong way to recover

Economist Arthur Laffer, the man credited with creating and popularizing supply-side economics, has sat with presidents through many crises — in the early 1970s when Richard Nixon devalued the dollar, took the nation off the gold standard and imposed wage and price controls; President Ford’s disastrous Whip Inflation Now campaign; crafting the tax bill after the 1981 economic crash in the early years of the Reagan administration; the 1987 crash; the onset of the Great Recession during George W. Bush’s second term; and now with President Trump in the COVID-19 crisis.

This experience has made the 79-year-old fond of saying, “Whenever politicians make decisions when they are either panicked or drunk, the consequences are rarely attractive.”

He put Congress and the Trump administration in the category of the former with respect to the CARES Act.

It was the wrong way to go.

Laffer was unsuccessful persuading the president and Treasury Secretary Steve Mnuchin to stand strong behind the idea of cutting the payroll tax for employers and employees.

You might recall that was one of early ideas the Trump administration floated before Congress.

As Laffer argues, crucial to an economic recovery is making work attractive and making hiring employees attractive. In his view, giving employers and employees each a 7.65% cut in taxes would do both. Such a cut would have meant a $4,000 raise for a $50,000 employee and $4,000 of cash to the business.

Laffer also advocated for the federal government to make loans or provide loan guarantees to America’s businesses — with the expectation that the loans would be paid back.

A lack of short-term cash, as we’re seeing now, Laffer says would mushroom into a national solvency crisis.

Congress did respond to that part of Laffer’s prescription, but with one big exception — Congress is not expecting many of the loans to be repaid.

In the end, according to Laffer, the CARES Act is massive redistribution. As Laffer explains, borrowing $2 trillion is taking money from one group (taxpayers) and giving to another group. Or as Laffer also likes to say, “Government spending is taxation, as Milton Friedman repeatedly said.”

And the consequences of the CARES Act? Laffer predicts a slower recovery than it could have been.

— Ed.

To his credit, Gov. Ron DeSantis does appear to grasp the economic side of this disaster better than other governors. He has been one of the few to show reasoned leadership and courage by resisting to shut down the entire state economy.

And as we noted last week, we know DeSantis — and all elected leaders, for that matter — is fighting an intense, two-front war. Imagine being in his shoes. The public is watching his every move, looking for hope, stoicism, optimism, decisiveness, proactive responses and foresight.

Of those qualities, it still appears there have been few signs of proactive response to the state’s economic plight. It would be easy to rely on the $2 trillion CARES Act.

But let’s ask: Would you rely on the federal government to save your state’s economy?

Of course not.

What, then, should be done? We turned to Laffer:

“First, let me give you some background,” he said. “Florida is such a pro-growth state. It has an extreme sensitivity to the cycles. When the economy is strong, Florida is really strong. But when it collapses, it goes to the basement.”

Ugh. But hold on. There’s a little bit of good news: “You’re going to have a very sharp downturn,” Laffer said. “But it won’t be as bad as ’08 and ’09.”

What should the governor and Legislature do?

Laffer’s prescriptions:

“Do not raise taxes.”
“Cut as much state, county and local government spending as possible — right away. Do not wait.”
“Taxes: This is not a period for exclusions. Move to as broad a base and low rates as possible. Eliminate all the sales tax exemptions you can, and lower the rate. Get rid of distortions.”
Have the state guarantee loans that banks make to creditworthy companies.

Laffer’s overriding and fundamental recommendation, the one he emphasizes from the 30,000-foot economist’s view, is this: “You want to make it worthwhile for people to work. Make it more attractive for producers.”

More suggestions: Lower airport landing fees; lower city and county hotel taxes (you can imagine all of the screaming over that one); lower or eliminate the sales tax on commercial leases. (“That will encourage more building,” Laffer said.)

When businesses and entrepreneurs produce more supply, when they produce more goods and services of value, demand will rise. That’s the premise of Laffer’s supply-side economics. So if we want to stimulate demand, government must reduce the barriers to produce more supply.

It wasn’t all that long ago that’s what occurred in Florida — during the Gov. Rick Scott years from 2010-2018. Surely you remember Scott being almost maniacal about wanting Florida to have the best business climate in the nation. He spent eight years touting “jobs, jobs, jobs,” pushing the Legislature to cut the corporate income tax and the sales tax on commercial leases and manufacturing equipment, among other cuts to taxes and fees. And he did likewise with regulations.

These were steps to reduce the barriers to production, to leave more capital in business to be invested to create more supply … and demand.

It worked. During Scott’s two terms, Florida employment increased by 1.67 million jobs. State sales collections — driven by a robust economy — increased 46%, from a low of $27.69 billion in 2009, in the pit of the recession, to $40.47 billion when Scott left office. Increased business supply led to increased demand.

Similar steps would help now because, in truth, the CARES Act is not an economic stimulus act. There is nothing in it that reduces barriers to economic productivity. It’s just the opposite.

The $2 trillion stimulus is merely transferring money through borrowing — taking from one hand and redistributing it to another, shifting that $2 trillion in borrowed money to consumers to create more consumption. Consumption, Laffer will tell you, doesn’t stimulate growth; consumption is a result of growth that already occurred.

That’s why Florida’s state, county and local politicians should take seriously Laffer’s recommendations to help Florida’s economy, to make Florida more attractive for businesses to produce as we fight our way through this war.

When you talk to CEOs and entrepreneurs who navigated successfully through business crises, they almost uniformly advise this one principle of crisis management: Act fast, and don’t wait.

No big rush in Tallahassee

Gov. Ron DeSantis doesn’t have the authority to enact many of the steps economist Arthur Laffer recommends for Florida. They would require legislative approval.

Asked this week if there’s talk in Tallahassee yet of calling the Legislature back into special session to address the inevitable economic downturn, Katie Betta, communications director for Senate President Bill Galvano, R-Bradenton, referred us to a memo Galvano sent out last week to all Florida senators.

Galvano noted that state revenue data just released was for February, which actually reflects January sales. It was good news — collections were $48 million more than expected.

Galvano closed his five-paragraph memo with this:

“The General Revenue Collection Report for March, and more so the subsequent report for April, will provide our consensus estimators with the first concrete pieces of data they will need to formally adjust our revenue estimates. We will keep you updated as additional information becomes available.

“In the meantime, I believe our state is well served by the $4 billion reserve we worked together to set aside during the 2020 session.”

In other words, lawmakers won’t see data on the effects of the crisis until May and June (April sales). Thousands of businesses are likely to be gone by then.