krebscycle

Thomas Sargent won the Nobel Prize in economics for works based on mathematical models which supposedly provide a scientific basis for understanding how real economies work. One widely cited paper on the causes and cures of South American hyperinflation includes near the beginning a claim to have identified two points on “the Laffer curve” – and that claim is enough to reveal the work to be right wing ideology not science.

The Laffer curve is the name given to a graph Arthur Laffer supposedly once drew on a napkin for Donald Rumsfeld and future torture king Dick Cheney to show why taxes should be cut. Laffer’s reasoning was that there is some point where very high tax rates would be too burdensome for economic well being (something nobody disputes).  Laffer then went on to speculate that there should be a curve showing tax revenue goes up as the tax rate increases and then drops as the rate becomes too high. Among the other factors ignored in this theory is – what the government does with the money it collects, how much the government borrows, how much money the government prints (creates). Supposedly it doesn’t matter whether those tax funds are used to pay for community colleges or for secret police or for numbered bank accounts for family members of government officials. This “curve” has been used to justify supply-side economics and has repeatedly been tried in the USA over the last 35 or so years, always with the same result that cutting taxes reduces revenue.

Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already – Austen Goolsbee

In Sargent’s paper, it becomes apparent he is using the Laffer curve to model spending, not tax rates. There’s just as much reason to suppose government spending versus revenue forms a nice curve as there is to suppose taxation and revenue form a curve, I guess. And in Sargent’s paper, this magical curve is a parabola because, well because parabolas look all sciencey. Throw in some greek letters and a hidden Markov model – it’s downright mathy! A supposedly scientific paper that claims to show fixed points, no less, on a curve that some ideologue invented on the basis of nothing.  Economics, what a field.

The two fixed points are on different sides of the peak of the Laffer curve, so increases in the deficit raise π₁*, but lower π₂*
– THE CONQUEST OF SOUTH AMERICAN INFLATION
Thomas Sargent, Noah Williams,Tao Zha
Working Paper 12606, http://www.nber.org/papers/w12606

And that’s not even the most objectionable part of this paper.

@root_e Yeah, well, if they figure out a way to test intelligent design, that analogy won’t be ridiculous! 😉

— Noah Smith (@Noahpinion)
January 11, 2015