Economist Laffer: The age of prosperity is over

When a noted economist declares that an economic era is over, and does so in the Wall Street Journal, it's worth noting. In this case the economist is supply-sider and Reagan influencer Arthur Laffer, who writes in today's Journal, "The Age of Prosperity is Over."

Laffer's point, as I read it, is that the government's panicked responses to the housing slump and the financial crisis are wrongheaded in the extreme, and will not only prevent the free market from correcting current imbalances, but will sink the economy:

Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

It's worth repeating what Laffer has to say about the housing bubble and bust (pet peeve: why is it so difficult for political leaders to acknowledge that much of our current crisis stems from a disastrous housing bubble?):

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

Your thoughts? Comments? E-mail story tips to Peter Viles

--Peter Viles

Photo: A Newport Beach home. Credit: George Briggs

Hat tip: It All Happens on the Margin

Comments

[MyLessThanPrimeBeef]

I think he's about 20 years late.

He should have started with Sir Bubbl'alot, aka Babbl'alot, Greenspan's numberous panicked responses over the years to prevent, as he said, 'the free market from correcting.'

By the way, when you vote for Time magazine's Man of the Year, please don't forget to vote 'the taxpayers.'

[Laker]

"...Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity..."
"...Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved..."

Wow, I had to put these two quotes since they hit the nail on the head with 700 billion ton of hammer. This is so true.
That is the professional explanation of my rhetoric of government unintended consequences...The $700 billion bailout was not only bad because we gave good money to people and banks that did not deserve it, but the worst part is that it was TAKEN from the good - tax payers. That void will be missing and will be paid by lower standard of living, higher unemployment, inflation, poverty, sinking economy, long term stagnation, etc.
I repeat, this is scary stuff, if this thing really plays out like that, housing prices will get so low that even guys like me would look like shockg of the bears. Unreal!

[pablo]

thats great , Laffer 2 years ago , was saying we were in the most prosperous times ever. He was cheerleading Greenspans lowering of interest rates and the lowering of regulation.

[Crash and Burn]

As much as I like to see conservatives eat their own young and rag on the Bush administration, this guy has no credibility as his own philosophy of no regulations and supply side economics are exactly what caused the massive unregulated stupidity in Wall Street and caused this crisis. Bubbles within our economy are fairly predictable if you look back upon the past century. Being completely unprepared for them is a completely man made catastrophy.

Just about any regular Joe could have seen the housing bubble coming (just read the LA Land archive comments), so to say that this was really the cause of the crisis is a little over simplistic and misses the massive unregulated leveraging that was occuring on Wall Street. The leveraging is what burned the banks, not just bad guesses on asset prices, and the result was that the economy got tanked.

This guy is a nut-job, not an economist. If there is no capital, there is no production. He offers no solution to this fundamental problem once the banks went and screwed themselves, some entity has to loan out the money to keep the economy going. Once the banking industry blows up, someone has got to pick up the pieces. Paulson's bailout was kooky and not well thought out, but the British led plan which was followed by America which traded cash for ownership actually is trying to address the capital problem.

This guy has a lot of nerve to try to paint this crisis as caused by government action, when it was really caused by the unregulated greed of Wall Street and government inaction.

[Drew]

Laffer -- ah yes, wasn't he the one who came up with the now throughly discredited concept of supply-side, trickle-down economics? Maybe he and Bubbles Greenspan can start an economic think tank -- everyone will listen to them and then do the opposite.

Laffer's fallacy in his analysis -- Hoover did nothing. For 3+ years, he sat back and assumed (hoped?) the markets would correct themselves. We know the result of that inaction and naive faith in the ability of grossly out-of-whack markets to correct on their own.

What is being done now is not nothing. It may be worse than nothing but at least it's something. The point is that we need to neutralize the fear that is paralyzing the market now. And doing something is more likely to restore confidence in the market than will doing nothing.

FDR's words ring true today -- "We have nothing to fear but fear itself." The hard work ahead will be reinstilling confidence in the global markets and global financial systems, of course, but that cannot happen as long as people continue to act like a bunch of Chicken Littles.

[Tab]

My wife and myself declined many offers to drink the housing financing kool-aid, started a family, remained renters and observed years of housing bubble madness on the Westside. We are hopeful that our plan to buy a modest home in our neighborhood with a sustainable monthly carrying cost will happen in the next couple of years- even on the westside. As we waited, we avoided debt, built good credit and a sizable down payment. Except for cases where poor health and other genuine hardship cases have forced desperate measures, we share no inclination to reward people's reckless financial sense.

[Dan]

Quote:
If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers.

EXACTLY.

Every single person reading this article who is not overleveraged - just realize that all these people "losing their homes" probably should not have been in those homes to begin with. 5 years ago, if I'd bought a home for $2M when I can only afford $500K, and then I lost the home, would any of you feel sorry for me? I hope not! So why do we care if a painter earning $36K/yr loses his $750K home, or a yupple (my term for yuppie couple) loses their $1.5M beachside condo in Newport because Marcy lost her $120K/yr job as a pharmaceutical rep and their ARM just reset?

Sheesh. LET THE MARKET CORRECT.

Get the people who can't afford their homes out of their homes, that's why there's something called renting.

And then let the home prices continue to drop, and other people will buy them.

If you buy your home as anything other than a nest, you're taking a risk. If you buy as a (long term) nest, the value doesn't matter today, it only matters when you sell. And if you need to sell sooner than expected, well, sometimes life throws you a curveball. As the guy who just found out he has cancer, or the lady who buried her child.

There are no guarantees in life, and it's not the taxpayers' obligation to insure your home's value. It's just not a sure thing that you're gonna come out on top when you buy a house. If you can't handle that reality, rent.

[356man]

Two comments: 1. Duh! 2. Laffer should look in the mirror with his supply side cronies to see the root of our current financial meltdown.

[Steve]

Laffer ,makes a valid point, while the houses are going up nobody complains, on the way down it is bail out time and we all become socialsit. What is sad is we never were a free market and never will be. The renter and th poor chump trying to buy a house in LA gets screwed again. The bail out will support prices by more then 20% plus, the bottom is almost here now with the bail out. Housing is fundamental to our economy and the Fed will do what ever it has to subsidize it. Bottomline buy a house and get yourself in debt if you want to move foward finincailly.
After GW/Greespan caused this debacle they are going to print money like no other time in historyTake a hard loook at the 70s

[SoCalJim]

As funny money disappears and the "perception" of wealth by thinking you "own" a house when in fact it owns you simply transitions to reality - prosperity comes down to how much you make and how much (or little) you spend. As it has in the past. By not owning a house, and being in a very busy field, the past 2 yrs have been the most prosperous for me personally, and when things turn, they will be even busier. This correction also emphasizes the fact that people who have marginal skills and do not contribute in a meaningful way will be pushed to the curb, like paper pushers who fill in prompted mortage applications (any monkey can do it), sales people (realtors, your day is coming, or is here - your value in telling someone that the floors you are standing on are hardwood should tell you your true value, which is very low, particularly considering your "advice" to buyers has cost 1000s of buyers and their families financial ruin, loss of home, and untold stress, then again, that stupid advice is consistent with your education/skill/value level (i.e., closer to 0 than to 10), just like other low skill / low education jobs that are fungible and require only a fraction of brain power of others. Bottom line - education and experience that puts you in a valuable niche will lead to prosperity. Otherwise, middle class stays in the middle, or drops down b/c of self-interested and not-so-intelligent realtors. People are starting to see this now. The film "American Beauty" comes to mind. Wake up people. You make your own decisions, live with your own stupidity. If you were gullible enough to buy too much house the past few years, well then, you probably deserve what is coming. Not that complicated. The "American Dream (or nightmare)" is not free and is not an entitlement, which is why they call it a "dream." In fact, it costs a whole lot of money... money many people simply don't have and never will. Again, people burned by their own stupidity are starting to learn.

[dclogang]

I know a way to prop up the American economy and get things going again.

Give everyone who filed for taxes last year ( MINUS those who are in trouble because they lied on their loans and lenders and no one who makes over $200,000, basically if you speculated on either side) and give the rest of us 1 million dollars out of that bailout. Tax free of course.

I guarantee you, I will buy a house with that money, I'll buy new furniture, new appliances, heck maybe 2 hybrid cars (one for me, one for the wife) and lots of groceries. I will also go out to eat more although I'm trying to eat healthier these days. I will also invest and put the rest in savings but I will spend to get the economy going. It will create jobs too. : - )

130 million received tax rebates so I subtracted 30 million who speculated and gave bad loans etc.

[The Original RZ]

Peter,
Thank you for continuing to post these sorts of articles and to make the point about the need for the economy to correct itself. I think this is the most underreported story of the economy and it gets lost too easily among all the daily updates of market activity, foreclosures, etc.

Fareed Zakaria of Newsweek had a somewhat related take last week. His view is that US spending - by consumers and by banks - must become more disciplined. Here's the link: http://www.newsweek.com/id/163449

[TakeFive]

"The age of prosperity is over"

Really?

Is this because we can't all have 12 room houses with Dish TV in every bedroom, granite countertops, and a couple of Hummers in the 3 car garage?

Or is it because there won't be work for industrial slaves in china to make cheap crap for us to buy and throw away after a few uses?

Seriously though, I get Laffer's larger point: We have just entered an unprecedented era in government financial regulation. And this, just as an all but admitted radical socialist is likely to ascend to the presidency.

[TrojanDLA]

Government intervention at this scale is unheard of and the consequences are most likely dire, simply because we have mortgaged the taxpayers future on the hopes (gamble?) that this move will pay off 10 years from now. Paulson assumes that this at worst will be a net zero cost to taxpayers - as long as the economy gets back on track. On the other hand, if the global economy suffers what Japan suffered in the 90's, then the taxpayer will be in very deep doo doo 10 years from now because the $1 Trillion (yes, when all is said and done it will be a $ Trillion) bailout will come home to roost.

*sigh* short term comfort in return for long term suffering.

[desmo]

Art "Laugher", watch the brilliant "Laugher" in 2006.

http://www.youtube.com/watch?v=IU6PamCQ6zw

[Guillermo]

Peter, please never refer to Laffer as a "noted economist" because he's a sham.

In 2006 he denied any of these problems could happen and poked fun at Peter Schiff for what turned out to be extremely accurate predictions.

Here's the video tho prove it. It's just embarrasing how far off Laffer was and how demeaning he was to Schiff.

http://www.youtube.com/watch?v=LfascZSTU4o

[L]

Dan...brilliant post.

If the housing bubble was still inflating, these folks sobbing for a bailout would instead by profiled on some TV show, smiling smugly while some "real estate expert" advised them that they could expect 100K appreciation this year on their home as they installed a granite countertop in the kitchen and painted the guest bedroom a soothing shade of taupe.

I remember the endless boasting regarding home appreciation in the workplace lunchroom, at kids functions, family gatherings, etc. It was impossible to escape. It's difficult to have much sympathy for these people now. If I hear one more talking head on television with a hand wringing sob story about helping these "poor people" out who were "duped" into buying these houses, I'll scream. In my humble opinion, in many cases this bubble was fueled by mix of pure greed and and an unbridled quest to "keep up with the Joneses" .

[rfw]

I agree. Loved Dan's post. Is this the same person that writes my (other) favorite housing blog, Dr. Housing Bubble? If so, double kudos!

Re: Laffer...I now refer to him as Laugher. He
was on Bill Maher last Friday and it was a pathetic
showing. Bill referred to a bet Laugher made which
I didn't understand at the time. This video explains
it all. It's from August, 2006 and involves Mr. Laugher VS Peter Schiff. Worth watching.

http://www.youtube.com/watch?v=IU6PamCQ6zw

[anonymous]

If the end of the era of prosperity means not spending money you don't have, I'm all for it.

I agree with Laker, "The $700 billion bailout was not only bad because we gave good money to people and banks that did not deserve it, but the worst part is that it was TAKEN from the good - tax payers. "

Look out everyone, now they're going to do the same thing with the Big Three. Those poor corporations that can't build fuel efficient vehicles because the SUVtards need the monster vehicle because their HELOC is burning a hole in their pocket.

The end of the era of prosperity indeed.

[It All Happens on the Margin]

Laffer was wrong in 2006.

But Peter Schiff is wrong in 2008:
http://tinyurl.com/63sqkh
"I still like Singapore, Hong Kong. Asian markets are the place to be. I like resource markets like Scandinavia. I'm spreading my chips around the world. I'm just avoiding the United States."

The Asian markets have taken the brunt of the collapse thus far - the Nikkei is at a 26 year low. Foreign markets have plunged as much as 70%. The Dollar is the only decent investment right now and the Dow, for all the bruising it has received, looks half decent when lined up against the other indexes.

Show me one economist (or blogger) who has been right 100% of the time.

In fact, the article is significant in the fact that he has changed his thinking so profoundly...

[Nelcisco]

Well well well.... the time has finally come when, the end of properity, what took so long? Did America think this would continue forever???
good job Laffer on reporting this piece.

[jb]

George Carlin had it right - RIP

http://www.youtube.com/watch?v=kJ4SSvVbhLw

[anony]

YES YES YES to Dan and L's comments!!!!!!

I've been doing my part to save money, cut consumer spending, and try to minimize trash. If more and more people are doing the same, the world may become a better place, albeit less financially prosperous......

[LA-renter]

It All Happens on the Margin,

I agree with you, I think.

Peter Schiff's opinion has been refreshingly honest. However, I'm skeptical about how well China or Asia will thrive if they stop selling cheap labor to us.

[buz]

L- couldn't agree more. I too remember the incessant bragging about how much people had made flipping houses. At work, dinner parties it was all anyone talked about. As a renter I was looked on as being financially retarded and told that I was going to be priced out of the market it I didn't buy "something" I never did because at the time the only "something" I could afford was a crackerbox in gangland. I have NO SYMPATHY for idiots who bought something they could not afford. Time for them to RENT.