Saturday, July 14, 2007

The Laffer Curve ...

One of the sharper descriptions of the Laffer Curve appears in the novel A Tenured Professor by John Kenneth Galbraith (my review):

Even some of the more theoretically committed members of the faculty found themselves asked about the budget priorities of David Stockman [President Reagan's Budget Director], the monitarist magic of Professor Milton Friedman, the now compelling doctrine that the rich were not working because they had too little money, the poor because they had too much. And about the Laffer Curve. Especially about the Laffer Curve.

The economic formulation of high personal importance to the Marvins held that when no taxes are levied, no revenues accrue to the government. An undoubted truth. And if taxes are so high that they absorb all income, nothing can be collected from the distraught, starving and otherwise nonfunctional citizenry. Also almost certainly true. Between those two points a freehand curve, engagingly unsupported by evidence, showed the point where higher taxes would mean less revenue. According to the accepted legend, the original curve had been drawn on a paper napkin, possibly toilet paper, and some critics of deficient imagination held that the paper could have been better put to its intended use. ..

Today, the Wall Street Journal is being laughed at because of its attempt to better the 'freehand curve, engagingly unsupported by evidence' with a modern version. Mark Thoma started this riot, and much fun is being had by many.


  1. Veena said...

    Thanks for this Sat morning entertainment. What I find terribly funny is that while everyone knows its not exatly rocket science to manipulate statistics to say what you want to say, the AEI and/or WSJ doesn't even seem to want to make that effort. I have to put this curve up somewhere in my office!

  2. Anonymous said...


    Thanks for the write up and links. Very insightful.

  3. Anonymous said...


    This has got to be the worst ever curve fitting I've ever seen.

    The wall street guy must have obviously slept through his linear regression course.