Arthur Laffer

Even measured by his own standards, Arthur Laffer’s predictions in ALEC’s “Rich States, Poor States” undermine his supply-side economics.

Each spring since 2007, the conservative advocacy and lobby group known as the American Legislative Exchange Council (ALEC) teams up with Dr. Arthur Laffer, the “father of supply side economics”, to publish “Rich States, Poor States” (RSPS).

The RSPS report is best-known for it’s state vs. state* rankings on two measures: economic outlook and economic performance. If Laffer (and ALEC) are to be believed, then those states that RSPS ranks with poor economic outlooks will perform poorly in the future; conversely, those with good economic outlooks will do better.

Problems with Laffer’s report are already well-documented, but I decided to set those aside to examine one simple question: How well does Laffer predict his own results? I compared Laffer’s average economic outlook ranking with his average economic performance ranking for every state since 2007 – and he’s not even close.

Nearly one-quarter of states have an economic performance ranking that differs by 20 places or more from Laffer’s economic outlook ranking. On average, Laffer’s predictions differ from his own measures of economic performance by an average of 11 places.

It’s true that predicting economic outcomes isn’t necessarily an easy task, but more than half the time (in 27 of 50 states), Laffer predicted a state would do worse economically from 2007-13, when it actually did better – or he predicted it would do better, when it actually did worse. Flipping coin would actually yield better results. (Keep in mind, this is using Laffer’s own data!)

How could Laffer’s rankings be so far off, even when he is the person creating his own economic outlook and economic performance rankings? Put simply, his assumptions are too narrow. Laffer (and ALEC) fixate on state tax rates and union density above all else – but those two factors aren’t good predictors of economic performance.**

When the Iowa Policy Project examined a broader set of economic performance measures, including manufacturing, transportation, health, and education, as well as Laffer’s tax cut variables, it found:

Neither…total taxes or “right-to-work”…had a statistically significant effect on growth in state GDP, growth in non-farm employment, or growth in per capita income. The composition of the state economy, on the other hand, had a great deal to do with how fast a state grew, particularly in explaining growth in employment and per capita income. The share of the economy consisting of extractive industries (mining, oil) was a very significant determinant in all equations.

It turns out, in fact, that Laffer’s rankings have zero positive correlation to actual economic indicators, such as state GDP growth. In fact, the only real correlation is negative: the higher a state’s economic outlook ranking (according to Laffer), the lower the state’s actual per capita income and median family income, and the higher the poverty rate.

*Why do I say “state vs. state”, instead of “state by state”? Because in Laffer’s report, no state can tie – every state is ranked 1 to 50. That’s convenient for ALEC, because it means half of all states will always find themselves in the bottom half of the rankings, making it easier for ALEC to pressure legislators into enacting their legislative agenda.

**Previous editions of Rich States, Poor States are hard to find. If you’re interested in doing your own evaluation of Laffer’s work, here are the files:

Rich States, Poor States 1st Edition
Rich States, Poor States 2nd Edition
Rich States, Poor States 3rd Edition
Rich States, Poor States 4th Edition
Rich States, Poor States 5th Edition
Rich States, Poor States 6th Edition