I’ve been mulling for months about this old Megan McArdle post proclaiming Peter Orzag’s goal of “bending the curve” of health costs to be the Laffer Curve of the Left. The parallel seemed weak to me, and, up for an intellectual challenge, I’ve been trying to come up with a better one.
The problem is that while I’ve been a-mullin’, the analogy has completely collapsed. The CBO just scored the Baucus health care bill, and — guess what? — he bent it. To the tune of $50 billion in deficit reduction over 10 years. And, since there’s always room for improvement, Brookings has a few quite reasonable and realistic suggestions for bending it further.
As for the Laffer Curve, nothing’s changed there. Too many on the left treat it as a complete myth. It’s not: Art Laffer was perfectly correct in observing on his now-infamous dinner napkin that there’s a point at which taxes yield negative returns to revenue because of the damaging economic effects of high taxation. No, the myth was when he and an army of supply-siders went (and sill go) a step further and asserted that the U.S. was on the right side of the curve. Alas, we’re still on the left hand side [PDF]. So yes, tax cuts still decrease government revenue. In other words, it’s not that the Laffer Curve is fiction, it’s that it’s not a terribly useful tool in understanding contemporary America public policy.
As for my nomination for the left’s Laffer Curve — that is, an insight that is narrowly true but over-generalized for the purposes of political agenda — I’d nominate the 1992 Card-Krueger minimum wage study. It’s not nearly as well known to rank-and-file liberals as the Laffer Curve is to conservatives, but most progressives in positions of influence with more than a passing knowledge of labor policy have heard of it. The dime summary is that economists David Card and Alan Krueger found that employment in New Jersey fast food restaurants increased when compared to neighboring Pennsylvania restaurants after New Jersey raised their state minimum wage. It’s a completely counter-intuitive result, though it makes more sense if you model fast restaurants as a collective monopsony (single buyer) of low-wage labor. As for the economy as a whole, however, your standard Econ 101 logic prevails: raising the minimum wage probably increases unemployment.