10-15-24: Who Should Win This Week’s Nobel Prize for Economics?

by Gary Alexander

October 15, 2024

The Nobel Prize in Economic Sciences will be announced this week, perhaps today, but since we go to press Monday, I don’t know who will win, but this year marks the 55th anniversary of the first such award and the 50th anniversary of the first great free-market winner, Austrian economist Friedrich Hayek, in 1974 – the same year that brought us the birth of the “Laffer Curve” and Robert Barro’s first notable economics essay. Robert Barro and Art Laffer are my top two picks. I’ll list four in all. The first three are notable Growth advocates, profiled here in alphabetical order, which is also the order I would rank them.

#1: Robert J. Barro, 80, is currently Professor of Economics at Harvard and senior fellow at Stanford’s Hoover Institution. He first gained fame for his 1974 paper, “Are Government Bonds Net Wealth?” It was written during America’s first wave of high inflation. He argued (against the then-current orthodoxy) that these sovereign bonds tend to engender future taxation and inflation, and hence are “not net wealth.”

Barro is a champion of growth. His 1984 Macroeconomics textbook is a standard of excellence, along with his co-authored 1995 graduate level textbook, Economic Growth. His primary focus since 1990 was comparing growth profiles between private and public sectors and between nations and their policies.

In the first category, Barro showed that for every dollar the government borrows and spends, spending in the private economy falls by almost the same amount, making him an opponent of stimulus spending. For example, he called President Obama’s stimulus bill “garbage” and “the worst bill since the 1930s.”

When comparing national policies, Barro assembled a data set of incomes since 1960 for nearly 100 countries along with a long list of variables that influence growth in incomes, such as school enrollment, private investment and the size and stability of its government. He found that poor countries tend to catch up with rich countries “if the poor countries have high human capital…but not otherwise.” He also found that government investments did little to trigger growth, and even tended to reduce economic growth.

We’ve seen developing nations grow faster when following Barro’s preferred model. Larry Summers (#4 on my list, below) called Barro’s positive variables “the iron law of convergence.” In fact, Barro’s body of work is credited with turning the tide of academic thought in favor of a smaller government role.

#2: Art Laffer, 84, developed the “Laffer Curve” 50 years ago during the Ford administration, when he was a Professor of Economics at the University of Chicago (1967-76). I later met him at the University of Southern California, where I worked (1976=79) and he held sway from 1976 to 1984 while also serving as a member of Ronald Reagan’s Economic Policy Advisory Board. During the mid-1980s, I enlisted him to be a regular columnist in our Wealth Magazine, where he wrote regularly on the development of the groundbreaking 1986 Tax Reform Act, the purest form of the Laffer Curve in action – eliminating nearly all tax shelters and preferences while reducing tax rates to two levels, 15% and 28%, on the theory that moderate tax rates generate higher tax revenues. A 10% rate raises too little revenue, and so does a 50% tax rate. Experience shows that the most revenue is raised in the mid-20% range. Historically, under Coolidge in the 1920s and Kennedy/Johnson in the 1960s, top tax rate cuts raised the most revenues.

The reason I recommend Laffer for this year’s Nobel Prize is that we just learned that the federal fiscal year of 2024 has given us yet another proof the Laffer Curve works. The Trump tax cuts of 2017 paid for themselves within two years, but the Biden-Harris administration has kept those tax rates intact for nearly four years, and they kept generating massively higher tax revenues. Tax revenue climbed 11% in fiscal year 204 to a record $4.92 trillion vs. FY’23. Before COVID in 2020, total federal tax revenues were under $3.5 trillion each year, so tax revenues are booming in 2024 at Trump’s lower top tax rates.

In his book, “Taxes Have Consequences,” Laffer and his co-authors, Brian Domitrovic and Jeanne Cairns Sinquefield, show how this magic formula has worked in every administration – both Democratic and Republican – over the last century, under the simple common-sense principle that, when faced with punitively high top tax rates, high-income earners have the means, motive, options and wherewithal to “readily change the location of where they earn their income, the timing as to when they receive that income – not to mention how much income they choose to earn.” Likewise, when taxes are affordable – under 30% – those same high earners will roll up their sleeves, work more, and send in more total taxes.

#3: Mark Skousen, 77 this week, made a major contribution to economic statistics with his magnum opus, “The Structure of Production,” which forms the theoretical basis for a new, broader definition of growth, Gross Output (GO), which could in time equal the influence of Gross Domestic Product (GDP).

Gross Output measures the production sector, while GDP measures consumption. “Both are required in a complete system of accounts” (Dale W. Jorgenson, J. Stephen Landefeld, and William D. Nordhaus, in “A New Architecture of U.S. Accounts”). As you may have heard (endlessly), “The consumer represents 70% of the economy,” but that is only true of the GDP, which overloads the end-product sales to the consumer while ignoring the primary stages of production. GDP leaves out the supply chain – all of the business-to-business (B2B) transactions in the production process, since GDP only measures the end-product sales.

The “Structure of Production” comes in four stages (chart below, left). The first three stages are ignored by GDP. When those stages are included, Gross Output totals about twice the volume of GDP, and it is more volatile (right chart). In an expansion, GO tends to grow faster than GDP; during a contraction, GO declines more sharply; and during the recovery stage, GO tends to accelerate at a faster rate than GDP.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As Gross Output gains traction, Skousen’s contribution to economic understanding deserves a Nobel look.

#4: Lawrence Summers, nearly 70, the second Harvard Professor on this list, is my only Democrat on the list, and in fourth place, with no book recommendation I like, but he deserves special recommendation for his research papers and for speaking truth to power about President Biden’s first major act in office in February 2021, the “American Rescue Plan.” Summers bravely broke ranks with his Democratic team in calling this $1.9 trillion stimulus package, passed in the midst of a strong recovery, “the least responsible macroeconomic policy we’ve had in the last 40 years.” It provided “helicopter money, like $1,400 in personal “paycheck protection plans” as a reward for not working, and $600 per week in unemployment checks, which often went right into stock speculation accounts, in too many cases, for up to 18 months.

In a February 4, 2021, Washington Post op-ed, Summers dared to predict, “macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation.” At the time he said this, the Consumer Price Index was below 2% and hardly anyone but perma-bears and some Republican zealots were predicting high inflation, but high inflation came. The CPI eventually soared to over 9%, while Fed leaders and Treasury Secretary Janet Yellen said inflation was “transitory” (as in 2021 alone). This high inflation lasted for two years, and it was even higher if you include debt service and housing under Summers’ old measurement standard, and in his latest paper on the inclusion of debt service, which pushed real inflation to a peak of 18%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In April 2021, San Francisco Federal Reserve President Mary Daly told Barron’s that the Fed’s main goal was still to RAISE inflation to 2%, saying “We always have the tools to pull inflation down if it gets too high.” My response was a headline here: “Inflation Will Roar Again – And Probably Soon” (April 13, 2021), so Larry Summers and I had a jump on the Federal Reserve and the Biden-Harris spending team.

The odds are that I’m way off base and somebody else will win this week’s Nobel Prize in Economics, but I tend to favor these four, with a real-world market impact, not some ivory-tower theoretician.

If not now, then soon. This quartet is not getting any younger.

P.S. The Nobel-winning economists were announced Monday morning – a three-way tie of those specializing in wealth disparities between nations. On the surface, some of their research seems to contradict my #1 pick, Robert Barro, but that’s the nature of conflicting currents of economic thought. What struck me most in this political season is that one of the winners, Simon Johnson, made the same misguided prediction that Nobel Laureate Paul Krugman made in the New York Times on the eve of the 2016 election – a stock market crash and recession if Trump won.  Johnson wrote, a week before the 2016 election, “…growth and employment around the world look fragile. A big adverse surprise – like the election of Donald Trump in the US – would likely cause the stock market to crash and plunge the world into recession.”  Of course, Trump won, the market rallied and there was no recession.