Five Pillars of Growth
THE PATH TO PROSPERITY – I see so many wild and outrageous economic claims made by experts and non-experts alike—both on cable news and on the internet that I wanted to share some refreshingly accurate and concise comments from one of the clear thinkers in economics. If you develop a proper worldview, it equips you to discern events in such a way that you can make good decisions for yourself, your family, and your business.
Dr. Laffer laid out the 5 Pillars of Prosperity at the 2023 Advanced Advisor Conference recently, hosted by Matson Money. If you want to understand what’s going on in the economy today and have a framework from which to interpret it, take two minutes to read his comments. Dr. Art Laffer was on the President’s Economic Policy Advisory Board from 1981 to 1989 and is the recipient of the Presidential Medal of Freedom.
Laffler began, “We [Registered Investment Advisors] are the people who know how to keep balance sheets, how to keep income statements, how to do cash flows, how to balance good economics to create good prosperity,” he said to the advisor coaches in attendance. “We are the stewards of the economy and the guarantors of prosperity.”
1. Taxation is the first pillar of prosperity, according to Laffer – in particular, a low-rate broad base flat tax.
“Taxes have consequences,” he said. “We have all of the tax data, and we know how taxes work. It’s not guessed work or samples. It’s facts, it’s not based on how you feel. This is the way the world really operates, and in our world, we have to deal with reality.”
Laffer has said that increases in tax rates will increase tax revenue, but when rates become high enough, revenue will actually decrease, suggesting that higher tax rates can create a loss of incentive for earning (or in some cases, reporting) taxable income. “Every time we have raised taxes on the rich – the top 1% – tax revenues from the top 1% goes down, Period. These are the facts,” Laffer said.
Discipline, Laffer says, is as important in tax policy as it is in an investment strategy. “In macroeconomics and tax policy, what you want to have is the lowest possible tax rate on the broadest possible tax base,” he said. “You provide people with the least possible incentives to evade, avoid or otherwise not report taxable income and you have the broadest base so you have the fewest places where people can put their income in order to avoid paying taxes that they should pay on their income.”
2. Government Spending is necessary but should be done with as much restraint as possible, said Laffer. “Government is an integral part of a good economy. We need schools, we need highways, we need a military, and a judiciary,” he said. “You can’t say no government, it would just be pandemonium.”
Laffer suggests that government spending should be done where it can do the most good, for the most people. “All taxes are bad, but some are worse than others,” he said. “You want to collect your taxes in the least damaging fashion, doing the least damage to the economy.”
“The concept is very simple. When the damage is done by the last dollar of taxes collected is less than the benefit done by the last dollar spent, the government should stop spending. Any government that is larger than that is too large and needs to be shrunk. Any government that is smaller than that needs to be expanded. This is the north star of spending.”
3. Sound Money, that which is not prone to sudden appreciation or depreciation in purchasing power over the long-term, aided by a self-correcting mechanism inherent in a free-market system, is Laffer’s third pillar of prosperity.
“There is very little on this earth that can do as much damage to an economy than inflation can,” he said. The U.S. Bureau of Labor Statistics reported on March 14, 2023, that the Consumer Price Index increased by 0.4% in February 2023, creating a 6% increase over the past 12 months.
Inflation is important to investors because it represents the rate of which the real value of an investment is eroded and the loss of spending or purchasing power over time.
The solution to combat inflation, according to Laffer, is a sound monetary policy. “You have to limit the size of the Feds balance sheet, expand the rate of goods, and contract the rate of growth of money. Then you need to set a monetary standard.”
“We need to go back to a monetary system that eliminates the fickle nature of an unhinged paper currency and go back to stability. That is the north star.”
4. Minimizing Government Regulations is Laffer’s fourth pillar of prosperity, while recognizing that not all regulations are negative.
“We know we need regulations,” he said. “We can’t choose which side of the road we drive on. There have to be rules and regulations, but we want to keep them to a minimum. We want to make sure that these regulations don’t have external effects with unintended consequences that damage the system. We don’t want to overregulate and then destroy the very goose that is laying the golden egg.”
This, according to Laffer, is of utmost importance and should take priority above other political differences. “We need to focus our attention 100% on a positive agenda for the world,” he said.
5. Free Trade is the fifth and final pillar of prosperity Laffer shared is the importance of a free trade system. “This country of ours was built on trade. We have not only survived but prospered on comparative advantage trade. We make some things better than foreigners do and they make some things better than we do. We and they would be foolish in the extreme if we didn’t sell them those things that we make more efficiently than they do in exchange for those things they make more efficiently than we do. It’s the gains from trade, it’s a win-win, it’s comparative advantage. Trade is an economic policy, an economic tool, and should be kept out of politics totally. To use trade as a political weapon in the global economy is to guarantee enemies. Why is prosperity and economic growth important to investors and the world as a whole? A prosperous economy can create a bull market, the opportunity for better quality and higher paying jobs, and more opportunity for everyone to live their American Dream. The five pillars of prosperity are really critical as being the stewards of the economy and guarantors of property,” Laffer said. “There are so many peripheral and side benefits that come from prosperity, growth, and economic advancement.”
Let me know if you want to discuss the best ways to interpret the economic information you see, or would like advice on your portfolio, or investment advisory practice.