From bad to worse: How Arthur Laffer’s “Rich States, Poor States” rankings refute themselves

April 18, 2014 | Aaron Keating

Arthur Laffer

Arthur Laffer

Arthur Laffer’s own data says his “Rich States, Poor States” rankings were never that good – and they’re getting worse. A coin flip is actually a better predictor of economic performance.

As they have each year since 2007, the conservative lobby group known as the American Legislative Exchange Council (ALEC) has teamed up with Dr. Arthur Laffer – known as the “father of supply side economics” – to publish “Rich States, Poor States” (RSPS).

The bulk of RSPS is comprised of state vs. state* rankings on economic outlook and economic performance. Laffer says states with low outlook rankings will perform worse economically, while those with high outlook rankings will do better – likewise, those with high performance rankings have done better economically over the past year than those with low ranks.

Except that’s not actually the case.

I’ve compared Laffer’s outlook and performance rankings each year since RSPS was first published. His own data shows he was wrong to begin with, and has grown less accurate each year since. In the 7th edition of RSPS, Laffer has proven his predictions wrong more than 60% of the time.

Nearly one-quarter of states (12) have an economic performance ranking this year that differs by 20 places or more from their outlook ranking last year. The average of this “Laffer Error” for all states is now 13.5 (up from 12.2 last year, and 11.9 the year before).

Lowering the bar for success doesn’t help. This year, in 31 out of 50 states (61%), Laffer predicted a state would do worse economically, when it actually did better, or vice-versa. That’s up from 56% in 2012, and 50% in 2011. At this point, a coin flip is actually a better predictor of economic performance than Laffer’s report.**

Remember, this is all using Laffer’s own data and methodology — which have other problems that are already well-documented.

Why is Laffer so wrong, even when he’s collecting his own data and writing his own report? In a word: ideology. Laffer (and ALEC) are fixated on lowering state tax rates and union density above all else, so they want to believe those factors are good predictors of economic performance. The problem is, they simply aren’t.

As the Iowa Policy Project found when it stacked up Laffer’s variables against a more comprehensive set of economic measures, including manufacturing, transportation, health, and education:

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.

Laffer’s rankings have zero positive correlation to actual economic indicators such as state GDP growth. 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
Rich States, Poor States – 7th Edition

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