Economics and financial markets are intertwined. Investing in financial markets can generate an opportunity for contributors to defer consumption today for consumption in the future, creates a possibility for the government to raise the capital needed to create a secure society, and generates opportunity for financial growth which can contribute to economic health.1
At Matson Money, we are training and developing investors to not only have confidence in their investing strategy – based on empirically-tested academic investing principles – but to create capitalism and invest for global prosperity over a lifetime. A fundamental understanding of economics and its impact on financial markets is instrumental in becoming a prudent investor.
Frequently referred to as the “Father of Supply-Side Economics”, Dr. Art Laffer served as a member of President Reagan’s Economic Policy Advisory Board from 1981-1989, is a recipient of the Presidential Medal of Freedom, and a member of Matson Money’s Academic Advisory Board. His economic acumen brings a distinct opportunity to Matson Money as he helps to navigate the complexities of the economy, interest rates, and tax efficiency as it applies to portfolio construction. During Matson Money’s 2023 Advanced Advisor Conference, Laffer spoke to the audience about what he considers the five pillars of prosperity: taxation, government spending, sound money, minimal regulations, and free trade.
“We 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.”
The first pillar of prosperity, according to Laffer, is taxation – more specifically, 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 guess work or samples. It’s facts, it’s not how you feel. This is the way the world really operates, and in our world, we have to deal with reality.”
Laffer is the creator of the Laffer Curve, a theory asserting 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. 2 “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 equates, 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.”
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.”
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.3
“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.4
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.5
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.”
Laffer’s fourth pillar of prosperity focuses on minimizing government regulations, 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 at 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.
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,” he said. “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 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.”
And as for those who believe trade and politics can and should comingle, Laffer added, “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, 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”
Each year, advisors join Matson Money for the Advanced Advisor Conference to hear from dynamic lineups of industry leaders. Advisors can be inspired to be powerful entrepreneurs and coaches in the financial industry. It is Matson Money’s vision that advisors leave the conference with a renewed sense of purpose, empowered to expand their businesses and bring academic investing principles to families within their communities through the American Dream Experience and/or Breakthrough Investing.
1. Economics and Investment Markets. CFA Institute. 2023 Curriculum. Retrieved 6 April 2023 from https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/economics-investment-markets.
2. Hayes, Adam. Laffer Curve: History and Critique. Investopedia. February 16, 2023. Retrieved 6 April 23 from https://www.investopedia.com/terms/l/laffercurve.asp.
3. What is Sound Money? Sound Money Explained. Sound Money Defense League. Retrieved 6 April 2023 from https://www.soundmoneydefense.org/sound-money-explained#:~:text=Sound%20money%20is%20money%20that,in%20a%20free%2Dmarket%20system.
4. Consumer Price Index Summary. U.S. Bureau of Labor Statistics. March 14, 2023. Retrieved 6 April 2023 from https://www.bls.gov/news.release/cpi.nr0.htm.
5. Segal, Troy. What is Inflation and How Does Inflation Affect Investments? Investopedia. September 7, 2022. Retrieved 6 April 2023 from https://www.investopedia.com/ask/answers/what-is-inflation-and-how-should-it-affect-investing/.
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Dr. Art Laffer is a member of Matson Money’s Academic Advisory Board.
Academic Advisory Board members receive compensation from Matson Money for their services which include, but are not limited to, independent leadership consulting; co-authoring white papers; and speaking at Matson Money conferences. Advisory Board members may also provide insight to Matson Money on portfolio construction, asset allocation, quantitative analysis, investor behavior and other areas of expertise, as needed.