Russ: This is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com. My guest now is Dr. Arthur Laffer, one of the most influential American economists since 1970, a member of President Reagan’s Economic Policy Advisory Board, and also the father of Supply-side Economics, a guy that has hit the big time for sure now because he’s on The BusinessMakers Show; Dr. Laffer, welcome to The BusinessMakers Show.
Arthur: Thank you, I’m so nervous. It’s not, you know, hitting the big time is really – well, but I’ll…
Russ: I can tell (laughter). All right, let’s start with you giving us an overview of Supply-side Economics.
Arthur: Yeah, Supply-side Economics basically is people like doing things they find attractive and they are repelled by things they find unattractive and government policies can make things more of less attractive; if you tax something you make it less attractive, if you subsidize something you make it more attractive and, you know, if you look at what we’ve been doing in the last 8 years, we’ve been taxing work, outputting employment and subsidizing non-work, leisure and unemployment, and it shouldn’t surprise anyone why we have so little work output employment and why we have so much of non-work, leisure and unemployment.
Russ: That’s because people go to where the money is, right?
Arthur: Well yeah, they do. And if you tax rich people and give the money to poor people, you’re going to get lots and lots of poor people and no rich people. And the dream in America has always been to make the poor people rich, not – not to make the rich people poor, but that’s not the way government’s operating in the United States today.
Russ: Right. Well what concerns me and a lot of people I know significantly, but there seems to be a lot of people that don’t get it right now and – and there’s a lot of people that don’t understand that maybe small government is better than big government.
Arthur: Well you’re right, they don’t but it’s perilous for them. I mean, honestly people deserve the governments they get and as long as you believe in Democracy you make your case as best you can and if you don’t convince them, they bear the consequences of the policies they have enacted on them and I think it’s been a disaster for at least the last 2 years of W and the whole term of Obama and we need a political change where people recognize that the way to prosperity is not through taxation. I mean, have you ever heard of a poor person spending himself into wealth?
Arthur: It’s just dumb. Or you taxing an economy into prosperity; it’s Econ1 dumb, but that’s exactly what Washington’s doing. Obama’s been raising – trying to raise tax rates on everyone, and they have this stimulus spending to bring back prosperity; it’s ridiculous.
Russ: Well I worry a lot Dr. Laffer about particularly young people, maybe just now coming out of school, and – and – and they’ve lived through a very prosperous time and they think when they hear the position that you take that that’s once again the rich people wanting to just hold onto their money; that’s – that’s their impression. I worry that the counter argument’s not being conveyed to them at all.
Arthur: Well, but it is the rich people wanting to hold onto their money; and it’s the poor people wanting to become rich. I mean, this is the idea of how you get prosperity. And you know, the best form of welfare is still a good high-paying job. Have you seen the number of people unemployed, how the participation rate in the labor force has fallen? It’s tragic. And, you know, how are you going to get it out? We have all these people in the inner cities that haven’t had a job in 6 years. You know, they’re losing all the ability to ever get those skills and ever become productive members. And, you know, after being unemployed for a couple of years they’ll become unemployable and after being unemployable for a few years they’ll become hostile and then you have to protect yourself from them and, you know. That’s why I write - wrote Enterprise Zones years and years ago; have tax free zones in the inner cities so you bring the jobs in and we get this economy going just the way Kennedy and just the way Clinton did, just the way Reagan did.
Russ: Well I know, the Clinton comment is interesting to me too because I think people hearing you start off would think that you’re a Republican, but you’re not, right?
Arthur: No. I voted for Clinton twice, I did papers on Clinton. He doesn’t like me at all, but that’s because I always added that I voted for him even though he was a disgusting person. But I figured that if he hadn’t been elected he still would have been an embarrassing, disgusting person and we’d have lost the benefits of his great presence. He was a great President, right? I loved it and he did a great job.
Russ: And you didn’t like either of the Bushes because they spent quite a bit too, I mean yeah.
Arthur: Huge amounts and, you know, it just doesn’t make any sense. I mean there are other issues that I have as well but – but I’m focused on economics and, you know, the economics of the last 3 years. I mean, can you remember Paulson sitting there on the crash and squealing and hollering you’ve got to pass the bill today? I mean, whenever people make decisions, all right, when they are either panicked or drunk, the consequences are rarely attractive. And, you know, I’ve seen it so many times; I watched Nixon bring the tablets down from Camp David and, you know, you just shiver in your boots. I watched the cover up for Watergate, I watched Jimmy Carter’s National Energy Plan, and I’ve watched the I watched the great recession stimulus packages by both Bush and Obama. Obama’s no better, I mean the - Obama’s just extends the silly economics, but it’s nonsense. Free markets work and they work especially well in crisis. You know, when it’s crisis that’s when you’ve got to take your hands off the wheel - or what is your Texas – no, I guess she’s Oklahoma – Carrie Underwood says, let Jesus take the wheel. You know, trust in free markets when it’s a crisis, that’s when you’re supposed to trust in them.
Russ: You know, the whole focus seems to ignore spending in all categories, even when they talk these days about affordable living. Affordable living, they’re just always looking at the income side and not what a particular person might be spending; I don’t know how you bring that back to the discourse that, you know – back in the 60s and 70s when I was younger, we talked about saving and we talked about careful spending - at the home, at the government level - and we don’t do that at all anymore.
Arthur: I know, and you don’t talk about work anymore either, it’s just not the repertoire. Start up jobs, they’re now striking at McDonald’s and Wal-Mart to get $15.00 an hour – let’s guarantee everyone $1,000.00 an hour pay.
Russ: Right, so everyone will be rich!
Arthur: How many - yeah, yeah, everyone will be rich, but no one would be employed. I mean, thank God I’m making a thousand an hour, unfortunately I don’t have a job today but. But you know, economics has to work where you balance supply and demand and government puts a wedge in between supply and demand. When you put a tax on a product you cause the price of the product to be higher and the return to the supplier lower, it drives a wedge between the price paid and the price received, and if you make that tax high enough, you’ll kill all supply and all demand. And, you know, it’s Econ I stuff and, by the way, my colleagues at the university are not much better than the – than the young people you’re describing who don’t get it. You know, it seems to me every now and then it takes a PhD in Economics not to be able to understand the obvious.
Russ: Well let me – let me put it to you this way, what if suddenly there was a ground swell movement and people elected you as the Economic Czar of the United States, put you in charge and said wow, we recognize Dr. Laffer that it’s broken, what would you do to fix it?
Arthur: There – there are 5 things I’d do - and, you know, they’re the basic 5 things you’d need to do and they cover the - the kingdoms of Macro Economics; a low rate, flat tax, that’s first of all. And you make the same rate from the first dollar to the last dollar, no deductions, exemptions, exclusions, but you have to have a low rate, flat tax so you don’t even have to report your income.
Then you have spending restraint, that’s number two. Number three, sound money; you can’t have – you need to do contracts and no inflation. Then you want free trade; you know, we do some things better than foreigners and they do some things better than we do and we and they would be foolish in the extreme if we didn’t sell them those things we make cheaper than they do and they sell us those things they make cheaper than we do. I mean, Wal-Mart’s a perfect example of looking at that, it’s just great. And lastly, minimal regulations; I mean, if you prohibit anyone from having losses, no one can have profits and the whole dynamic of progress is some people lose and some people win and you learn better ways and you evolve and you take your chance, you take your risk and do it.
And – but you don’t want regulations to go beyond the specific purpose at hand. Of course we want full transparency, we don’t want cheats and liars in there, but risk is fine. And, you know, you make your bet on a stock, I make my bet on a stock and you may beat me and, you know, we get a better company, a process going. Respect the economy and when you respect the economy, don’t sit there and poke it all the time. Get these 5 things; low rate, flat tax, spending restraints, sound money, free trade and minimal regulations, then get the hell out of the way and let the free markets solve it. But, you know, they don’t do that. These guys in there think that they are far smarter than the markets – they aren’t.
Russ: Right. I love everything you’ve said, specifically flat taxes; what - what did you think of Herman Cain 9-9-9?
Arthur: I loved it; I helped him work on it, 2 of the 9s were mine – how do I do it – with 9-9-9 and 2 of the 9s were mine. But he was great, he came in with a fair tax and then we split it into 3 - a VAT, a personal unadjusted income tax, and a – and a fair tax – and it was, I thought, perfect. He did a great job and he’s so – such an articulate, really nice man.
Russ: Yeah. Well I was a champion of his campaign for sure, sure.
Arthur: Oh, heavy energy too. That guy just – he had the Energizer Bunny working for him (makes more noises).
Russ: Oh yeah. What about the – we had Steve Forbes on the show 5, 6 years ago when he wrote his book and he was championing a flat tax; what did you think of his plan?
Arthur: I love it. I mean, you know, there are differences and this and that, I like a little bit more of that one, this one or the other one, but you should never les – let the enemy be - the best be the enemy of the good, you just can’t. And while I may disagree with this little thing and there, I love Steve’s proposal, I loved Herman Cain’s proposal, I love the Fair Tax; they’re all so much better than our current tax system.
Russ: Is it even possible though to get that through?
Arthur: Of course it is.
Arthur: It’s not only possible, it’s highly popular. I mean, I don’t know if you remember the ’86 Tax Act we had? In the ’86 Tax Act we dropped the highest rate from 50 to 28%, not bad; for the fat cats we really gave them the money. Then we dropped the corporate rate from 46 to 34%, more cream for the fat cats to gobble up. Then we raised the lowest rate from 12.5 to 15% on the poor people – the low income earners – you know we’re moving towards a flat tax. We got rid of tons of deductions, exemptions, exclusions so it exactly revenue neutral. Okay remember, dropped it from 50 to 28 and 46 to 34, okay? Those – what was the vote in the Senate?
Russ: I don’t remember.
Arthur: 97 to 3. Simon, Melcher and Levin were the 3 voting against it. Alan Cranston, Mr. Lefty-wefty from California voted for it, then Mr. Death Tax himself, Metzenbaum , voted for it, Teddy Kennedy voted for it, Joe Biden voted for it, Chris Dodd voted for it, Bill Bradley voted for it, Al Gore voted for it, Harry Reed voted for it, Barbara Boxer, Dick Durbin, Chuck Schumer, they all voted for it and they were right. And we can easily do that again if we bring back political consensus to common sense.
Russ: Yeah, well I – there’s nobody really championing it right now, is there, that’s capable?
Arthur: Well, yeah, sure, sure. There are lots of people who are capable, but the times create the president. You know, you don’t get a president like that just randomly. You need the times and Reagan came at a very special moment in time and he was a very special person. But you know, if he hadn’t done it, someone else would.
Russ: Well Dr. Laffer, I really appreciate you coming in and sharing your perspective with us.
Arthur: Thank you, it’s a real pleasure being here with you.
Russ: You bet. And this is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com.