For Arthur Laffer economics is not a dismal science

In 2005 I interviewed the supply-sider who gave us the 'Laffer Curve' and has had the ear of presidents for 40 years.

Economist, business commentator and adviser to Republican presidents Arthur Laffer is still going strong at age 81. He’s still a frequent guest of his pal Larry Kudlow on the Fox Business channel. Here’s his bio.

Famous for the theory “The Laffer Curve,” which he didn’t invent but did popularlize, he’s famously upbeat.

He’s always optimistic about the future of the country and the benefits of American-style capitalism — though trillion-dollar deficits, the current spike in inflation and a looming recession may have put an end to that.

I met him in 1979 in LA in his office at USC when I was doing an article on the underground economy for the LA Times and I interviewed him by phone in 2005 for the Pittsburgh Trib — when he thought the economy was doing great and the American voters understood why.

Q&A: Art Laffer

Pittsburgh Trib

Feb. 5, 2005

Last time I talked to economist Arthur Laffer was in 1979 when I interviewed him at the University of Southern California in Los Angeles.

In those miserable economic times, before he was dubbed "The Father of Supply-Side Economics," Laffer was considered a kook by the liberal econ-establishment for pushing his idea that by cutting taxes governments can simultaneously stimulate economic growth and put more tax revenue into their coffers.

Today his famous "Laffer Curve" is no longer ridiculed, and the former member of President Reagan's Economic Policy Advisory Board is famed for sparking a worldwide tax-cutting revolution.

I talked to him in the winter of 2005 by telephone from his home in San Diego. Though into his 80s, he’s still a regular on the Fox Business channel.

Q: What do you think of President Bush’s Social Security reform plan?

A: I think it’s terrific. It’s a continuation of the policies started by Reagan and worked in by Clinton as well of moving from a defined benefit program to a defined contribution plan, which is the way it’s got to go.

Q: Does it have any big weakness or big strengths?

A: The plan itself does not. The Social Security system itself does. It has a huge unfunded liability, as you know, and it’s hard to paper that one over. That’s a real problem and how you address it maybe mitigates the pain, but you have a real problem.

Q: Does it go far enough for your taste or is that the best Bush can do given the political realities?

A: It goes plenty far for my taste, although it has to go further later on. But these things are gradual in a democracy and this administration is taking one step further to moving us to a defined contribution plan, which is the correct way to go. People must be responsible for their own retirement. You can have a welfare system on top of that for people that don’t make it. But for the general retirement system of a country, individuals must be responsible for their own actions and their own savings.

Q: Someone here was raising concerns that all this money being given over to the federal government would pose a problem because the government’s power would be so great and would distort investment markets.

A: When you’re dealing with the U.S. today, those numbers are huge. What’s the alternative? Having the government run it for you? It’s not as though there is any system that has no flaws. They all do.

The question is, Are you better at running your own retirement system or is the government better at running for you? That’s really the question. Now the government has run it with a huge unfunded liability, because they spend all your retirement, and understandably so.

I’m not criticizing them for that. They spent it all and they have none left, and yet they owe you all that retirement money– and that’s the unfunded liability. Would you like to start the system afresh and make it so at least you have the counterpart of investment? It’s your choice, but yeah, I would. I’m 65 and I’m past the stage where it matters to me. If I were your age, I’d love to do it.

Q: Hey, I’m 57.

A: Well, if I were your kids’ age.

Q: What grade do you give Bush on economics?

A: I’m really shocked by it. As you probably know, I was not a fan of his father’s. I voted for Clinton twice. I really thought (Bush the elder) and Bob Dole were tax-collectors for the welfare state. The reason I voted for Bush W. was more Al Gore than it was Bush. And now I am just totally a fan. This guy is just incredibly good at economics.

Q: You are not concerned about the big deficits or the steel tariffs?

A: Oh, the steel tariffs are terrible. They’re embarrassing. By putting on steel tariffs, what you do is cause U.S. companies that buy steel to pay higher prices for lower quality steel.

Now you tell me what happens to the American automobile industry and the other products that use steel as an import? I’m from Youngstown. Born and raised in Youngstown and I know steel pretty well. It does not help America, it doesn’t help steel and it doesn’t help Youngstown. It hurts everyone.

Q: How do you define your politics?

A: I’m pro-growth. I’m Democrat when Democrats are into pro-growth and I’m Republican when they are. I vote the issues really hard-core and they’re all economic issues. That doesn’t mean that I don’t have strong views on social issues. That’s just not where government is involved in my life.

Q: The biggest economic issue of the moment?

A: Right now, gosh, I don’t know what it would be. I like low flat-rate taxes. I like sound money. I like free trade. And I like minimal regulation for serving social purposes. That’s it.

Q: Is that a definition of supply-side economics?

A: What it is is the supply-side definition in each of the major areas of macroeconomics. There are four areas of macroeconomics: fiscal policy, monetary policy, trade policy and a sort of catch-all, incomes policy.

Those are all the indirect ways government affects business – regulations, restrictions, minimum wage, wage and prices, etc. Those are the four areas that we as macroeconomists have divided the world. Everyone wants taxes and everyone wants government programs, me included.

The question is, how do you do it the best way possible.

So (I favor) a low flat-rate tax and no government intervention where government doesn’t do a better job. There are not many areas. But on trade, you want free trade, literally except when you’re exporting nuclear bombs to terrorists.

And for monetary policy, you want a very stable sound money that maintains its value over time. Regulations are wonderful. You can’t have everyone driving on whatever side of the road they choose this morning. But you want to make sure you have the minimal amount of disruptions so it’s not used as a tool to really hurt business.

Q: What’s the most prevalent and most dangerous economic myth that the public believes that needs to be debunked?

A: Bottom line, I think the public’s got it.

Q: Really?

A: I’m really impressed with the public. I wrote a paper a long time ago about how the Republicans would win the 2004 election, but I didn’t really believe it. I believed it from my analysis, but I didn’t really believe it in my heart. When I saw the polls, and when I saw Bush sweating at the debates....

But you know, it works out that the electorate really sees through all this crap. They understand free trade. They understand low-flat-rate taxes. They understand sound money. The electorate is really cool. I’m superbly impressed by democracy – and I’m not natively that way inclined, just so you know.

Q: One of my questions was whether the public and its leaders were getting smarter or stupider in economics.

A: They’ve been great. Look at what’s happening. Since that ’79 interview we had, OK, let’s take a look at what happened to marginal tax rates. The highest rate has gone from what -- 70 percent -- down to what -- 35 percent?

What’s happened to inflation? What’s happened to regulation restrictions? What’s happened to America and the world? What’s happened to the stock market? What’s happened to everything you and I believe in.

Bill, it’s been wonderful. Do you remember what unemployment rates looked like back in 1979? Do you remember what the prime was when we came into office on Jan. 20, 1981? It was 21 percent prime. Tell me it’s not a wonderful world.

Q: This is a happy economist. It’s not dismal at all, is it?

A: I can not believe how wonderful it is. When Bob Mundell and I sat there at the University of Chicago in 1967, ’68, ’69, we dreamt of a world. That world is now. Can you imagine a world with no inflation? Everything that’s happened. It’s absolutely spectacular. I’m just so happy about what’s happened to this world. Don’t you feel that way?

Q: I’m a libertarian and I’ll probably never be satisfied. But I think in economics a lot of people have gotten a lot smarter over the last 20 or 30 years.

A: If you looked at (House minority leader) Nancy Pelosi and you looked at Sen. Harry Reid last night, they looked really, really uncomfortable. They were running everything in 1979.

They had the President, the Senate, the Supreme Court, the Fed chairman. They had every damn position in the world. They had everything -- the states, the houses, the governors. It was a Fabian redistributionist nightmare.

Now it’s really beautiful! I’m an old man, and old men are supposed to be curmudgeons and hate the modern day and love the ancient. But the truth of the matter is, we’ve won.

I had to quit teaching because my students would laugh at me, and ask, “What was inflation like, Professor Laffer, back in your day? What were the taxes like?” And I tried to explain to them, but they didn’t get it.

Q: What’s something that’s true about economics right now that every layperson should know about?

A: If you tax people who work and you pay people who don’t work, do not be surprised if you find a lot people choosing not to work.