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Original Video: https://www.youtube.com/watch?v=g6ZAvi1hWYo
Economist Art Laffer is best known for the Laffer Curve and his work as a member of President Reagan’s Economic Policy Advisory Board for both of his two terms. Dr. Laffer also advised Prime Minister Margaret Thatcher on fiscal policy in the U.K. during the 1980s. He has been a faculty member at the University of Chicago, University of Southern California, and Pepperdine University. Often referred to as the “Father of Supply-Side Economics,” he is the founder and chairman of Laffer Associates and co-author of the 2018 book Trumponomics: Inside the America First Policy to Revive our Economy as well as The End of Prosperity and The Return to Prosperity. In speaking with CEO Jennifer Grossman on March 31, 2021, Laffer covers a whole range of topics, including his defense of Trump’s trade policy (making the distinction between negotiating tactics and actual protectionism), why he’ll never forgive George Herbert Walker Bush for raising taxes, his previous work with Jerry Brown and Bill Clinton, and his radical proposal to put all elected officials on a commission plan to incentivize pro-growth policies. Watch the interview HERE or check the transcript below.
JAG: Hello everyone, and welcome to the 45th episode of The Atlas Society Asks. My name is Jennifer Anju Grossman. My friends know me as JAG. I'm the CEO of The Atlas Society, which of course is the leading nonprofit introducing young people to the ideas of Ayn Rand in non-boring ways like our webinars, our living history events, our graphic novels, and our animated videos. So today is a big, big privilege. We are joined by Dr. Art Laffer. And of course, I want to give all of you the opportunity to ask Dr. Laffer your questions directly. So you can get started, get first in line by typing those questions into the Zoom chat. Of course, if you're joining us on Facebook or YouTube, just write them into the comment section.
JAG: So, Dr. Art Laffer has been called the Father of Supply Side Economics. He is the recipient of the Medal of Freedom Award. I was actually honored to be able to attend that ceremony. He is, of course, famous for the Laffer Curve, which we're going to discuss a little further in the interview. He was a member of President Reagan's economic policy advisory board for both terms. And he was also an advisor to Donald Trump's 2016 presidential campaign. He and our previous webinar guest, Steve Moore, co-authored the 2018 book, Trumponomics: Inside the America First Plan to Revive Our Economy, as well as many other books, including The End of Prosperity and The Return to Prosperity, which I've been listening to on Audible. So, Dr. Laffer, welcome again, thank you so much for joining us.
AL: Thank you, JAG. It's a real pleasure to be with you.
JAG: So, okay, let's start off with the Laffer Curve. The Smithsonian Institute has the napkin where back in 1974—hard to believe it, I also want to know what you do to keep looking so young—you outlined what, of course, became known as the Laffer Curve. Can you tell us, explain briefly for the uninitiated, what is the Laffer Curve and maybe a bit more about the circumstances behind that famous napkin?
AL: Well, the Laffer Curve precisely is when I stand up and then turn my profile. That is the Laffer Curve that you see in the profile there. No, seriously, the Laffer Curve just shows the relationship between tax rates and tax revenues. It's a very straightforward thing. I didn't invent it. It was named by a guy named Jude Wanniski. He listed it, of course, as the Laffer Curve. And, it's been around for at least a thousand years. They know it was in The Muqaddimah by Ibn Khaldun and references throughout time, but it'd been forgotten in the fifties and sixties and seventies; in tax theory, at least, it had been almost totally, completely forgotten. And what it does is it shows that, you know, there are always two tax rates that are associated with the same tax revenue. Now, this is a pedagogic device I'm going to describe to you, not a literal numerical representation of some country. But, the bottom line is that at zero taxes, you're not going to collect any government revenues. You may have a lot of output and a lot of production, a lot of income, but at zero tax rates, there'll be no revenues. And likewise, at a one hundred percent tax rate there will also be no revenues because there's no incentive for people to work or produce. And so, therefore, there’ll be no revenues. And between those two points what you find is as you lower tax rates from the high level there, sooner or later someone will start to work and start paying taxes. And likewise, if you raise tax rates at the lowest point, you'll start getting some revenues as well. And, it'll map out this curve. I did it with a very linear demand curve.
AL: So it's really simple. And, I just did it as a pedagogical device to show to my students that there are two effects taxes have on revenues. One is the arithmetic effect, which is obvious: if you raise tax rates, you collect more revenue per dollar of tax base. But, then there's the economic effect, in which if you raise tax rates, you reduce the incentives to produce, and there'll be a smaller tax base. And those two always work in opposite directions. And sometimes, the tax rate effect works, and you're in the normal range of the Laffer Curve, and sometimes the tax base effect works and dominates. And then you're in the prohibitive range of the Laffer Curve. And politicians had forgotten all about this. So they assumed every time you raise tax rates by 10%, you would get 10% more revenue. And, that's just plain not true. Now sometimes one wins, sometimes the other, we have to measure to do that. But this is just to illustrate a principle to politicians so they don't go way off the deep end. But as you can see, they still go way off the deep end <laugh>.
JAG: Yes. And it looks like they're going to go even further off the deep end and take us with them soon. You'd mentioned Jude Wanniski. And, this upcoming interview re-inspired me to go back and reread Jude's book The Way the World Works, which I was delighted to see you called one of the greatest, if not the greatest book, on economics ever written. I had first read it at the time when I was the senior writer for the National Commission on Economic Growth and Tax Reform. And I had the opportunity to write their final report. My biggest takeaway from that experience was this chart, which we included, which showed the fluctuation of the top marginal tax rate throughout the decades, and then also matched that against the level of revenues as a percentage of GDP, and what struck me was that it was like 18%. It really remained constant. And so, is that kind of a reflection of the Laffer Curve, and is that sort of 18% level something that we can expect?.
My problem is I'd like to see poor people become rich, not rich people become poor. That’s the way I'd like to see the world go.
AL: If you remember Jude called that the Hauser Constant, I think he called it back then the Hauser Constant because that straight flat line, we went from tax rates of 92.5% to tax rates of 28%. And, yet still it's always 20%, 18% or 19%, whatever it is there. Yes, that's an illustration of it. I mean, that's an illustration of the two effects. And, if you got into that illustration now, if you did a time series analysis of that curve and tax rates you would find that the Laffer Curve was alive and well throughout the whole period there. If whenever you propose to raise tax rates you reduce the tax base by at least the same percentage and don't collect any more revenue, why on earth would you ever raise tax rates? Why would you do that? You just don't like rich people? I love rich people. My problem is with poor people. And, my problem is I'd like to see poor people become rich, not rich people become poor. That’s the way I'd like to see the world go.
JAG: You know, we are going to continue to replenish the population, hopefully. We're going to continue to have young people graduate from college or decide not to go to college, start off in the world, and they're not going to start off rich. Right? And, to the extent that we're also welcoming immigrants—we've always been a nation of immigrants—they're going to come here from Somalia or wherever, and usually they're not going to come with a great deal of wealth. Sometimes maybe they will, although why they would want to right now, I'm not sure. But, usually, yes, they're going to be people coming from desperate circumstances. They are not starting out with large wealth. And as long as that is always part of the equation, I think these kinds of comparisons of inequality are really not taking that into account.
サプライサイドの新自由主義は、確かに代替案に勝てる
JAG: It's not sort of an institutional, fundamental poverty level. There's so much mobility as you have rightly pointed out. But getting back to this, I've been looking at this data, it seems like it's pretty obvious. It seems like it's been demonstrated. So, yes, getting back to your question: why would, if all you wanted to do, and you didn't really care about economic growth, you just wanted more revenues for government, you just wanted to spend more, wouldn't you want to have 18% of a larger base? You'd get more revenues that way. So where's the disconnect? Are they looking at different data than we are? Or is it really as I think we might argue at The Atlas Society, that it is a desire for the unearned, it is evasion, and it is envy?
AL: Well, it may be all that, but I don't think the taxes that are in their realm are viewed the same way. We look at taxes, and there are three things you sort of talk about, taxes and redistribution. You talk about them with regard to revenues. You talk about taxes with regard to punishing people. And I think those are the three sorts of ways. We tax cigarettes now. And, why do we tax cigarettes? Why do we tax speeders? Why do we tax people who drink alcohol? We do it to get them to stop smoking, to stop drinking, and to stop speeding. That's why we do it. Now in the same breath, why then do we tax people who earn incomes? Why do we tax people who employ other people?
So taxing people who work and paying people who don't work is not a good path to provide prosperity for the society. It's just not.
AL: Why do we tax businesses that make great products at low cost and make lots of profits? Now, we don't tax them to get them to stop earning income. We don't tax them to stop employing other people. We surely don't tax them to stop making wonderful products at low cost, and all of that. But just because we use a different logic in why we tax doesn't mean that the same consequences don't occur, JAG, they do. And so when you tax people who earn an income, don't be surprised that people earn less income. When you pay people who are unemployed or low-income people, don't be surprised if that also discourages employment. So taxing people who work and paying people who don't work is not a good path to provide prosperity for the society. It's just not.
JAG: Yes. And, not necessarily a good path to provide revenues either. I was revisiting what you wrote in Return to Prosperity, which I think you wrote in the Obama years, in which you talked about the estate tax and that it brings in maybe 1% of tax revenues.
AL: Well, it's clearly in the Laffer Curve region; it's just terrible unless you catch some guy on an off day. Like John John Kennedy flying up to his cousin's wedding in Massachusetts in his plane, and crashed very young with his wife, both of them, then the estate tax nailed them. I mean, really nailed them. But most people who are wealthy plan, and they don't get their money. I mean, it's just a huge expense that probably doesn't even cover the expense of trying to collect it and the costs that it is to them. It's just a ridiculous tax. I mean, you can earn your income, you can pay your taxes fair and square. You can take that money and go to Vegas. You can gamble, you can drink, you can smoke, you can carouse. You can do all that.
AL: And that's fine as far as the federal government's concerned. Go for it. It's your money. But if you want to give that money to your kids—you rat. How dare you do that? I mean, that's the only reason I work. I'm 81 years old, Jennifer, and the only reason I work is I've got six kids, 13 grandchildren, and four great-grandchildren. And you may have kids, your friends may have kids, all of that. And they may be wonderful kids, but I don't want to work for them. I want to work for my grandkids, and I want to work for my great grandkids. And, well, not so much my kids anymore, but I'm just joking, <laugh>. But that's the incentive there. And when you talk about redistribution, I mean, I look at these guys, Saez, and Picketty, and San Chava and these others, and Zuckerman, and, you see all that crowd of redistributionists, it's such silliness.
AL: Because, you know, whenever you raise that highest rate—I've got a book coming out with Brian Domitrovic—and, you know, whenever you raise tax rates, if you look back at when taxes were high, what you find happening is that the distribution of income doesn't get better. All they do is hide their income. And all that happens is the poor are just hammered. I mean, they started the big high tax rates in 1932. The highest rate was raised from 25% to 63%. Is that a good enough raise for you? They really wanted to get you, then they raised up to 79%. By the time we got to the end of the war in 1945, the highest rate was 94%. Now, what do you think happened to the poor, the minorities, the disenfranchised, everyone? It ruined everyone's lives. It was the worst period in human history. And that they want to go back to because they think that's when incomes were equal. Well, what you know is that when you do those taxes, if incomes were equal, it'd be equal to zero. So everyone suffered equally. No, that's not what we want.
JAG: Yes. So, talking about going to Vegas and all of the things that one does in Vegas in one of your books, the Handbook of Tobacco Taxation, you wrote that tobacco policies should be levied, the taxes should be levied locally, not nationally, not internationally. And, apparently the World Health Organization has a goal of worldwide 70% excise taxes on tobacco. And of course, our confidence in the World Health Organization has been a bit shaken over the years with the handling of the pandemic and the policies that they want us to follow again at these larger national or even international levels. Why is it important for us to try to locate taxes and the regulations even at the most local level?
AL: You know, the tobacco taxation book is one of the most fun ones I've ever had. I'm not a smoker. I'm not a big fan of combustible tobacco products. I don't like lung cancer. I think there are a lot of very associated diseases with it there. So, when they asked me to do the book, I was like whoa, yeah. <laugh>. But they gave me full authority. You know, why I would do such a book is very obvious. I mean, there is no product on Earth that has in every different form, shape, way, country, they've tried everything with regard to tobacco taxation. I mean, they tax cigarettes per unit in Poland. So they got six foot cigarettes with little dotted lines where you could cut the cigarette <laugh>, you know, and smuggling in Ireland, they raised the taxes in Ireland, smuggling.
AL: The revenues went way down dramatically. And everyone still kept on smoking the same amount, although it was all contraband, illegal. So, you know, this is just great, great. They had the one there that they did, taxing cigarette tobacco, but not cigar tobacco. So they packed cigarette tobacco in cigars. And, so they'd slice 'em open. I mean, it's the miraculous wonders of human ingenuity. That just is amazing. You know, they did it by states. You can see it all the way, and it's just great stuff. So that's why I did that. But it really illustrates all the principles, all of 'em really clearly. It's just beautiful, beautiful stuff. And, the one I'm going to mention to you here, and I hope your friends who are on the line understand, but they have a product:
AL: Philip Morris International has a product coming out, not coming out, it's been out for nine years now. It's called IQOS. It's called a heat stick. Now, it's a warm tobacco product, not a combustible product. So, therefore, the carcinogens are really low now. It delivers the flavor and the nicotine. Someone should go there and look at the science and PMI website over there in Lausanne, Switzerland. And look at this thing. 25% of all of Japan have shifted now to non-combustible, warmed tobacco products, getting the nicotine, getting the flavor, but not the carcinogens. And you should see what's happening to this. Now, the World Health Organization, Billy Gates and his buddies are all against it, but, you know, this is the type of ingenuity we need to find healthy products. You know, there are a lot of things out there that just need to be made healthy with that information.
AL: And tax policy can influence that and does. But you know, when you have this big clump of a wet blanket place and everything, you allow for no variety, ingenuity, or any of that stuff. So, I loved doing the book. I just loved it because it was so fascinating. But, as I said in the introduction, I made them sign a thing that I had total authority over the product, over the content. You know, my mom died of lung cancer. She was a smoker. Three packs a day. And I mean, look at the tobacco, the cigarettes didn't pop into her mouth, light themselves, and force it to go down her lungs. I know she had a choice on that. But, I still don't like 'em. But the product, the responses there, that tobacco taxation book, I didn't know you even knew about it, but that was one of my technical pieces and, you know, you'll love it, that stuff in there is really fun stuff.
JAG: It really, really is. I would highly recommend it. And, maybe if we can, our gremlins here can put some of the links to Dr. Laffer's books in here. That would be great.
AL: Some of 'em are really boring, Jennifer.
JAG: I learned that you—and I fell down on this—I didn't tell you that I was in Malibu, so you didn't tell me that you were coming to Malibu because I would've hosted a party for you. And, of course, you were coming, maybe not back to Malibu, but you were coming back to California because you left California, and are now in the city where another one of The Atlas Society's supporters and a previous webinar guest, Andy Puzder, decided to call home.
AL: I got him to move here. I've known Andy for 40 years now, 35 years, and I got him to move here. It's so, I mean, as Larry—
JAG: And I failed to get him to stay in California. So, now we know who really is—
We're the fastest growing state, one of the fastest growing states in the nation. One of the lowest property taxes, big surplus. Our pension funds are fully funded.
AL: Let me give you a great quote from a Nashville resident, Larry Gatlin, if you know the Gatlin Brothers. ”It ain't rocket surgery.” <laugh>, we have no income tax here, either earned or unearned. We have no death tax. No gift tax. We have the eighth lowest property taxes in the nation. Now we do have a big sales tax. That's true. Alright. But you know, this is the third lowest tax state in the nation. I think the lowest. I mean, what's not to love? Now we don't have the buildings of New York City. We don't have the beaches of California. We don't have the sailfish fishing down in Florida. We don't have the big mountain with the faces up like South Dakota does. But, you know, we're the fastest growing state, one of the fastest growing states in the nation. One of the lowest property taxes, big surplus. Our pension funds are fully funded. We've had the biggest improvement in education of any state in the nation. Fourth grade math, reading; eighth grade math, reading. And we've had the biggest reduction in the differences between black and white educational outcomes of any state. But other than that, we're really rotten. I mean, we're not very good. It's just exactly what—
JAG: You— <crosstalk> and you have the music. So we have that.
AL: I do love the music. Do you? No, you're not, you're not a country western person.
JAG: No. I am. But, I just still can't let go of my Malibu view. And I feel like somebody has to remain here.
AL: So are you in Point Dume, or are you in Point Dume, or where in Malibu?
JAG: No, I'm actually really close to Pepperdine, so—
AL: Oh, really? On the hills. I'm just—
JAG: Yes. On the hills, looking out at the ocean. So that's why next time—
AL: My favorite singer of all time was at Point Dume on the beach there. Do you know Linda Ronstadt?
JAG: Of course!
AL: I did. Blue Bayou—I loved. Oh, I just think she's wonderful. I'm in love. You know, I did Jerry Brown's Flat Tax when he ran for president. Jerry's one of my dearest friends. And, you know, he used to date Linda Ronstadt, and I've got some great stories, but that's probably for another podcast. Let me tell you what Jerry Brown ran on, just so all of your friends can see it. It’s not Republican, it isn't Democrat, it's economics. Jerry Brown ran on getting rid of all federal taxes, all of them. Alright, well, one exception. He kept the sin taxes. And, the reason we have sin taxes is not so much to raise revenues as it is to change behavior. I jokingly say we Americans don't like drunk people smoking while we shoot each other <laugh>.
AL: But, then he got rid of all but two flat rate taxes. One in business net sales. If you're a Democrat, you call that value added. And, one on personal unadjusted gross income. Again, from the first dollar to the last dollar rates, no deductions, no exemptions, no exclusions. Two flat rate taxes. If you did that, static revenue neutrality. Now this replaces all of them: income tax, capital gains tax, the death tax, the payroll tax, both employer and employee Medicare, Medicaid taxes, excise taxes, tariffs. It gets rid of everything. If you did that, you could have a tax of 11.8% on each of those; it would replace all federal taxes, all of them including the gas tax and all that stuff. I mean, what's not to love? So he ran, he raised it 1%. He went to 13%. We went from eighth in the race in the Democratic primary in 1992—
AL: We went from eighth in the race, JAG, to second in the race. We had that blue-eyed fellow from Hope, Arkansas, in our crosshairs; we had that guy, we had just won the primary in Oregon, and we’d just won the primary in Connecticut. We're coming to New York and California, and we had him dead to rights. The polls were closing. We were just going to smash him. And, then Jerry announced that Jesse Jackson's his running mate. And somehow that didn't work out well in New York or California. But, bottom line, we still got the second largest number of delegates in the Democratic primary in 1992. I mean, everyone loves good economics. Everyone does, except for the politicians because then they don't get the control.
JAG: And yet, you know, with Clinton, winning that wasn't something that you were that distraught over, I mean, as you mentioned before, you are not a partisan, not Republican, not Democrat. You've never been someone—
AL: But, you can't vote for George Herbert Walker Bush after he raised taxes after Reagan. I mean, come on.
AL: I voted for Clinton.
JAG: I worked for him. So, you know.
AL: Well, that doesn't mean you have to.
JAG: I didn't have to. That was before my time when he reneged on Peggy Noonan's beautiful line and was—
AL: I was the guy in the TV thing that night in the convention, “Read my lips, no new taxes.” That's the line you're talking about. Sam Donaldson had me centerline and that was his promise to me personally. And, he broke it. And, you know, I can understand politicians. I never thought of them as the straightest shooters in the world. But when you do something like that, I mean, that's just a little hypocritical, no?
JAG: Yes, I agree. And that's why we love Grover Norquist. He's been on this show, and he's just been such an important, not only, advisor to The Atlas Society, but he's working absolutely every day in every single state. And that tax pledge has just been such a powerful institution, really. And I think in a way, what you're saying, even though I was sad, I lost a job—
AL: You've done enough. Good job. Much better. You're the executive director of The Atlas Society.
JAG: Yes. And I actually went on from that job working at the White House to working for Ted Forstmann. And that's how I met—
AL: Ted Forstmann was my classmate at Yale. And, I'm a shareholder, I'm an owner, part owner of some of his companies, of a bunch of his companies. I see and talk to him all the time. I knew all three Forstmann brothers. They were great. Just super. What more could you want? You had a great job.
JAG: True. That's true. All right. So, somebody went back on the most important pledge and that, you know—
AL: He thought it was wrong to have made the pledge. The problem with him is he thought that the mistake he made was he made a pledge. Rather than the mistake was he didn't keep his pledge. That's the problem. Nancy Reagan—Michael told me this story—she came down and she said, “Oh, did all of you hear the news? Michael said that George Bush just raised taxes. Did you hear that?” And she just says, “he's our Carter.”
JAG: Yes. <laugh>.
AL: I mean, you know, there's nothing worse than one of the—
JAG: Don’t speak ill of the dead.
AL: Well, they're all dead now. I mean, come on. Someday you'll hear this quote from an Atlas Society video archive, and we'll all be dead. But it'll still be funny.
JAG: Yes, I agree. But, as I mentioned, rereading your Return to Prosperity and listening to your very compelling argument against tariffs, even against not supporting tariffs against people whose policies were, we find, very objectionable, that we want to pressure them. That you're saying tariffs aren't the way to go, trade is the way to go. Then you also advised President Trump, and we tend to think of his trade policies as very different from the ones that you recommended. So, is that a misperception?
AL: Let me go through this with you, if I can. Trade is my specialty area, and, my book, International Economics, is the big textbook in that. And, I did my dissertation in this area and all that. Let me, if I can say that trade is one of the most complicated, arcane, mathematical fields in economics, by far. And it's very nuanced. For example, no one wants to trade nuclear weapons with North Korea. No, no one wants to do that. We raised all of our revenues for the federal government up until 1930. Not all of them, but a vast majority of our revenues, federal government revenues, came from tariffs. That's a perfectly legitimate use of tariffs there. What you don't want to do is use tariffs for trade policies to protect industries. Now, what Donald Trump did with his tariffs, and I don't know if you'll want two minutes of how he explained it to me.
JAG: Yes, please.
AL: Let me give you how he explained it. He called me right at the beginning, and I talked to him a lot, but he said, “Look, I'm a free trader.” And, I told him, I've known him for a long time, I said, “I know that, I know you are a free trader.” He said, “yes.” And I said, “You know, anyone who runs an international company the way you have the Trump industries through all the hotels, et cetera, has to be a free trader. I know of no CEO of a major international company that's not a free trader. They always want to find the cheapest places to source their supplies, the most expensive places to sell their products. And that's how they make it. And governments just screw that up and they make it bad.” And I know that, and I told him that's very, very true. Plus I said, ”Anyone who's imported two foreign wives has to be a free trader.” That was a joke. He did not laugh.
JAG: That's a good one.
AL: He did not laugh though. But I said, “Yes, a free trader.” He said, “But, let me just tell you the problem I have is how do I explain to them that their tariffs hurt them? And us? You know, of the big countries, Arthur, we are the freest trade country. They're the big ones. Now, there's Isle of Man and Jersey, Guernsey and Sark, and whatever these are, who are more free trade, but we're the freest trade. And Japan and these other traders use protectionism all the time.” You know, he said, “to sell a car that's road ready here in the US, to sell it in Japan, so it could be driven on Japanese roads, would cost about $50,000 to get around non-tariff barriers. It's just awful. They manipulate currency. They do all this. And how do I get to them to get them to negotiate for your trade?”
AL: And you know what, he was making sense. He said, “Look, the only thing they care about is their exports here. So I'm going to threaten the bejesus out of them. I'm going to threaten their markets here and get them to come.” And, if you look at what happened with the USMCA, or you looked at what happened with South Korea, even Japan, to some extent, they did do freer trade, in that South Korea did a lot freer trade. But he said, “I'm using this as a tool to negotiate a better one.” He is a negotiator. I am not. Now, in the one G7 meeting that he had in Ottawa, he was going to Singapore to meet with Kim Jong Un. Remember when he met with Kim Jong Un, head of North Korea? There, he had the lead.
JAG: The body language in that meeting was really something to watch.
AL: Well, there were two bodies there. They're big ‘uns <laugh>. And I shouldn't talk that way. That's body shaming. I don't mean to do that to people, especially if you could see, well, I should be body shamed more than anyone.
JAG: You look marvelous.
AL: Well, thank you. Thank you. Marvelous. Thank you. But he said, he’s at the G7, and he apologized to everyone there, the other six members there, “I've got to leave. I've got to go to Singapore, and please forgive me, but I've got one thing to tell you.” And this is true. He said, “I have one thing to tell you before I leave. And just one thing: I will right now promise to get rid of all tariffs and non-tariff barriers in the US if you guys will agree to do the same thing in your countries.” And they looked at him, went <whistle sound>.
Without China, there would be no Walmart. And without Walmart, there would be no middle-class or lower-class prosperity.
AL: This man, I believe, is a free trader, but he's a negotiator. Mm-hmm. <affirmative>. And, you know, trade is so nuanced that when you look at trade, what you want to do is look at what you expect the outcomes to be. Now, to protect a domestic industry so you can get profits in a very inefficient company or business—that's wrong, wrong, wrong. And when you ever hear me talking about this, what I'm talking about is not protectionist of domestic industries, but, using it for political purposes, using it for revenues, for running government. And if I can just finish on the trade stuff without China. JAG, without China, there would be no Walmart. And without Walmart, there would be no middle-class or lower-class prosperity. Have you ever gone into a Walmart? I'm a gardener, and they had all these different types of shovels, long skinny ones, big fat ones, scoopy ones, all these things there.
AL: And they're beautiful. They're perfectly made, 20 bucks each. I just tried to sit back and think of how much would it take me to get something that's a 10th the quality of those things. I mean, trade is wonderful, and having foreign investments in our country is wonderful. China owns about 1.2 trillion of our national debt. Now, let me just explain this number. They own about 1.2 trillion of our national debt. They pay us to lend us the money. Their interest is way less than 1%. Inflation's much higher. So they're giving us the money and paying us for taking it. And how do they get rid of it? They don't want that debt to go to zero in value. They've got all these companies in the US operating, they're our biggest cheerleaders on having us do. You know, be very careful because without China, we're in real trouble.
AL: I mean, we just prosper enormously. Now, do we need to get agreements and military and political stuff? Sure. But, you know, be very, very careful how you treat them. And, make sure you don't pow yourself in the head in some sort of gunga din moment of falling down on the dung heap, dead. I don't want to kill Americans, no matter what the principle is. And I'm really worried about this administration. And I was not worried about Donald Trump. I think Donald Trump understood exactly what I just told you. And, you know, I'm a free trader beyond free trade. And I thought he did a great job on trade and trying to bring them to the table to get them to cut their tariffs.
Basic Truths of Saysian Economics
JAG: That's a really important distinction that I think too many people just lose. That he was a negotiator, a deal maker, first and foremost, and that this was—
AL: He scared part of the bejesus out of me. Have you ever negotiated, JAG? I'm a wuss. I'm a wuss. You know, the first thing I do once a negotiation starts, and it gets tense there, I start getting all nervous. I roll up, I curl up in a fetal position, I crawl under my bed, and I start crying. If I have a fallback position, I immediately blur out my fallback position before the <inaudible>. I'm no good at negotiating. But he is good. I mean, he's really good.
JAG: That's something I will keep in mind. When we eye down the road bringing you on board as another Senior Scholar at The Atlas Society. I will file that away.
AL: And, Donald Trump, you'll be amazed. Why don't you have him on?
JAG: Well, we will, I'd love to. . Do you have his number? <laugh>?
AL: I do, as a matter of fact.
JAG: Okay. Alright. Well, we'll talk about that afterwards. And, one of the first questions that I would ask him, I don't know if you know this, Art, but, when he was asked in April of 2016 by USA Today, what his favorite book was and who his favorite author was, he mentioned Ayn Rand and The Fountainhead, and gave a sort of involved answer about how, for him, it related to not just building things, where you could understand why he liked the book from that regard, but to beauty and to inner emotions. Anyway, then I would get friends, even friends that were relatively non-antagonistic to Trump, like John Fund saying, “Oh, you know, he never read the book.” And, I said, “You know what, if you were going to, just on the fly, come up with a book that you wanted to tell an interviewer that you had read, you would not say, Ayn Rand.”
JAG: Right? Because she's relatively so—she's controversial. But I bring that up because we have, speaking of Senior Scholars, questions, and I want to get to these questions. Our Senior Scholar, Richard Salsman—we actually reunited, he and I, at your ceremony at the one that Steve Forbes hosted across from the White House—Richard Salsman has a question for you, and that is: have you, Dr. Laffer, ever thought about the rather close relationship between Ayn Rand's theme in Atlas Shrugged, shrugging and the prohibitive range of your tax curve? In short, the top producers will shirk or quit if you punish them.
AL: Yes. It's all the same principle of incentives. I mean, economics is all about incentives. And, there are two types of incentive. If I can go to the 30,000 foot pace mm-hmm. <affirmative>, there are two types of incentives. There are positive incentives and there are negative incentives. By way of illustration, if you feed a dog, you know exactly where the dog will be at feeding time, right where you put the bowl. Okay. Positive incentives tell you what to do. Then there are the other incentives, the negative incentives. If you beat a dog, you know where the dog won't be. It won't be where you gave it the beating, but you have no idea where it's going to go. It's going to, well, take off. Negative incentives tell you what not to do. Do not put your hand on the hot stove. The hot stove doesn't care where your hand is, just not on it.
They'll cause people to evade, avoid, otherwise not report taxable income, move to different jurisdictions or just go out of work.
AL: So negative incentives tell you what not to do, and positive incentives tell you what to do. Now, the government can influence these incentives dramatically because if you tax something, people don't like that and they avoid taxes. Now, the thing is, you don't know how they avoid taxes. Taxes are a negative incentive. They'll cause people to evade, avoid, otherwise not report taxable income, move to different jurisdictions or just go out of work. But you don't know how positive incentives tell you what to do. You know, what Ayn Rand does, I think beautifully although she's wordy <laugh>, she’s got a lot of words in those books—they were really big fat things, and I'm just an old mathematician—but, she describes these incentives so beautifully. The one I loved most of all was Harrison Bergeron.
JAG: Yes, it was a play. I think it was also made into a movie about putting disincentives on the abler people, right?
AL: Yes. And I'm an older person. Yes, it's Kurt Vonnegut. And there he has, we had to put little nemo diodes in your brain to stop you from being smart.
JAG: Right.
AL: If you're pretty, you know, shorten your legs, chop your knees off and put a little bend in there and make it shorter. I mean, it's just a beautiful, beautiful story about the whole thing. And, that is Ayn Rand, and it's the pathos. It's the human spirit and it's the love.
JAG: How could you not love her love stories? I also think the romance, the glamor, the sex appeal. All right, I am going to get in big trouble if I don't get to some of these questions, because we've got a ton. We have record registrations on both YouTube and Facebook.
AL: You know, I don't even have a computer, so I don't do email. And I have a flip phone.
JAG: You don't have to have a computer.
AL: I don’t even know what YouTube or Facebook is, but go ahead.
JAG: All right. Jim wants to know, do you think we will see the seventies style inflation with the massive dump of money and tax hikes by the government?
AL: So far, I do not see any of that happening. Nor do I really understand fully the logic. This is a different world than the 1970s. When I wrote that piece in the Journal, “The Very Bitter Fruits of Devaluation,” I said, we'd have double-digit inflation. I got Samuelson and Friedman and all of them told me I was way wrong. I didn't understand economics. And we did, you know, when you have those types of things. But the mass dump of money today is a very different money than we had in ancient times where you would've had inflation if there'd have been a quadrupling of the gold supply. Believe me, you would've had inflation just like Spain did in the 17th century. You would've had exactly that. But, what's happened this time in the huge increase in the monetary base, is the Fed issues liabilities, $4 trillion worth of liabilities, deposits held at the Fed, and pays 30-basis points interest.
AL: And, then they buy government bonds from the banks. Four trillion's worth, they yield 30% interest. So I don't really understand how issuing 4 trillion in debt and taking on 4 trillion in assets, both of which are yielding the same amount, has any effect on anything. Now, if you ask me what does cause inflation, I'm going to be honest with you, I really don't know. I don't know. But I do not feel any sense that this should be the cause of it because we don't really have money in the old-timey sense. We have now cryptocurrencies that come in and replace gold. So even gold prices are falling, which falling gold prices are not a harbinger of inflation, and falling or very, very low interest rates are not a forecaster of high inflation. It's not, we don't have any of those inflation warnings coming. So my guess is that I wouldn't be surprised if we had inflation, but I have no reason to expect it's coming right now because there's just no sign of it. Is that fair?
JAG: Encouraging, it's encouraging. All right. This is a slightly technical question, but I think you'll get the gist of it. And it's the first one that was submitted, so it must be asked. And, also, from a donor, Jeffrey Kivitz. He is writing that he recently heard you, Dr. Laffer, make a point that we shouldn't compare a stock, the national debt with a flow, the current year's GDP. You said we should compare GDP to another flow, the yearly interest of the debt. And whether you could elaborate. Tell me what that means.
AL: This is old-timey Business 1. You never compare a balance sheet item with an income statement item. And you never compare an income statement item with a balance sheet item. You compare flows with flows, that's income statement. And you compare stocks with stocks. That's balance sheet. And when you look at the US federal government, it's no different. If you want to do it, you should never look at debt to GDP. because GDP is a flow and debt is a stock. If you look at that number, our debt's gone from 82.5% of GDP in 2017 or 18 or whatever it was. Now to 115% of GDP. Oh my god, I want to jump off a cliff. But, if you look at US debt to wealth, I don't know what the number is, but it's something like 16 or 17%.
AL: It's high and it's going up and it's clearly not good, but it's not jumping off the edge of the cliff. Now the one that's shocking is if you look at debt service, which is the interest we had to pay on the debt, and compared to GDP, it's half the level it was in 1981 when coming right out of the hyperinflation there. Now admittedly, interest rates are lower, but then don't you borrow more money at low interest rates? Debt is not the problem we have. The problem we have is redistribution. Can I spend a second on this with you.
JAG: Yes, please.
AL: Because it's just so, it's so that I don't understand it. Redistribution occurs when you take from someone who has a little bit more and you give to someone who has a little bit less. You with me?
JAG: Yep.
AL: You take from someone who has more and you give to someone who has less, and that's called redistribution. Now, by taking from someone who has a little bit more, you reduce their incentives to produce and they will produce a little bit less because you took a little bit more from them who made more. You with me?
JAG: Yep.
AL: Now, by giving to someone who has a little bit less, you provide that person with an alternative source of income other than working. And so that person too will produce a little bit less, this is just math, but I'm trying to do it in fun, intuitive terms. You follow me?
JAG: Completely.
AL: The theorem is really clear. No acceptance. It's a theorem. Whenever you redistribute income, you always reduce total income, period. That's math. And there's no exception. You can be liberal, you can be tall, short, fat, anything. You want to be old or young. It's a theorem. Now, the dilemma from this theorem is beautiful, too. The more you redistribute, the greater will be the loss in total income. You follow me?
JAG: Mm-hmm <affirmative>.
AL: The first one is, whenever you redistribute, you lose total income. The dilemma is the more you redistribute, the greater will be your loss in total income. And the limit function of this theorem is beautiful as well. The limit function is if you were to succeed in redistributing income completely so that everyone came out exactly the same, the theorem here says there will be no income whatsoever. Now, let me explain that to you, if I can.
AL: So it's fun explain to your group. In order to get everyone to come out exactly the same, what you have to do is you have to tax everyone who earns above the average income a hundred percent of the excess. You with me?
JAG: Yep.
AL: And, you have to subsidize everyone below the average income a hundred percent up to the average income. Now, if you actually did that, Jennifer, if you actually taxed everyone who made above the average income, 100% of the excess, and you actually subsidize everyone below the average income up to the average income, I'll stipulate today, counselor, everyone will come out exactly equal at zero. There will be no income. This is math. I don't give a damn what your ideology is. You can be the emperor sitting on the beach, the tide's coming in, he's going to get wet. It's math. You can be Paul Krugman, you can be Saez, you can be Picketty, you can be all these guys. They don't understand math. They don't understand these things. They are ideologues pushing a line. And I'd be glad to debate any one of these guys who claims to be an academic. You know, I was in all my classes. They were all in my classes telling me I got better grades. And they didn't, in the classes I taught, they didn't do all that well either.
JAG: Have you ever had the opportunity to?
AL: Well, they won't, they won't debate. Saez was going to, and then he said, “No, I would not do that. No.” I mean, they won't for good reason. I've got this book coming out, which is on when taxes were high. It's, as I said, it ain't rocket surgery. It's obvious. Can I have one second to go through what the results are? Whenever you tax a product, the price of that product rises to the consumer and the price of that product to the supplier falls. So taxes raise it. What they look at is they look at pre-tax, pre-reported distribution of incomes and show that the pre-tax reported distribution of incomes improve, quote unquote, they say improve, when taxes are high. All that means is that no one is taxed, no one reports their income anymore.
AL: They find lawyers, they find accountants, they find deferred income specialists. They find favor grabbers, lobbyists. When you see a group of people hanging with Obama, a group of them, don't think for a moment those are street people trying to explain to Obama what it's like being poor. No, it's not. These are tax guys from Goldman Sachs flipping back and forth doing their trades, their straddles, their whole stuff. You know, low-rate, broad-based, flat tax. Jerry Brown. There's nothing wrong with Warren Buffett doing what he does, but Warren Buffett in his letter said he paid 7 million in taxes in the year he, according to the Hague Simon definition, made 12 and a half billion. His effective tax rate was six one-hundredths of 1% legally. All great. I love Warren Buffet, and he's just doing what he should be doing.
AL: But if we had a low-rate, broad-based flat tax, he'd have paid what, 1,500,000,000 in taxes, and he would've loved it more, and he just wouldn't have had to use all the shelters and all the stuff there. These guys don't understand how you do a tax return. They don't understand this stuff. And, then we subsidize them with tax-exempt industries, which are called universities. They're 501(c)3s. Besides, they don't even know any of their contributors. They've never responded to an incentive in their life. And, Saez there, I think Saez’s income at Berkeley, it's like $400,000, if you look at the Berkeley spread. Hello, help us! Get rid of all of these tax-exempt organizations, have one lower-rate, broad-based flat tax and be done with it.
JAG: Okay. But until we do that, everybody, yes, until we do that—and I'm all with Dr. Laffer on this—but until we do that, remember The Atlas Society is a nonprofit, and you want to lower your—
AL: But, they would give to you, JAG, because of what you do, not because you're tax exempt.
JAG: No, I agree. I'm just, I wouldn't be doing my fiduciary duty if I didn't put in a plug. But, I agree with you. All right, we’ve got a question. Thomas Wright was asking, where is Dr. Laffer located? Well, that's good because we were talking about it back and forth. He thought you were located in Montana, but no, he is located in Nashville, Tennessee, along with our beloved Andy Puzder. Okay. Arthur Holtz, another one of our donors says, considering the incredible and disturbing governmental departments and infrastructures built up around huge tax revenues, what is the best way to reverse course? Would a flat tax help us to reverse?
AL: No, that one, the greed for revenue would always be there with this. Arthur Holtz, did you say it was?
JAG: Yes.
AL: You know, what a cool question. The way you handle this issue is the way you handle every other issue in economics. It's all about incentives, JAG. Now, if you're a politician, what are the consequences of you raising taxes and collecting more money? None. Absolutely none. I mean, if you look at two companies, company A and company B, company A has all of its officers and directors get paid very high salaries. They have no stock options. They own any stock of their own company. B is the exact same company, but the officers and directors have low salaries. They got a lot of stock options. They all own a lot of stock. Which one of those two companies would you rather invest in? The one where the incentives are aligned. Our incentives with our politicians are not aligned.
AL: You remember Jimmy Stewart, Mr. Smith Goes to Washington, remember the movie? Oh, it was wonderful. Comes there with a blah, blah, blah, blah. He's just imbued with, you know, helping a better altruism, all crying out there. And imagine he lowers the unemployment rate. He lowers the poverty rate. He lowers inflation. He creates prosperity. The stock market soars. The enemies of America pushed offshore. What happened to that congressman's salary? Nothing. Now his evil twin comes in, he comes to Washington, he does just the opposite. Poverty rates go way up. Little kids are committing suicide in the streets. The orphanages are stuffed full of people. The fields are dry. The prophets of the country, the enemies are coming up on the beaches of America. What happens to that guy's salary? Nothing. The problem with this society and the problem with democracy, if I may say, and the real problem is these people are not incentivized to behave correctly.
We need to put politicians on commission just like we do everything else. An incentive structure should be in every department and agency all the way down.
AL: And how would you get them to incentivize, behave correctly? Put them all on commission. You know, JAG, imagine 3% growth. Congress, you get your salary. Hey, it's yours, got 3% growth. 4% growth will double your salary. Mm-hmm <affirmative>. 5% growth, My God, will triple your salary. 2% growth, I'm sorry you're not going to get any checks from us. 1% growth, you owe us the money back. They would never vote the way they vote today. You know, they vote today, they get all sorts of slings and woggles and oodles of things. And by corrupt—I use corrupt not in an illegal sense—corrupt morally, in an Ayn Rand sense. It's corrupt to the fundamental core. We need to put politicians on commission just like we do everything else. An incentive structure should be in every department and agency all the way down. Make them simple enough so that people can understand them and follow them.
AL: You don't want them so complicated that it takes a trial lawyer to get it. You want to make it really straightforward. That's what you do. And if we don't put politicians on commission, democracy will not survive very long because they're going to make extra money. And they're going to do it by corrupting the system, not by doing. Look at this administration. Look at the corruption that exists, and I mean, the corruption in the core. Look at it in Russia with Putin. He's the wealthiest man in the world. Duh. He's got the most guns of any man in the world. We don't want that. You tell your society the key thing we need to do is put politicians at every level on commission, and then you will find the society and democracy really working. There's nothing wrong with shareholders voting a CEO out of office, but the CEO should be incentivized to do well. Do you understand that? But that's really something that no economist is talking about. It's true. It's just true. None of the guests on your show here have ever talked about that.
JAG: Really, it’s revolutionary.
AL: But it's all the way down to the core. Teachers who teach well should be paid more than teachers who don't teach well. School administrators, who bottom-line dedication to excellence as demonstrated by the performance of their students, should be paid more than those who don't. Students who do well should get grants, not those who don't. Just imagine you took the SAT scores or what they call ACT now or whatever they are, these things. People in the top 5% of the SAT scores—give $15,000 tax free, no questions asked. People in the second 5%—give them $7,500, no questions asked. None. Just there's the check. Can you imagine what would happen to you? Come home and, “Hey dad, I just missed the top 5% by one guy.” “Get in here, son, what you did, grandma sitting there tutoring the little guys all week long.”
AL: You would spend fortunes developing an education. I don't give a damn if it's public school, private school, grammar tutorials, home school, any of that. What matters is excellence, and reward excellence and let the competitive marketplace take it over. That's what you have got to do in education. You’ve got to do that in politics. You’ve got to do it in everything and all of your people that you have on this stuff. That's the answer. And that's what The Atlas Society of all people on Earth should be espousing. I talked to you about my dream of a low-rate, broad-based flat tax to provide the least incentive to aid, avoid or otherwise not report taxable income, the least place to stick, your income. But the bottom line is you need incorruptible politicians and the only way you get them to be non-corrupt is to pay them a lot if they do well.
JAG: Is your next book going to have a lot on this topic?
AL: Which of the books? I did this back in the 1970s and ’80s, and it never gets traction.
JAG: Alright. Well, we're going to see if we can change this. We're running out of time. This has totally flown by.
AL: I'm 81 and I'm running out of time too, JAG.
JAG: Yes. Okay. We'll have to change that too.
AL: Exactly, feel sorry for me.
AL: Don't I look like a victim? <laugh>
JAG: No, not at all. And you do not look 81. You hardly look 41. And that's always been the case. I want to get a couple more questions in, including from our Senior Scholar, Richard Salsman, who says he agrees that tax rates matter, but isn't the real burden on the economy government spending, no matter how financed? If so, shouldn't that be the focus of supply-siders or, say, given a choice between tax finance and debt finance, is the latter better because it is voluntary and less confiscatory?
AL: Richard's got the two best questions. I mean, they really are.
JAG: He's awesome.
AL: He is awesome. I mean, this question is perfect and forgive me, Richard, I'll try to answer it this way. . . . Three things are important in policy. One is: how you collect your taxes matters. That's why I want a low-rate, broad-based flat tax where I think it does the most good. All taxes are bad, some are worse than others. What you want to do is collect your taxes in such a way that it does the least damage-per-dollar of revenue raised. With me? The second thing is government spending matters. You want to spend in the most beneficial programs that you possibly can, and go down the list there with the money that they have. So, how you tax matters, how you spend also matters. And then the final thing is how much you tax and spend when the last dollar of taxes collected does less damage.
AL: Then the last dollar you spend, you stop already. You know, government can be too small and government can be too large. There is a very appropriate role for government in society, but that government should not go beyond that role. It's like everything else. And you know, how you collect your money matters. How you spend your money matters and how much total you spend and collect. Milton Friedman was totally correct when he said, government spending is taxation. He's right. Government doesn't create resources. Government redistributes resources. And for every dollar they give to someone, they have to take from someone else. What you want to make sure is it's done in the rate range. And when it hits the level, you stop. And, Richard, thank you for that question. You gave my philosophy on that: I am not anti-government, I'm not pro-government. I think there's a role for government, just like there's a role for electricity, like there’s the role for cars, like any other product in society. And, if too much of it's there, it'll hurt you. Too little of it's there, It'll hurt you, too.
Mises: Legacy of an Intellectual Giant
JAG: Agreed. And Ayn Rand was not an anarchist by any stretch of the imagination. She believed that government had a role with defending our borders, with defending us against criminals, with courts to adjudicate different disputes, of course. So, we do need to fund those legitimate functions, but hopefully, in a way that—
AL: Once you give a person power in government, they have that power and they will then use it for nefarious reasons. They will be at the altar of Nosferatu, unless you put them on incentives.
JAG: Agreed, and agreed.
AL: When I tell you that they've got to pay a penalty when they spend your money, if they don't spend it well, and they’ve got to be reported—
JAG: I'm sensing a platform for the next presidential campaign. That should be it.
AL: I tried this idea out with Jared. He didn't go for it. <laugh>. He thought it was kooky and weird.
JAG: Maybe you need to take it up with the big guy.
AL: Oh, I do. I did <laugh>.
JAG: Well, we'll see, we'll see. Well, anyway,
AL: Ronald Reagan. Ronald Reagan loved it. Ronald Reagan loved it. But you know, my godfather was Justin Dart, as you probably know, if you remember Justin Dart. And, of course, he was Reagan's best friend. That's how I got the relationship I had with Reagan, the real president. You know, I tell everyone he had all the economists in the US on the stage, and he said, I'll take the little, short, fat one over there. But it’s not true. That's not how it happened. It's that my godfather was his best friend. It's that nothing's better than having privilege. I love it. I just love, love, love it.
JAG: And those relationships, those relationships matter a lot.
AL: They matter a lot.
JAG: They do. They really do. And so, that's part of our message to the young people: to take advantage of all of the resources that we have at The Atlas Society, to join our book club, to join our social hours, to become an Atlas Advocate, to come to our gala. It's not just about learning, which we are today, but also about forming those relationships that you just can't imagine, today, how much of a benefit that they will be in years to come. So anyway, for those of you who joined us today on YouTube, Facebook, Zoom, Instagram, LinkedIn thank you, thank you to all of the great questions from Professor Salsman, from, all of the donors, existing donors, future donors. If you enjoyed this work, please consider making a donation to The Atlas Society. And most of all, thank you, Dr. Laffer, this was really something I've been looking forward to for a very, very long time. You exceeded all expectations and my expectations were high. And I look forward to hosting you in Malibu, coming to visit you soon in Nashville.
AL: Thank you, JAG. It's been really fun with all of you guys.
JAG: Thanks. All right, everybody, come back next week. We're going to have Tim Draper, the great venture capitalist and Bitcoin proponent, joining us. So, we'll see you next week. Thanks everyone. Bye.
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