CLAY: Joined now by Art Laffer. He is maybe the nation’s most esteemed economist out there and — importantly, given my lack of supreme economic knowledge — he can make me understand very complex topics and he can do the same, I bet, for almost everybody out there. Plus, he’s even mentioned in the legendary film Ferris Bueller because of the Laffer Curve. He is a former Ronald Reagan economic adviser.
I don’t know how many grandkids he has, but he’s got a ton, and he is here in Nashville where I live. And Art, you came on with us about a month ago; people loved it. You walked us through where we were headed. We’re not very excited about the state of our economic union. What would you say right now? Thanks for giving us the time. Where are we big picture?
LAFFER: Big picture, I think the U.S. is in very bad economic shape, but I’m much more optimistic than I was last time. And the reason very simply is I think the election in November is going to be good for the Republicans, which will at least stop the onslaught by Biden and the Democratic Congress and may — just may — lead to some good policies, although that’s still in doubt. The Republicans can screw things up pretty badly, too. But I’m very optimistic about the election and about stopping the Biden onslaught on the economy.
BUCK: Hey, Art. It’s Buck.
BUCK: You know, last week, Stan Druckenmiller, one of the most well-known hedge fund money managers out there, basically said, “Look, no one can predict the future, but I’m about as certain as I can be that we’re heading into a pretty nasty recession in 2023 and it could be a really bad one.” What do you think of that?
LAFFER: I think he’s right. I know Stan very well and he’s a very smart guy. And I’ve known him for 40 years, 35 years, and he really knows his stuff. And he comes at it from a very different perspective than I do. But he’s awfully good at his trade and I would not discount his advice and his forecasts at all.
CLAY: Art, a lot of people out there have been trying to figure out when to buy a home, and in the space of a year, we basically had 30-year mortgage rates go from around 2.5% to now approaching 7% in many places. We got a lot of young people out there listening, a lot of people who might be trading down in homes as they’re retiring. What would you tell people who are in the housing market based on your economic analysis both of where we are right now and where we might be headed?
LAFFER: Well, let me just say that what I would think is that those mortgage rates are not going down any time soon. In fact, if we keep on with the inflation — the Biden inflation — that we’ve had, I think those rates should go up a lot higher now. In 1980, ‘81, those mortgage rates got up to 16, 15, 17%, maybe even higher. So that’s not out of the question. So, when you look at this, if that happens, housing prices will come down substantially. So, I don’t know how your tradeoff between buying and producing a house, but I don’t think the mortgage rate peak has been hit.
BUCK: We’re speaking with Art Laffer, former economic adviser to President Reagan. You all see him on Fox News. Art, I’ve got to know the job situation. You know, that’s… It’s interesting because over the summer, the Biden White House would point to the low unemployment number and say, “See! We can’t be in a recession ‘cause the jobs number is so good,” as in unemployment is so low. Where do you see that going now? I mean, the first six months of the year, we did have negative GDP growth. That has been affirmed by further analysis recently that was just put out. So the jobs picture, what’s it going to look like? Because I’m not hearing the Biden White House saying — at least not as much — “Oh, but look at how great the unemployment figure is.”
LAFFER: Well, you know, I don’t know why they… I mean, obviously, they’re going to take the want to look the best to them. And as far as unemployment rates go, this is a very low rate of unemployment in the U.S. But the reason the unemployment rate is so low is not because there’s so many people employed. In fact, the participation rate — which is the total number of people in the labor force divided by the population — is at its lowest level. So why aren’t any people at this age group trying to find jobs?
Why are they in the labor force? And it’s because the government has given all these special goodies that they don’t need to work. They can take time off and not work and still not suffer the consequences of hardship on buying things. They just don’t. So I think the jobs market is at one of its worst positions ever, not because of the unemployment rate, but because of the participation rate, which is at about, oh, I think 62.4%, which means that everyone left the labor force and there are very few people left working, and that’s a real problem that can’t be solved simply.
CLAY: Yeah. And look, I want to build on what you just said, because a lot of economics is about analyzing people’s behavior and what might or might not be rational for their individual economic decisions. It seems to me that what we did when we shut down the economy in March and April and May of 2020 and flooding the market with giving people so much money and not requiring them to work is create brand new paradigms whereby, to your point, Art, some people just decided, “Hey, you know, this whole work thing is not for me. I’m just not going to do it or I’m going to commit to very short-range jobs.” And to your point, I hear very few people talking about this. To me, it’s a psychological issue. Why is the overall rate of work down so precipitously compared to February of 2020? Is it a psychological or economic issue that needs to be healed in order for us — particularly when it comes to young men — to get these people back in the workforce?
LAFFER: Well, it comes to economics, and by giving them all that money and I think it was $3.5 trillion, which, you know (chuckles), a trillion here, a trillion there, sooner or later it adds up to real money —
LAFFER: — and giving them that type of money gave them the wherewithal not to have to work. And so therefore, they quit. And if you look at the people who left the labor force, they’re almost all low-level workers. Even the high-level workers went online to do that and calls and stuff. So they don’t even work as hard. What I proposed, if you’ll remember, back in March of 2020, was I proposed to the president that he not do the Mnuchin spending plan of $3.5 trillion with Schumer and with Pelosi but that we get rid of the payroll tax. We have a payroll tax waiver, both employer and employee, for a year and a half. That would have put the same amount of money back into the economy, but it would have done it by encouraging people to work harder not less hard, not to take off from work, which is exactly what we needed to do. If we’d done that, we’d be in great shape today, but we’re not, and that’s not what they did. Mnuchin and Schumer and Pelosi got their way.
BUCK: Art, the Inflation Reduction Act is something that the Biden White House still talks about as though it will reduce inflation. What do you see from that spending bill? How long will it be before we feel those effects? And just generally speaking, for everybody out there… Here. I just saw this this morning on the amount of increase in the cost of food: 13.5% increase in grocery prices year over year for this past year. That’s a lot of money to people. That really hurts.
BUCK: What’s going to happen with inflation? When is this thing going to get under control?
LAFFER: Well, that really irritates me given that I’m a little bit tubby and I love eating.
LAFFER: I just love, love, love, love eating. So I really I really resent the 13%-plus increase in grocery prices more than other people do. But there is no reason to expect that that inflation will stop. Now, what you can see is that there are a lot of spot commodity prices — very sensitive prices — that during an uptick in the economy, like when we came out of the out of the pandemic, those prices like oil and like lumber and like copper and all these others rose enormously. So, the inflation was overstated substantially.
We got up, I think, as high as 9.1% inflation on the CPI. Now that we’ve rolled over and the economy is going down, these prices are falling very rapidly and now they are understating inflation dramatically. What you want to look at is sort of a core inflation without this, and I think the core inflation number today is probably at its highest point, and I don’t expect any decline in inflation until there’s been a decline in the bad policies that are put into place which really stimulate demand and really are antagonistic to supply.
CLAY: Art, so, let’s say that Republicans take back the House and the Senate. To me, that — and most people out there, I would imagine — is much desired. But to a large extent, it will just kind of create a logjam because Biden won’t be able to shove through his excessive spending programs. But a lot of what Republicans would want to do to address our economic status also won’t get signed into law by Joe Biden. So, what does that mean for the overall state of our economy? Let’s presume Republicans take back the House in the Senate. What do we look like in ‘23? What do we look like in ’24 in your mind, given, as you said, the elevated state of inflation and how hard now it is to chop it down?
LAFFER: Yeah, let me just talk about Republicans for a second. Republicans are no angels. Now, the reason we look so good as angels as Republicans is because we compare very favorably to Democrats, to Schumer, Pelosi, Biden, all that group which are running with a tight, tight, tight rule.
BUCK: Imperfect compared to insane is still favorable for imperfect.
LAFFER: That’s right. But during the next two years, if we did take back the Senate and the House and given that we can have some sort of discipline on the Republicans — which is by no means guaranteed. If we could have discipline on the Republicans, we could have a stasis period where things don’t get a whole lot worse quickly. There’s a lot of still money left out there wanting to be spent that’s going to be spent. But what I would like to see the Republicans do is take aspects of the Build Back Better bill — or the baby Build Back Better — like the 87,000 new IRS agents, and just advance a piece of legislation.
Repeal the 87,000 and the $80 billion of spending there and let it go through the House, let it go through the Senate and then have the president veto it. And do that every six months and pick out the 20 least popular things there so we can make sure that we get the presidency back 2024. If we can get it back in 2024 — and God willing, and the creek don’t rise too fast — then we can get a complete reversal of these policies. Jimmy Carter. It took Jimmy Carter to create Ronald Reagan, guys. Believe me when I tell you that. In the same breath that it took Jimmy Carter to create Ronald Reagan, you can’t imagine the great president could follow Joe Biden.
CLAY: Art, you’re an optimist based on that story.
LAFFER: That’s what I’m really looking forward to.
CLAY: One thing that I’m actually curious about. You’re an economic genius. You’ve been advising presidents for generations now. Does Joe Biden have anybody advising him economically that you like or think, “Man, if he would just listen to this guy or this girl, everything wouldn’t be a disaster”? Because Bork and I struggle to find any Democrat who has basic economic sense. Are there any.
BUCK: If we were doing a raft of the White House personnel —
BUCK: — we would wait till next year’s draft.
LAFFER: (laughing) You know, you’ve got a group of people that are intellectually identical. They all have seen the view of the world through the same eyes from Larry Summers to Furman to all of them — Goolsbee — and even the ones in there, I mean, you look at Bernstein, you look at Deese, you look at all of these guys, and they all have the same view of the world that government spending stimulates the economy and makes life better. And that’s not true. I have never heard of a poor person spending himself into wealth. It just doesn’t make sense! Have you ever heard of an economy being taxed at prosperity?
Again, it just is silly on the face of it. But these guys believe that’s true. They are so doctrinaire and so in lockstep that they are unwilling to look at any evidence to the contrary. I don’t know if you’re aware, but my book just came out called Taxes Have Consequences. It’s a complete history of the U.S. income tax from 1913 to the present. I did it with Brian Domitrovic and Jeanne Sinquefield, and if you look at that… You know, everyone is allowed to have his or her own opinion. They are! I mean, you can have your opinion about anything you want. But you can’t have your own facts — and, you know, when you look at the facts, these people’s models have not worked. They just don’t work. Biden, Jimmy Carter, they’re all the same, and they just don’t work. And they lead them to a rebound by the other view of the world and that’s what I’m really looking for.
BUCK: Art Laffer, giving us some hope. Some truth and some hope. Art, thank you so much for being with us. What’s the name of the book again, Taxes Have Consequences?
LAFFER: It’s called Taxes Have Consequences.
CLAY: We’ll have to get together in Nashville.
CLAY: Every time he comes on, I love it.
LAFFER: Well, I live right here in Nashville. You can just walk across the street and say hello to me.
CLAY: I know. I gotta do it.
BUCK: Clay is gonna come and get a signed copy. He’s gonna go pick one up.
CLAY: That’s what I’m gonna do.
LAFFER: I would love it. I will sign it for both of you. Both of you don’t have to come, but I’d love it if you did.
BUCK: All righty.
CLAY: (laughing) Thanks.
BUCK: Sounds good to me. We appreciate you.
LAFFER: Thanks, guys.