I.O.U.S.A - Addison Wiggin [113]
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228 The
Interviews
Q: Can you talk about it in a personal way?
Arthur Laffer: If you ’ re talking about the time value of debt, that ’ s a little complex and arcane. The point I ’ m making is that you never can tax an economy into prosperity. If you want to create growth, people have to have incentives to grow. You can create growth to get yourself out of a defi cit problem.
In the 1980s, we saw the country overrun by Fabian socialists.
Tax rates were out of control, infl ation was out of control. When we took offi ce, the prime interest rate was 21.5 percent. Can you imagine that? Tax on what they called unearned income was 70
percent. In 1978, Steiger - Hansen had cut the capital gains tax rate but, before that, it was at 35 percent on nominal capital gains, not real capital gains. The effective tax rate on real capital gains prior to 1978 was probably well over 100 percent for many, many years.
These were seriously bad taxes and structures.
We tried to cut tax rates and put in a sound monetary policy.
That was Paul Volcker all the way, and he did a great job. Ronnie Reagan did a great job on fi scal policy, on regulatory policy, and on trade policy — we had tariff cuts. It was great. We grew the economy like mad and we grew our way out of the fi scal crisis.
And that ’ s exactly what you ’ re supposed to do. It was Reagan and Clinton who really created the surpluses at the end of the Clinton era.
Clinton did a great job when he was president. He pushed NAFTA through Congress against his own party and against the unions. He put in welfare reform, the idea that you actually have to look for a job before you get welfare. He cut government spending as a share of GDP, by three and a half percentage points, more than any other president ever had done. He signed into law the biggest capital gains tax rate reduction in our nation ’ s history, exempted owner - occupied homes from any capital gains taxes. That ’ s amazing. He got rid of the retirement test on Social Security. He reappointed Reagan ’ s Fed chairman twice. Yes. In his fi rst two years, he made a huge mistake on the personal income tax and he pushed through a bill that cost c17.indd 228
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him the House, the Senate, the governorships, and the state legislators. He then switched and became more Reagan than Reagan and was a great president for the last six years of his term in offi ce. I ’ m a huge fan of Clinton.
Q: Can you tell us about the crisis you inherited when you went into offi ce?
Arthur Laffer: I told my mom, “ Mom, you can ’ t believe it. I just wrote a speech for Nixon and he used every single word. Well, he did make two little changes. Everywhere I had ‘ is, ’ he put ‘ is not ’
and everywhere I had ‘ is not ’ he put ‘ is, ’ but other than that, Mom, it ’ s exactly my speech. ” Nixon did all sorts of things wrong: the import surcharge, the wage and price controls, the huge increase in social spending, the doubling of the capital gains tax rate.
But, to my way of thinking, Nixon ’ s biggest problem was going off gold. I am a strong advocate of sound money. I believe that it ’ s basically the Fed ’ s responsibility to guarantee the value of the dollar; to make sure we don ’ t have infl ation. Nixon wanted us to go off the gold, which led to the high interest rates and hyper infl ation of the ’ 70s and very early ’ 80s. In fact, it really was a global phenomenon.
There was one person whose side I was on. Paul Volcker and I worked on going off gold — that was our task — but both of us shared a view that we needed to keep on the gold standard to provide discipline to the monetary authorities. And, unfortunately, we lost the battle. They went off gold and you can see the consequences: the devaluation of the dollar back in the