I.O.U.S.A - Addison Wiggin [115]
percent. We ’ ve had the long bond yield fall to 4.5 percent. When the long bond is at 4.5 percent, the gods truly love you. We ’ ve had a tremendous prosperity. I ’ m going to say it here and I say it seriously: If they reverse those policies, if these tax increasers try to raise taxes on the rich and have unbridled monetary expansion, or if they try to restrict imports or stop illegal immigration or try to reregulate the economy, believe me that the fi lm will play backwards. You ’ re going to get a mini 1960s/ ’ 70s period again.
It ’ s a catastrophe that they ’ re proposing.
Q: What was it like be a part of the administration as you argued successfully for the tax cuts? At the same time, can you talk about how Paul Volcker restored sound money?
Arthur Laffer: I watched the world go to hell in a handbasket under Richard Nixon. I liked the people there, but for everything c17.indd 231
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I believed in, everything I thought was sound economics, the opposite was done. Under Nixon, we had the import surcharge, we had the doubling of the capital tax gains tax, we had the unhinging of the paper currency, and we had Social Security and tobacco. We had all of this stuff happening under Nixon. That was part and parcel of one of the worst periods in U.S. history.
Before Reagan, I had done a lot of work with Bill Steiger on the capital gains tax rate reduction. I was very involved with Proposition 13 in California in 1978. Then you got Paul Volcker in 1979, and Ronald Reagan in 1980, with all of the policies of the tax cuts, sound money by Volcker, free trade, and deregulation. It was just a beautiful era. Paul Volcker clearly knew what he was doing on monetary policy and was spectacular.
George Schultz, Milton Freidman, Ronald Reagan — all of our group — really knew what they were doing on economics. It was much more fun. I didn ’ t have to bear the consequences of my own actions.
One time period that was very tough, and we deferred the tax cuts. As you know, the tax cuts were phased in. If you know they ’ re going to cut tax rates next year, what do you do this year?
You defer all the income you can. By phasing in the tax cuts, we created the recession/depression of 1981 – 1982. If you think this is revisionist history, go back and read my piece in Barons in 1981, where I talked about how we were going to have a deep recession/depression in ‘ 81 and ‘ 82 because we phased in the tax cuts. That was the only time period that was really, really tough.
The president had been shot by Hinckley, and he was in a very different frame of mind than he was when he was really healthy.
I was really, really concerned that Bob Dole, George Bush Sr., Dick Darman, and Dave Stockman — what I call the anti - Reagans — were going to convince the president to reverse the third year of the tax cut. As it so happened, he didn ’ t waver. He stuck with it, and you can see how the fi lm played. It was just a beautiful era, and I really enjoyed being there. It was loads of fun.
Q: In the early 1980s, you actually stopped the rise of the size of the federal government. The size of the federal government c17.indd 232
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grew from 3 percent GDP in 1913 and by 1980 it was at 20 percent and rising rapidly. Ever since the policies that you worked for in the 1980s were enacted, we have been at 20
percent or lower. Can you talk about that?
Arthur Laffer: The best way of reducing federal government, in my view, is to make it unneeded. When you have lots of people unemployed, when you have lots of people hungry and times are really awful, it ’ s really very hard for the government to resist the temptation of government to come in and try to solve the problem. The government can ’ t solve the problem by writing a check, because that check comes from workers and producers. It doesn ’ t come from the tooth fairy. But the temptation is for the government to try to do it.
The history of the Great Depression is a classic case. Roosevelt, with the New