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clearly makes the case that they added to it. During the Great Depression, we raised the highest federal marginal income tax rate from 24 to 83 percent. We put in state and local income taxes and sales taxes. Is it any wonder it was the longest, deepest depression ever? You can ’ t solve a depression by raising taxes.

With Reagan, it worked so nicely because by cutting the tax rates and creating the prosperity, it really reduced the need for government. The other thing that reduced the need for government, if I may be so bold, is that Ronald Reagan really understood the Soviet Union. He used an old Jack Kennedy line that the best form of defense spending is always wasted. Whenever you fi nd yourself in a situation where you ’ re required to use your military hardware and prowess, that is a clear sign that you didn ’ t spend enough. Reagan used defense initiatives with regard to the Eastern Bloc and the Soviets. He and Lady Thatcher literally collapsed the Soviet Union and thereby reduced the need for us to have as big of a defense establishment as we otherwise had. It was a perfect combination of creating the prosperity and destroying the Soviet Union through a strong defense that really led to us being able to control federal government expenditures. Now we ’ ve c17.indd 233

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234 The

Interviews

got to fi gure out a way to control state and local expenditures, but that ’ s a story for another time.

Q: Okay. Talk about defi cits. Do defi cits matter?

Arthur Laffer: During the Reagan era, the defi cits were very, very large. That was the only way to bring back the prosperity. Are defi cits bad per se? No. Are they good per se? Absolutely not. If I ’ m willing to lend to you at 2 percent, risk - free, and I can borrow from you at 5 percent, risk - free, how much should I borrow? I should borrow all that I can. It ’ s a guaranteed spread. Now, reverse those numbers. I ’ m lending to you at 5 percent and borrowing from you at 2 percent. How much should I borrow? Zero.

Borrowing is neither good nor bad. It ’ s a tool. You really want to look at the spread. When we came in in 1980, ‘ 81, our country was in the trash heap of history. We had a really underperforming economy. We were just like a venture capital or private equity fi rm.

We took over this company that had been run into the ground, and of course we needed to borrow money to be able to cut the tax rates, to put the executives back, and create incentive plans to control infl ation. The defi cits went up but, in my view, that led to lower future defi cits and a control of government debt and also control in government spending.

Q: You talked about the Clinton era. That led to the closing of the debt clock. Has that mood of fi scal discipline reversed itself in recent years?

Arthur Laffer: Clinton did exactly what you ’ re supposed to do as president during his eight years. When you have a really prosperous economy and everything ’ s going pretty well, do you need to spend all of that money and have huge defi cits? Absolutely not. That ’ s when you pay down your debt. Clinton even ran surpluses in the federal government. He did a great job. If you look at the national debt as a share of GDP, or steady - state interest payments as a share of total GDP, it really dropped like a stone.

Now, take George W. Bush. He comes into offi ce on January 20, 2001. He won the election in 2000. The markets had peaked in March of 2000 and there was an incipient nascent recession c17.indd 234

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coming on that was really serious. In addition to that, eight months after he ’ s in offi ce, you get the attack on America and this huge need to increase spending for security. Here he has a recession and the need for security. What ’ s the guy supposed to do? Raise taxes on the last three people working? I don ’ t think so.

Clinton provided Bush with a fi xed fi scal fl exibility to be able to do what was right in 2001,