The Japanese government is poised to increase its consumption tax next fall. Does it make the Japanese economy weaker as it impacted the Japanese economy in the past? Will the American economic boom continue? Is it sustainable? Will there be a possibility of the passing of the Tax Cut 2.0? What impact does the government commitment have to make education free for our society? Highly esteemed American economist, Dr. Arthur B. Laffer, shares his insights on these impending issues that affect many people’s lives. He also provides suggestions to advance the Japanese economy and explains why the ill-conceived approach of PM Abe to promote growth is doomed to failure. His insight and clarity lends itself to this most important interview, and we are honored to share it with readers of The Liberty.

 

 

Interviewer: Hanako Cho

 

Dr. Laffer’s Contribution to the Tax Cut and Jobs Act Bill

Interviewer: I’ve read your recent book, Trumponomics, published recently. I found two major discoveries. One thing is that you deserve huge credit for passing the Tax Cuts and Job’s Act which was enacted last December.

Dr. Laffer: Well, thank you very much.

Interviewer: You did so much to persuade Senators who were indecisive about passing it. I think that is very great.

Dr. Laffer: Well, I was very fortunate. We were able to get almost everything in the bill we wanted and were able to push away a lot of very bad things like a phase-in of the tax cut and other silly stuff. There is still a lot of nonsense in it, but the bill is really good.

Interviewer: The second one is that you have advised governments around the world to cut their taxes. Many governments, including Ireland, Britain, Russia, and even Sudan, and France, listened to you and cut taxes. That’s so amazing.

 

The Trouble with Governments and Taxes

Dr. Laffer: Thank you very much. But you know, there is a problem with governments. They try not to compete with each other and they have taxes that are way too high. You know, taxes can be too low as well, Hanako. And taxes right now are too high.

But when you let the animals run the zoo, they’re always going to make taxes way too high. And that’s what happens with governments today. I did a keynote speech at the recent OECD conference in Paris, and the issue was “is tax competition good?” And of course, I think it’s wonderful. They all think it’s horrible.

Interviewer: They are government employees so they want higher revenue by taxing people.

Dr. Laffer: They’re all government employees. There’s an old adage that whenever governments agree on something, it is always to the detriment of the people. They always are conspiring to rip off the people, and to exploit the electorate.

 

Convincing Governments

Interviewer: How were you able to convince those government employees in places like Russia, France and even Sweden?

Dr. Laffer: I don’t really know. It was lucky.

Interviewer: Lucky?

Dr. Laffer: Some of them I had to yell at and scream. Some of them I had to sit there and do papers and show them and answer questions for hours and hours and hours. But all of it was — I mean, it’s very confrontational.

Interviewer: In that confrontational environment you could do this kind of great job for the people of its country?

 

The Japanese Problem

Dr. Laffer: But your government, I mean, is a classic case of a problem. They won’t even listen to someone of a different view.

Interviewer: But they listened to you and followed your advice, right?

Dr. Laffer: But not Japan.

Interviewer: Excluding Japan.

Dr. Laffer: Excluding Japan — but you know it’s very tough. Because the government bureaucrats do not want you to get in there. They don’t want you to talk to the politicians. They don’t.

Interviewer: No.

Dr. Laffer: And when they do, they always present other arguments. And their arguments are not economic. Their arguments are personal or nasty. They are making — do you know the phrase “argumentum ad hominem”?

They say nasty things about the person instead of talking about the argument. But that happens everywhere. But we’ve been lucky in Ireland. We were very lucky in Britain with Lady Thatcher. I was very fortunate to be heavily involved with her. We were able to get her to drop the tax rate down to 40%. How’s that?

Interviewer: So they’ve become very competitive.

Dr. Laffer: I’ve just been in the Ukraine. I’ve been in Kazakhstan. I’ve been in Poland. I’ve been in Indonesia. All of the governments there try. And most of them don’t really care. But then, I was at the OECD – I told you about that – and it’s shocking how little they understand of economics. But it’s fun. And thank you for your nice comments. It makes me feel very good [laughter].

 

Laffer Offers Help If the Japanese Government Would Ask For Assistance

Dr. Laffer: When am I going to get to be invited back again to talk with Prime Minister Abe and his people?

Interviewer: We would like to receive the same guidance from you.

Dr. Laffer: I would too. Well, let’s see if you can find someone. Because it would be really fun. I used to write, as you know, for Nihon Keizai Shimbun. And I used to come over to Japan quite frequently, but that was in the 1970s and the 80s. I used to be an economic advisor when Japan was growing rapidly.

Interviewer: During the Reagan era, right?

Dr. Laffer: Well, it was 1970s. My first trip to Japan was in October 1970. That was the first time I came to Japan and spent time there. And then I’ve been coming — well, I’ve probably been to Japan 10 times. But all back then.

 

The Consumption Tax

Interviewer: At the end of the November issue, we are going to publish your interview, because that is the timing when everyone is thinking about the raising of the consumption tax. So that is why we badly need your opinion on this.

Dr. Laffer: Well, you know what’s happened in Japan when you did the first one. I mean, Hanako, in 1989, in December I think it was, or maybe November and December, the Nikkei Index was at 38,900. You know where it is today? It’s down to 22,000.

Interviewer: Almost half.

Dr. Laffer: I mean, it’s half of what it was almost 30 years ago. That’s a depression. Japan is shrinking. It’s very sad. Because you’ve got the most wonderful people I’ve ever met in my life. I love Japan. But Japan really needs to get the prosperity back again.

Interviewer: Thank you. Prime Minister Abe is thinking of raising the consumption tax next October.

Dr. Laffer: I know he is. You know what I think. I mean, the whole reason Japan collapsed in the early 1990s was because of the consumption tax put forward in Japan. The Nikkei Index peaked in 1989. They put in a consumption tax, I think it was on January 1st, 1990.

Interviewer: You remember it correctly.

Dr. Laffer: And the country just has been falling ever since. It was so bad, Hanako.

Interviewer: Yes. So bad.

 

Securing Social Welfare Benefits

Interviewer: Yes. Prime Minister Abe is saying that if the economic situation becomes good enough for raising taxes then they would raise the consumption tax next fall.

Dr. Laffer: Why do you need more taxes?

Interviewer: Yes. I know. He seems to want to raise government revenue for the purpose of securing the social security cost.

Dr. Laffer: Yes. He wants to tax people who work and pay people who do not work. Now, think of that. If you tax people who work and pay people who don’t work, what do you think happens?

Interviewer: Nobody wants to work hard.

Dr. Laffer: No one wants to work [laughter]. It’s just silly.

Interviewer: Yes, it is silly.

 

Taxing A Country into Prosperity

Dr. Laffer: And you know, it’s like the Europeans, and Japan should not be like the Europeans. The Europeans dress fancy, they sip their coffee, and they taste their wine, and they talk in deep, “Oh, yes. Do you remember the thing that happened in 1947? Wasn’t it wonderful?” And they say nonsense. They look like grown-ups, they try to act like they are smart and well-educated, but they’re not.

It’s like putting a suit on a monkey [laughter]. You need some good economists in Japan to tell the government that you cannot tax a country into prosperity. It doesn’t happen.

Interviewer: But PM Abe tries to make it look good for ordinary citizen. He is planning to introduce reduced tax rates for certain commodities such as newspapers, food, and drinks that are exempt. What do you think of this kind of measures?

Dr. Laffer: I think the whole set of policies make no sense. And the results are horrible.

Interviewer: Yeah. It’s going to be horrible.

Dr. Laffer: There was a time, Hanako, when Japan was the fastest-growing country in the world. People were finding jobs and prosperity was coming to Japan. It was just beautiful. It was lovely. Japan was growing and they were cutting taxes. When MacArthur ran Japan after World War II, he imposed very, very, high taxes on the Japanese.

Interviewer: I didn’t know that.

Dr. Laffer: Oh, it was horrible what he did. He didn’t mean to, but it was horrible. So as soon as MacArthur’s government left, Japan cut the tax rates a lot. And what happened is Japan grew very, very, rapidly. And it was just a miracle. It was wonderful. And then all of it stopped.

 

The Trouble with Redistributing Resources

Interviewer: I think the government is only thinking about social security. How to create a sustainable social security system. Maybe this was the highest priority for the Japanese government. What are your thoughts on this?

Dr. Laffer: Well, I’m not really big on social security, but it’s okay. But you should not have your priority be a spending item. Your priority should be the prosperity of the people. And you know, social security is nice to a limited extent, Hanako. But only to a limited extent. You need to have people working and producing to be able to get the income that the country needs to be prosperous. Your government doesn’t create resources. It redistributes them.

Interviewer: Yes.

Dr. Laffer: And they redistribute resources from people who work to people who don’t work. And that doesn’t make sense. Have you ever heard of a country being taxed into prosperity?

 

Creating Economic Growth to Realize Good Education

Interviewer: Prime Minister Abe seems to want to allocate the budget to make child education free, and enhance social security out of this government revenue coming from the consumption tax hike.

Dr. Laffer: Yes. I know. And you know what the best thing for education is?

Interviewer: What?

Dr. Laffer: If you get educated and you get a job, that’s your incentive to being educated. But all the good schools in the world are not worth anything if the person can’t find a job afterwards to use that education.

Interviewer: Ah, I see.

Dr. Laffer: You need economic growth to get good education. Poor people rarely are well-educated. Unemployed people rarely have good educations.

Interviewer: So we need to put more money on education?

Dr. Laffer: No. You need to get more money through cutting taxes to create economic growth. People will want to educate themselves because if they do, they can become wealthy.

Interviewer: So the order is opposite?

Dr. Laffer: Yeah. It’s the exact opposite. Educated people don’t create income. Income creates educated people.

Interviewer: I understand correctly.

Dr. Laffer: Does it make sense to you?

Interviewer: Yes. It makes perfect sense to me.

Dr. Laffer: Yeah. I mean, you look at who gets the best education here in the United States, it’s not the poor people.

But, Hanako, when you send a boy or a girl home from school to parents who are unemployed, that’s not a good environment for good education. And you know, the idea social security is wonderful. I love it. But it’s not worth killing your country over.

Interviewer: So prosperity creates jobs. And if the people find jobs, then they can train themselves.

Dr. Laffer: Yes. Then they can — I mean, then they can read. Then they can take classes. Then they can do all sorts of stuff to make themselves better. I’m sure it’s true in Japan too.

Interviewer: I think so. If young students cannot find jobs, then their life will be very difficult.

Dr. Laffer: Yeah. And education is a product of prosperity not a cause for prosperity.

 

Dr. Laffer’s Outlook on the Second Term of the Trump Administration and 2020

Interviewer: Democrats will take control of the house, right? And how does it impact the Trump economic policy?

Dr. Laffer: Not much.

Interviewer: Not much?

Dr. Laffer: Not much. I don’t think. I mean, I may be wrong on this, but we don’t have any major legislation we need in the next two years. And Democrats aren’t all bad by the way. Some of them are very, very good. But if the Republicans don’t have control of the House, that’s okay. When Reagan was president, the Democrats controlled the House every single year. And we were still able to do a lot of good work. So I’m not afraid of the Democrats. No. But I think it’s very important that the Republicans have control of the Senate, which we do. That is very important. Because that’s where all the judges get confirmed and all the other major issues are determined.

Now, the real answer will come in two years. In 2020, we will have another presidential race. And then you’ll find out what’s going to happen for the long run. Now, in 1982, with Reagan as President for two years, we did not do well in the 1982 election. It was really bad. But then the prosperity from the tax cuts came in. And by 1984, Ronald Reagan won 49 out of 50 states. 49 out of the 50.

Interviewer: Awesome.

Dr. Laffer: It was the most amazing election ever.

Interviewer: So that’s why he could continue the second term?

Dr. Laffer: Yeah. I mean, I don’t know what’s going to happen in 2020, but I’m very optimistic.

Interviewer: Well, that sounds hopeful.

Dr. Laffer: I’m much better, Hanako, at forecasting the past than I am the future [laughter].

 

Benefits Arising from Tax Cut and Jobs Act

Interviewer: Due to the Tax Cuts and Jobs Act, it is said that household income could increase by $4,000 per year according to the Council of Economic Advisors. Would you please share with us the benefits of the tax cuts so that we can share these benefits with the Japanese people?

Dr. Laffer: Now, this was done by Kevin Hassett. Kevin Hassett is a very good economist. Quite famous in the U.S. He is Trump’s Chairman of The Council of Economic Advisers. And he has done all this research on exactly what the consequences of corporate tax rate reductions are. And one of the things he says is that it raises real wages very rapidly and increases household incomes a lot. So that makes sense to me. Now, that is not my research. But his research shows exactly what you said.

 

Japanese Economists and Revenue Deficit

Interviewer: The Japanese economists are always talking about revenue deficit. So, I think it’s very important to share these kinds of stories with the Japanese people.

Dr. Laffer: Yes. I agree. But it’s surely not — the Japanese government does not criticize the deficits. They’ve got the biggest deficit ever. No?

Interviewer: Yes. We have.

Dr. Laffer: All because of spending. And they think you can reduce the deficit by raising taxes. They don’t believe in the Laffer Curve.

Interviewer: No. Unfortunately [laughter].

 

Japan Is Not a Free Trade Nation

Dr. Laffer: And then trade is such an important issue as well. I hope Japan does something with Trump on trade.

Interviewer: You mean more free trade?

Dr. Laffer: Free trade is very important.

Interviewer: Yes. So we have barriers against American food and cars and so many goods and services from the US. That is why we have to pay higher prices for commodities.

Dr. Laffer: Yes. It’s quite amazing the protection in Japan.

 

The Difficulties of Passing Tax Cut 2.0

Interviewer: I’d like to ask you about the Tax Cut 2.0 that is supposedly going to be passed after the mid-term election.

Dr. Laffer: I don’t think so. But maybe.

Interviewer: Maybe? Is it going to be difficult to be enacted?

Dr. Laffer: Yes. Tax Cut 2.0 would be a supposed middle-class tax cut. And I don’t know what it is. But if he proposes it, it has to go through the House Ways and Means Committee. It then has to be passed out of the House Ways and Means Committee. It then has to be passed by the House. It then has to be sent over to the Senate. It has to then be passed by the Senate. Then they have to have a reconciliation because the Senate will do some amendments. Then they’ll get a bill, a combined bill. Then it has to pass the House and the Senate at the same time. And then it has to be signed into law by the President. And that has to be done in a month and a half. Otherwise, there will be a new House. I don’t think it’s going to happen.

Interviewer: Because Democrats control the House?

Dr. Laffer: It’s not just Democrat, Republican. Even if it were only Republicans, they would still find things to disagree with. Nowadays here, people do not vote just the party line.

 

Can Tax Cuts Become Permanent?

Interviewer: But as you said in the last interview, tax cuts should be permanent?

Dr. Laffer: That would be wonderful. But that would be very difficult to get passed quickly.

Interviewer: Right.

Dr. Laffer: Now, I would like to see the tax cuts become permanent. I would also love to see capital gains index for inflation. That would be wonderful. And there’s some other issues too that would be wonderful to address. But I don’t think that’s going to happen in the next two months.

 

The Economic Growth Is Sustainable

Interviewer: Some people say recent high economic growth is temporary and not sustainable and the growth will decline to 1% after 2020 when the tax reduction effects fade away. What’s your reaction to this?

Dr. Laffer: I don’t think that’s true. I don’t think it’s true at all. It wasn’t true under President Kennedy. For eight years under President Kennedy, the economy grew in real terms at 5.2% a year. Under Reagan, from January 1st, 1983 to June 30th, 1984, in that year and a half period, our economy grew in real terms again by 12%. We grew it at an 8% per year rate. Under Clinton, growth was very high. I don’t see why people would say we’re going to stop growing.

Interviewer: So why can they say it’s going to be like 1%?

Dr. Laffer: These are people who were with Obama and with W. Bush. And I can understand why they believe that because that’s what happened with them. But the reason it happened with them is they had bad policies. But if we give the tax cuts, regulations, freer trade, sound money, and, hopefully, spending control some time, we could grow it forward 5% a year for a couple of years.

Interviewer: So you think the growth rate would reach to a higher level? Now it’s like 3.5%, right?

Dr. Laffer: 3.5% was the last quarter. And before that, was 4.2% which are the two highest quarters back to back, I mean, in a long time. We’re doing much better than Obama did. Honestly, if we keep our policies going, I think it’ll continue.

 

The Fallacy of Budget Deficit Increases Because of Tax Cuts: The Need for the Long-View

Interviewer: The Japanese newspaper reported recently that the budget deficit increased because of the deduction of the tax revenue caused by Tax Cut and Jobs Act. How do you respond to this report?

Dr. Laffer: I think it’s probably true.

Interviewer: True?

Dr. Laffer: Yes. You know, it takes a long time for growth to pay for itself. When you cut tax rates the first day, you’re going to lose a lot of money. But then, if you increase growth rates, sooner or later, you’re going to get more than that lost revenue back. It takes time. But it does happen. And if you don’t do the tax cuts, you’ll never get more money. When you make an investment, Hanako, you don’t expect to make profits the first day.

The investment goes out there, it’s put into use, it produces blah, blah, blah. And sooner or later, maybe it’s a couple of years down the road, you start making money.

Interviewer: Yes. Yes. Yes. Not right now. It takes time for the economy to grow.

Dr. Laffer: Yeah. Right. So people think it’s not sustainable, it’s not true since it’s actually only temporary that we see a budget deficit, but in a couple of years we’re going to see the tax increase, tax revenues more. I think tax revenues will increase, will be positive in three, four years. And I think over 10 years, the tax cuts will yield something like one point a half trillion dollars additional taxes. Not less. More.

Interviewer: Yes. I learned it from you the last time I interviewed you.

Dr. Laffer: Yes. And I think that’s what’s going to happen. And so far, the growth has increased. Let’s hope it continues to increase. But if it does, I think it may well pay for itself. Don’t you think so?

Interviewer: Yes. I think so too. And it’s really beneficial for working people.

Dr. Laffer: Yes. I mean, it’s like a store, Hanako. The store can price its products way too high and lose money, and it can also price its products way to low and lose money. But if the prices are too high and if the taxes are too high, the company will do better by cutting prices and governments will do better by cutting taxes, respectively. Now, the first day you cut prices on your products, you’re not going to make a lot of money because you’ll still get the same sales. People have to figure it out and know what’s going to persist for quite a while, and then you’ll get more sales. And that’s the same thing with taxes.

 

Entrepreneurship and the Tax Rate

Interviewer: You’re exactly right. I would like to ask you about entrepreneurship. It seems that entrepreneurship is now being unleashed or is going to be unleashed in the US. What do you think makes that possible?

Dr. Laffer: Well, I’m not really sure what they mean, but it sounds good, doesn’t it? And entrepreneurship unleashed sounds wonderful. New products and new ideas. I think it’s wonderful. What the White House is doing with lower tax rates, people will find it more profitable to develop new products, put in new investments, and create new entrepreneurial ventures. Now, that makes perfect sense to me. I don’t think in those terms, by the way, but it makes very much sense to me.

 

The U.S. Has a Pro-Business Administration

Interviewer: So the Trump administration is a pro-business government, right?

Dr. Laffer: Yeah. They’re not anti-business like Obama and his government.

Interviewer: What is the difference between Obama and Trump in terms of economic policy?

Dr. Laffer: Obama raised taxes. Obama did not reduce tariffs and trade barriers, he increased regulations, and he increased paying people not to work. And you wonder why the economy did badly.

Interviewer: It seems they think they can stimulate the economy through food stamps.

Dr. Laffer: Yes. He thinks prosperity comes from government and I don’t. So silly. He believes so. And so does your government.

Interviewer: Yeah. Our government certainly believes that.

Dr. Laffer: It’s sort of sad.

 

The Fed and Interest Rate Hikes

Interviewer: So sad. So what’s your take on Fed policy of interest rate hikes? Is it too much concerned about rising prices?

Dr. Laffer: I don’t think so. I think the Fed is doing a very good job. I think they’re doing a great job, even. Now, when Bernanke and Yellen ran the Fed, they had zero interest rates, which is awful. Who wants to lend money for zero interest? No one.

Interviewer: No one.

Dr. Laffer: Now, interest rates can be way too high, but they also can be way too low. What you want to have is interest rates that are right in the middle so that lenders make money and borrowers get to borrow the money at reasonable rates. And that’s what Powell is doing at the Fed. And I couldn’t be happier.

Interviewer: I see. The Bank of Japan sets its interest rate at 0%, but nobody wants to borrow the money from the bank.

Dr. Laffer: What happened in the US with low-interest rates, zero interest rates, is we had the eight worst years of new housing stats per 10,000 population in U.S. history. And the reason was, very simply, at low-interest rates, no one is willing to lend money for 30 years to risky borrowers to buy a home.

 

Creating A More Prosperous Economy for Japan

Interviewer: Now we are in a deflation spiral and …

Dr. Laffer: You’ve always been in a deflation with low-interest rates. It’s very sad.

Interviewer: We need to follow the example shown by the U.S. which was created, actually, by your great effort. So I think we really need to do the same.

Dr. Laffer: Well, if you get me over there to Japan, I’ll be glad to sit down with Prime Minister Abe and try to get a good policy in Japan to recreate Japanese prosperity. I would love nothing more than to see Japan prosperous and rich once again. It’s nice talking with you again.

Interviewer: It’s very nice talking with you too.

Dr. Laffer: And I’m always here for you if you’d like to call.

Interviewer: Thank you. I appreciate it.

Dr. Laffer: Thank you, Hanako. Bye now.

Interviewer: Goodbye.