Featuring Dr. Arthur Laffer, Father of Supply-Side Economics [Part 5]
Meeting Reagan

 
Dr. Laffer knew Ronald Reagan prior to his becoming governor of California. Dr. Laffer discussed his encounter with Reagan and Reagan’s path to becoming president.

 

President Trump’s Economic Advisor

Dr. Arthur B. Laffer

Born in 1940. After graduating from Yale University, Dr. Laffer received his MBA and Ph.D. in economics from Stanford University. Dr. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm. He is also known as the father of supply-side economics, which became the foundation of Reaganomics. Dr. Laffer was an economic advisor to President Trump’s 2016 presidential campaign. He has authored many books including “The End of Prosperity: How Higher Taxes Will Doom the Economy — if We Let it Happen” (2008) and “Trumponomics: Inside the America First Plan to Revive Our Economy” (2018).

(Interviewer: Hanako Cho)

 

— I’d like to ask about your memories of President Reagan this time.

Dr. Laffer: Let me give you a quote to start it all off.

‘The worst day under Ronald Reagan was better than the best day under any other President.’

It’s not totally true, but it’s good enough for our standards. Obviously there were some very bad days under Reagan, but they reflected a general increase in optimism, performance and unanimity of America.

When Reagan ran for governor of California, Edmund G. Pat Brown, who was the governor he was running against, said that Ronald Reagan is nothing but an actor. The response that Reagan had to Brown was, ‘Why not an actor? We’ve had a clown for eight years.’ We all used to joke that Reagan at least knew how to act like a president. Former President Jimmy Carter couldn’t even act like a president.

The reason I was so close to Reagan —I just loved the man dearly— is that he was such a fine man. Ronald Reagan was elegant, sophisticated, genteel, polite, considerate and discreet. This may come from his acting background or his childhood. As a young man, his father had been an alcoholic. Kids of alcoholics behave very meticulously and carefully because they’re always worried about their father hitting or yelling at them.

Ronald Reagan was very meticulous and careful all the time. I never saw him with a hair loose. I never saw him dressed badly. I never saw him angry or badly spoken. He was always elegant in public and private. And I don’t know of anyone in my life who is even close to the way Ronald Reagan was with regard to his personal demeanor. If you had a camera on him at any one moment in time, you would never find him acting badly.

After what happened with Clinton’s scandal, I never remembered, nor heard of a moment when Ronald Reagan was willing to accept such sexual favors for bad policy. I never experienced nor heard of a moment when he accepted financial gratuities or political favors. This man was the height of personal morals and honesty. He was always way above the standard of normalcy, so that made it really nice to be with him at all times because you knew he was a man who was never going to put you in an embarrassing situation.

 

How Laffer Met Reagan

When Reagan was elected governor of California in 1966 at the age of 55, I co-authored a paper with Dr. William Spurr on California’s growth prospects. I started getting really involved with Reagan when he became governor. The reason I knew Ronald Reagan as well as I did was because my godfather, Justin Dart, was Ronald Reagan’s best friend for many, many, many, many years. And so I knew Ronald Reagan socially.

Justin Dart was head of Reagan’s kitchen cabinet and the CEO of Walgreens and Repsol for a number of years and also, finally, of Kraft. He was one of the “industrial magnates”, they call them, of Southern California. Dart was also a politically influential man. There are three men I’d most admired and loved in my life personally, and he is one of them. The other two are my father and former Secretary of State, George Schultz. My second son was named after Justin Dart, he’s Justin Laffer.

When Justin Dart died, I was named the executor of his estate, just like I was for my father’s estate. So, Justin Dart was a very influential wonderful, fine man, just terrific; he and his family were just terrific. And that’s how I got to know Ronald Reagan.

And not only that’s how I got to know Ronald Reagan, but I got to be very close to him because I guess Ronald Reagan right from the very beginning liked my economics.

I was involved as a personal advisor to Governor Reagan in 1976 and attended the convention when he just lost the nomination to Jerry Ford, which was a tragedy.

 

Joining the Kitchen Cabinet as Secretary

In 1979, I was on the committee on electing Reagan’s policy advisory board with people like Will French Smith, Bill Wilson and Jack Wrather. They were all advisers of the kitchen cabinet to Ronald Reagan, and I was one of them.

Justin Dart wanted me to be on this President’s advisory board for the election in 1980, but all of his kitchen cabinet friends were 35 years older than I was. They all thought it was inappropriate to have a youngster like me be on this advisory board to Ronald Reagan. So Justin Dart said, ‘I understand what you all have said, but who’s going to take all the notes? Who’s going to be the secretary of our organization?’ None of them wanted to do it, so Justin said, ‘I know Art Laffer would do it if you let him be in the group.’ They reluctantly allowed me to be part of the committee. If you go to the Reagan Library, you can find my typewritten notes from all meetings.

The advisory board had 12 people in the beginning, but we ended up with 40 or 50 people once George Bush decided to give up the race and his team joined our group.

 

Newly Reformed Reagan

Let’s look back for a second on Reagan’s time as governor. As governor of California, Ronald Reagan was one of the worst governors in U.S. history, for sure in California history. I don’t mean worst in the sense that he was a bad man. His policies were bad. His policies were just bad.

He increased the state personal income tax rate from 9.2 percent to 11.2 percent, and the corporate tax rate from 9 percent to 11 percent. He increased the capital gains tax rate from 9.2% to 11.2%, probably the highest in the nation or very close.

Not only did he support the Equal Rights Amendment, he actually chaired the committee pushing for the Equal Rights Amendment.

He also eliminated almost all of the anti-abortion statutes in the state of California. It is shocking that he was the pro-choice governor of the U.S., because he became pro-life later on.

And it’s just a very different Ronald Reagan. He enacted the biggest increase in social spending, I believe, at the time in California. And I could go on and on, Hanako. But as governor, he was not the Ronald Reagan you and I know. He was not. He was the opposite. He was a liberal. Now, he was conservative on military defense and peace and law and order. But on economics, he was a liberal.

— How was Mr. Reagan able to shift his views?

Dr. Laffer: When Reagan ran for president in 1976, we got him elected because of the power of Proposition 13.

He planned to cut tax rates with Kemp Roth. And a reporter asked him, ‘How are you going to pay for these tax cuts?’ He stopped and said, ‘I’m going to eliminate waste, abuse and fraud, and cut government spending to match the tax cut.’ That’s what he said in 1976.

In 1980, another reporter asked him the same question, so he looked up and said, ‘What do you mean to pay for the tax cut? The tax cut will increase economic growth, prosperity, output, employment and production such that revenues will increase.’

— So he understood supply-side economics.

Dr. Laffer: That’s right. In 1976, even though he liked the tax cut, he didn’t mention any of these supply-side responses.

Between ’76 and ’80, Proposition 13 passed in California. The passing of Proposition 13 in California to lower property tax rates had a huge impact on Reagan (see also Feature on Dr. Laffer, The Father of Supply-Side Economics: Proposition 13 [Part 4])

We cut property tax rates from 2.5 percent to 1 percent. We were opposed by Democrats and Republicans, all of the labor unions including the California Teachers Association. We were opposed by all the big businesses in California. Literally no one supported us in the race in 1976 except for one small group called the ‘voters.’

We won the election in June 1978 with all of this opposition by over 60 percent of the vote. A landslide victory. There was no longer any politician who was not in favor of tax cuts, Republican or Democrat. It is amazing what happened. In the general election of 1978 — now remember we won the election in June of 1978 which was the primary election for Republicans and Democrats. By the time we got to November’s general election, every person who opposed us lost their seat. The voters were furious at the politicians. It was the most wonderful time period, Hanako, you can imagine.

Ronald Reagan saw the voters’ reaction to supply-side economics arguments that were put forth. That’s what changed his view from 1976 to 1980.

And then I was on the advisory board for Reagan in ’80 and then I was one of the president’s economic policy advisers on the transition commission. I mean, I loved Reagan and I think he liked me a lot too. If you read Bob Colacello’s book “Ronnie and Nancy,” the most intense compendium of Reagan before he was elected president, it was clear that he and I got along really well.

I served as Reagan’s personal advisor from 1976. We would have luncheons together before the ’80 election. He’d come in with a stack of papers with paper clips and we’d sit down and go through all of his articles that he read. He was an incredibly intellectually curious man. I spent a lot of time explaining why the liberals say this, why we say that, what the differences and evidences are. He picked it all up. Our relationship continued throughout his presidency. I was on the President’s Economic Policy Advisory Board which was about 12 of us who met with him every three or four weeks.

 

Winning the Presidential Election

The 1980 election included three people — Jimmy Carter, Ronald Reagan and John Anderson, who viewed Reagan as way too conservative. Anderson ran as a moderative Republican. Even a week before the election, the polls were showing that we weren’t going to win. All of a sudden, we got 51 percent of the vote. Jimmy Carter got 42 percent and John Anderson got 7 percent of the vote. Ronald Reagan won the election in a landslide.

The 1980 election was won on tax cuts. Following Proposition 13 in California, we had Proposition 2½ in Massachusetts. We had the Pete du Pont tax cuts in Delaware. We had tax cuts in Puerto Rico with Governor Carlos Romero Barcelo, whom I worked with closely. I went down to Puerto Rico all the time. I did tax cuts in Guam and the Northern Marianas.

We had tax cuts all over the nation. And coming into the election the voters really wanted tax cuts. And then when the election came, Ronald Reagan won in a landslide.

- It was a referendum on tax cuts?

Dr. Laffer: It was a referendum on tax cuts almost everywhere in the country. Coming into the election, the voters really wanted tax cuts, and it was just amazing what was happening. That’s how it culminated in the election in 1980 of Ronald Reagan with his tax cuts.

 

Three Major Accomplishments on His First Day in Office

— It is often said that Mr. Reagan’s structural reform, including deregulation efforts, became effective 12 years later during the Clinton administration. Could you describe the Reagan administration’s deregulation efforts?

Laffer: He led a lot of deregulation efforts, and he made some big mistakes. The one I had a big argument with him was when he put sanctions against Japanese steel imports. It was called the anti-dumping sanction in the U.S. I did not want him to put sanctions on, but he did it anyways. So, I’ve been involved with his discussions on regulation a lot.

The first thing he did after taking office involved air traffic controllers. The air traffic controllers were a fairly large union — all of those people at the airport in towers by the airport who give instructions of when each plane is supposed to land, park, stop and depart. Ronald Reagan was not a favorite of the unions. Every union in the country opposed him except for the air traffic controllers. In both the primary and general election, the air traffic controllers supported Ronald Reagan’s election. So they were his favorite union ever.

What happens is the day he was elected, the air traffic controllers went on strike.

They closed down all airports. President Reagan gave them three days to come back from the strike. If they didn’t, he said he would fire all of the air traffic controllers. They did not come back from the strike, so the first thing he did when he was elected was that he fired all the air traffic controllers, the very union that supported him in both the primary and in the general election. That was the beginning of his breaking up of all the unions, which led to a lot of prosperity in the U.S.

The other major deregulation that Ronald Reagan did on the same day he took office involved Jimmy Carter’s controls on the oil industry. Carter had set prices below the market, so there were long gas lines in the U.S. He had put on wellhead price controls on American oil wells, and he also placed an excess profits tax on oil companies in America. On the day Ronald Reagan took office, he got rid of all the oil controls that had been enacted by Jimmy Carter. Within four years, the price of oil had dropped by a factor of three. He got rid of the price controls, wellhead price controls and excess profits tax.

We went from the most regulated energy industry in the world to the least regulated, and the free market produced wonderful results. Both the air traffic controllers and the oil industry are two of the most important examples of deregulation under Ronald Reagan that really worked.

There was another thing that happened on the day Ronald Reagan was inaugurated. Under Jimmy Carter, Iranians had captured the U.S. embassy in Tehran, and they were holding all of the American embassy personnel hostage. On the day Reagan took office, the Iranians let all of the U.S. hostages free because they knew exactly what would happen if they didn’t. Reagan was not Jimmy Carter. He would have handled the Iranians that day. The Iranians were smart enough at that time not to test Reagan.

The three things he did on the day he took office were deregulating oil, firing the air traffic controllers and getting hostages released from Iran. Isn’t that amazing? We had a joke back then. ‘What’s covered with sand and glows in the dark? Tehran half an hour after Reagan takes office.’ It’s a pretty gruesome joke, but just a joke, nonetheless.

Featuring Dr. Arthur Laffer, Father of Supply-Side Economics [Part 5]
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