Why Is ‘Sound Money’ Important?
Protect Money From Government Control [Part 1 of 2]
Supply-side economics puts an emphasis on ‘sound money’ along with tax cuts and free trade. How is recent monetary easing policy reflected in the eyes of Dr. Laffer? I asked Dr. Laffer what kind of monetary policy should be adopted.
Interviewer: Cho Hanako
Cho: In the U.S., consumer prices are on the rise as government spending is increasing. Regardless, President Biden repeated three times that a multi-trillion-dollar spending plan will ‘reduce inflation, reduce inflation, reduce inflation.’ What are your thoughts on this remark?
Dr. Laffer: This question harkens back to my early career in my 40s. I’m really excited to talk about it with you in the modern context because these issues don’t change. Humans aren’t that much different than we were 2,000 years ago. Humans are humans. We behave in the same way. Likewise, governments are governments. They also behave in the same way.
With respect to governments, governments always want to control you. They always want to control whatever they have their hands on, and that’s a common thread throughout the eons of human existence.
We must be diligent at our job, which is to make sure that the government doesn’t take control of more than it needs to, and that we have some of our lives left other than what’s being controlled by the government.
Government Controlled Money Since Ancient Times
Dr. Laffer: Money and inflation is an area where the government has long had a lot of controls. They have decided what money was going back 4,000 years, whether gold or silver, or what coins are.
Of course, this all relates to the paying of taxes. A lot of words in English come from original tax words.
The word ‘gold’ and ‘money’ are both part and parcel of a tax system, of a government-controlled system. In fact, even the word for ‘cattle,’ which in Anglo-Saxon was ‘fee,’ is a word. That was the fee people set.
People throw salt over their left shoulder as good luck because you used to keep your little salt bag over your left shoulder. Whenever you spilled salt, you scraped it up with your right hand. You lifted the bag up over your left shoulder and flipped it in, and that’s why it’s supposed to be good luck because you’ve got more salt. The word ‘salt’ itself is the origin of the word ‘salary,’ which is ‘salarium’ in Latin.
Money, inflation and government control is an ancient area of concern. Government has almost always, to a large extent, controlled what is and what is not money.
Redistribution Kills the Economy
Dr. Laffer: With that in mind, let’s start on your first question.
Let’s say the government is going to spend a trillion dollars. Now, almost all of that spending is in transfer payments [like stimulus checks, for example]. It is not in the production of goods and services like roads, highways or bridges.
Now, a transfer payment is when you take from one person and you give it to another person without requiring anything specific from either person.
Let me tell you what this means.
The government doesn’t produce anything, but they redistribute income. Anything they give to someone, they have to take from someone else. The only people they can take from are those who produce.
Those workers and producers will be less incentivized to work, so they will come to depend on government. The Biden administration is trying to reward people for begging.
Whenever you give it to people who do not produce to get that money, you have created an alternative source of income for those people, which will incentivize them to also produce less.
It is easier to understand this idea from the very complete limit. What if we were to redistribute all income so that everyone who worked and produced received nothing, and all those who don’t work and don’t produce received everything? In other words, if we take everything from workers and producers, and give it all to those who don’t work and don’t produce, there will be no production whatsoever. You will have killed the economy completely.
So whenever you do these trillions of dollars of transfer payments, what you do is you incentivize workers and producers to produce less, and you incentivize the transfer recipients to also produce less.
This is not liberal or conservative, left-wing or right-wing, Republican or Democrat. It’s a very simple thing and it’s just plain math.
Whenever you do trillions of dollars in transfer payments, both producers and transfer recipients will produce less so you will reduce total output (*1).
Many of my colleagues in the universities do not agree with me on this even though it is just basic math and economics. The reason they don’t agree with me is that they are trying to impress their political colleagues with their woke instincts rather than trying to impress their political colleagues of their competence in being good economists.
It bothers me how professional economists will talk at great length about topics that have nothing to do with economics and, in fact, are almost anti-economics. Irving Kristol, a political commentator of conservatism, put it beautifully a long time ago. He said it takes a Ph.D. in economics not to be able to understand the obvious. You have to really be well-trained to know that two plus two does not equal four. It takes a lot of training to get you to forget simple truths. That’s a joke by Irving Kristol.
Will Biden Turn Hard-Working People Into ‘Entitlement Beggars’?
Dr. Laffer: Now, with that in mind, Biden says that if you spent trillions of dollars on transfer payments, that would lower inflation. But if you produce less goods and services, will the price of goods and services go up or down?
Cho: They will go up.
Dr. Laffer: They will go up, not down. Scarcity leads to higher prices, not lower prices. The exact opposite of what Biden is saying is the truth with a multi-trillion-dollar spending program that will reduce the supply of goods and services and make them more scarce, which tends to make prices rise. That is the long and the short of it there. Biden has it exactly backwards. His claim that a multi-trillion-dollar spending plan will reduce inflation is absolutely silly.
Frankly, the reason why Democrats like transfer payments is because those who receive the money feel good about getting the check for not working.
It’s important to understand the mindset of a welfare recipient, so let me give you an example.
Imagine you walk outside of your building every morning, and there’s a beggar sitting outside the front door. Every morning you give the beggar a dollar bill, and you’ve done this for a long time. Imagine one morning you walk out of your building. The beggar is standing there, and you walk right by him and don’t give him the dollar bill. What will the beggar do? ‘Hey, where’s my dollar bill? You owe it to me.’
He demands it because it is no longer a gift. It has become an entitlement.
That is what Joe Biden is doing in order to get votes. He is trying to make government welfare recipients feel that they are entitled to the money and therefore vote for him because he will always give them the money. Then, he will tell you that the Republicans will not give you the money.
This political process works in families as well. Babies are entitled to getting the bottle-fed milk. There’s a great deal of entitlement to being a child. The role of the parents is to make the child aware that these entitlements will disappear, and they will have to earn things on their own.
One of the toughest jobs of a parent is to wean the child off of the entitlement of the parents, and it’s exactly the opposite of what Joe Biden is doing. He is trying to get self-sufficient, hard-working people to become ‘entitlement beggars.’
The consequence of all of this is lower growth, lower output, more poverty, more despair and less prosperity.
The longer and the more you pay people to not work, and the longer and the more you tax people who do work, the decline in output and employment will be greater. Also greater will be the decline in the long-term growth path of prosperity and output for the economy. A perfect example is Japan, and we are becoming Japan. I don’t mean to say that to be mean. I’m saying it because it’s what these policies ultimately lead to.
FRB Only Gives a Partial Truth
Cho: Federal Reserve Chairman Powell says the inflation in the U.S. is temporary. Do you think so?
Dr. Laffer: There is some truth to that.
When we had the first couple of months of the pandemic, which was around March, April, May, June, July of 2020, there was a panic, and prices dropped very sharply. I think stock prices went from 30,000 to 18,000. All sorts of things dropped sharply in price, from housing to goods and services. When you compare those prices in 2020 with the same months in March, April, May, June and July of 2021, there is an illusion of very rapid inflation.
But once that sort of blip goes by, a lot of those prices won’t rise nearly as much as they did before.
When the crisis hit, everyone wanted to get paper and canned goods. All of that stuff will disappear, and the prices will come down quite sharply or at least they won’t go up anymore.
Lumber prices have gone way up, and then they came way down. A lot of other prices that had gone way up will come way down.
There is a lot of truth to what [the FRB] says, that the current rise in prices is temporary, but there’s also some non-truth to that. Some things like gasoline prices can be recouped very quickly, and things like that can go up and then come down. That’s not all prices. There are a number of prices of products that I don’t believe will fall. For example, I don’t think there’s much of a chance of housing prices falling. They may not inflate as fast, but they won’t go back to where they were.
Cho: Why will these housing prices not go down?
Dr. Laffer: They may in some. But we’ve got a situation where there was no production of housing, no construction, no building and nothing was going on. Now you’ve got a shortage of houses.
Even if the supply stream comes back on, it will take years before those houses have been reproduced enough to get housing prices to fall back. Very long, durable assets like houses will take a long time to build enough new products to satisfy the demand.
Housing is not only an expensive product for people to buy, but it’s also a major asset in their portfolios. It’s both a liability and an asset, and on balance, it’s an asset. If housing prices rise in real terms, that means that homeowners are feeling wealthier. You never want to live in a place where housing prices are low because that means no one wants to be there.
I would not say that rising housing prices are necessarily a bad thing to happen in a country. Rising stock prices are not necessarily a bad thing. A good stock market, a good housing market, are good things for an economy. Isn’t it true in Japan too that the wealth of a household depends partly on property valuation? A greatly increasing share of U.S. capital stock is in housing as well.
The valuation of good versus bad inflation depends on how the housing market prices rise. If they rise because supply is no longer available, that’s not good. But if they rise because the public’s wealth is increasing and they want better houses, that’s good.
The problem lies in Powell’s explanation.
There are a number of categories of prices that will stay high and continue to rise. By the omission of saying that, Powell and the FRB are misleading people into believing something that is not true. The FRB should tell the whole truth. This is important for people to understand in order to make good decisions.
These politicians are trying to mislead people into believing a partial truth, not a whole truth.
It’s just like Biden’s ‘reduce inflation, reduce inflation, reduce inflation.’ Politicians are repeating things that are misleading others to believe something that is not totally true, and I hate that in politicians. We should have a right to be able to judge politicians by what they do and what they say they do and have them be transparent and truthful with us.
Therefore, we have a right to expect politicians to tell us the truth, the whole truth and nothing but the truth. They should not try to deceive people, but unfortunately, they are deceiving people. They’re trying to deceive people, and they’re trying to play to people’s biases so that people believe these people are telling the truth when they are not.
The first two questions you asked are exact examples of the misbehavior of politicians, and it applies to all politicians. It’s every politician in Japan and in the U.S. Maybe not everyone but pretty close to everyone, and it’s a tragic shame.
The Power of Controlling Money Should be Taken Away From Government
Cho: If the inflation rate rises, what kind of monetary policy do you think should be adopted by the FRB?
Dr. Laffer: This is where I go back to the book, ‘The Emergence of Arthur Laffer,’ which talks about my early career.
Before I answer your question, my view is that the power of controlling money should be taken away from government. There is no reason why government should control money. This is another example of the overreach of government.
I think the world did a lot better when it was on the gold standard (*2) or on the Bretton Woods standard (*3). If you look at the world under Bretton Woods, we had stable prices and stable exchange rates for long periods of time. From time to time, they did change, but it was a very efficient, good monetary system.
Now, with the government trying to control all this money through the central bank, the Federal Reserve Board has become a huge transfer payment agency trying to bail companies out that should go under, subsidize companies that are bad, penalize companies that are good. The Federal Reserve has become nothing more or less than the Treasury trying to influence production decisions.
What should the Fed do? The Fed should try to get out of the money business. It should be an institution that makes sure banks don’t go bankrupt. It should try to stabilize the value of the currency. It’s not their job to do anything else.
The one thing that’s very important about money is that it is a numeraire to which you can attach any good, service or product in the economy.
In other words, let’s say you and I make a contract. You want to borrow $100 from me, and I want to lend $100 to you. We agree on an interest rate and on the provisions in the contract. What both of us want in that contract is to know that the value of a dollar 5, 10, 15, 20 years out into the future is stable. The Fed should stabilize the long-term value of the dollar and do very little else. They should regulate reserves. They should make sure that disclosure limits and banking regulations are in place. That is their domain.
Their primary function in the economy is to make sure that the value of the currency remains stable over long periods of time so that people in the marketplace can make contracts with each other in that currency knowing full well that the value of that currency in the future will be the same as it is today.
