Featuring Dr. Arthur Laffer, Father of Supply-Side Economics [Part 7]
Putting a Peaceful End to the Cold War

Reagan has the phenomenal achievement of putting an end to the Cold War. We asked Dr. Arthur B. Laffer about Reagan’s relationship with Gorbachev and behind-the-scenes of the Cold War.


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)


Hanako Cho: I’d like to ask you about your best memories with Reagan and have you share stories that portray his personality.

Dr. Arthur Laffer: The first one I want to tell you about is Reagan’s description about the first time he met Margaret Thatcher. The first time he really met her was at a G7 meeting in Ottawa, Canada. And as you know, the G7 is supposed to be very personal. No titles. No names. No pomp and pageantry. Reagan was the last one to arrive at the meeting, so he just raised his hand and said to everyone, ‘Hi, everybody. I’m Ronnie.’

The event was hosted by Pierre Trudeau, who was then the prime minister of Canada. Reagan noticed that Pierre Trudeau was being very rude to Margaret Thatcher, and he was infuriated. He said, ‘Arthur, I was just boiling over, and smoke was coming out from under my collar. I was just really upset by the way he was treating her. But I’d never been there before. This was my first meeting so I didn’t say anything until we had a coffee break.’

Reagan went right over to Margaret Thatcher and said, ‘You know, Margaret, I’ve been watching that Trudeau person. He’s been treating you badly. He’s been saying nasty things, and I’m furious. I was going to say something, but this is my first meeting and I don’t know what the rules are. I didn’t say anything, but I just want you to know that I’m infuriated at what he’s saying to you.’ Margaret Thatcher looked right at Reagan and said, ‘Oh, Ronnie, don’t you worry. We girls know when boys are boys.’

It was one of the funniest lines I have ever heard in my life: ‘We girls know that boys just behave badly.’

The second story relates to an event right after the invasion of Grenada in 1983. Reagan, a few of his friends and Nancy, were going to have dinner at a restaurant in Century Plaza Hotel called Chasen’s, which was our local restaurant in Los Angeles at the time. But before he went out to dinner, he had a little reception at his suite at the Century Plaza Hotel, and he invited three or four of us young kids. I was only 42.

On this island of Grenada on the Caribbean Sea, the Soviets carried out a coup d’état. Reagan sent seven thousand U.S. troops to protect U.S. citizens in Grenada and ended up preventing the formation of a pro-Soviet government.

I know nothing about foreign policy, but it fascinates me. I went over to him and asked him how he had made the decision to go into Grenada. I said, ‘How did you make the decision? Surely in one minute you didn’t get enough new information to change your mind.’ He looked at me and raised his arms. In his inimitable style, he said, ‘What would John Wayne have done?’ It was one of the funniest conversations I’ve had with Reagan.


Losing to Reagan in a Pepper Contest

Dr. Laffer: The third story happened back when I used to sit with him about once a month between 1976 and 1980 when he became president. In those four years, I had lunch with him frequently at the Beverly Wilshire Hotel, which has an annex with private rooms.

He and I would have lunch together in these private rooms. He’d come in with all these newspapers and magazines with paper clips on them. He’d then refer to these and ask me questions about economics. We’d talk for maybe an hour and a half.

During one of the conversations of these meetings, he asked me if I like peppers. I said, ‘Yes sir, I do. I like peppers.’ He said, ‘Do you like hot ones?’ And I said, ‘I’m pretty good at hot peppers. I’m not bad at it.’ He said, “Well, I’m probably better than you are at that.’ We always had the same waiter with a Mexican name of Chico. Reagan called the waiter over and said, ‘Chico, come on over here. Do you have any hot peppers?’ He said, ‘Sir, Mr. Reagan. I have hot peppers in the basement. These are really hot peppers.’

The waiter went away and came back with this tiny bowl of peppers. Reagan put the bowl between us. He said, ‘Arthur, are you ready?’ We each took a pepper, ate it and chewed it. This was the hottest pepper I’ve ever had in my life. My eyes were watering. I couldn’t breathe. I looked over at Reagan, the governor of California at the time, and he was the same as I am. He turned blue. Then he looked over at me and says, ‘Are you ready for a second one?’ I said, ‘No, sir. You win. You win.’ So that’s another fun little story.

Another one is about a time he came over to my house. He used to come over to my house for lunch. He brought Nancy with him quite frequently, but sometimes he just came over by himself. When he came over by himself, he was a very different person. Nancy was not quite so humorous as the president was. He always liked to sit next to the pretty girl. And we always had chocolate chip cookies. He would go to my wife and say, ‘Traci, can I have a second chocolate chip cookie? Nancy isn’t here, and she won’t know about it. She’d never let me have one if she were here.’

Those are very personal stories. They show you the man who was Ronald Reagan. He was very much a human — just a wonderful, wonderful person.


A Historical Encounter with Gorbachev

Laffer: The next story I have for you is about the first time Reagan met Gorbachev in Geneva, Switzerland. They had set up a summit there where he and Gorbachev were going to meet and discuss things. Just for the record, Ronald Reagan did not speak Russian, and Gorbachev does not speak English at all.

Reagan prepared for this meeting very carefully. He was at the Rothschilds’ home in Geneva, and there’s a little path that goes down. There’s a little cabin at the end of this path, and in this cabin, there’s a fireplace. Reagan instructed his people to build a fire in the little cabin in the fireplace. He suggested to Gorbachev that they should go down to sit in front of the fire, get to know each other and become friends. Reagan said to Gorbachev:

‘Mikhail, I would really love to become friends with you. I think it’s very important that you and I become personal friends, that we learn about each other, we get to know each other, we get to trust each other, and after trusting and knowing, becoming friends, perhaps we can sit down and do a negotiation to remove a lot of the nuclear threat that faces the world. I hope that’s the case.

The reason we’re so heavily armed is that we don’t trust each other. That’s the problem. The reason we don’t trust each other is not because we’re heavily armed. It’s the other way around. You and I need to build up a trust.’

Gorbachev thought that was a great idea. Gorbachev held Reagan by the arm and walked down the path like two old European women going shopping.

The two of them were just coming up to the cabin when Reagan stopped Gorbachev. Reagan looked at him and said, ‘Mikhail, I hope this works. I hope that you and I can get to know each other, get to trust each other and get to be friends. And that by being friends, we can trust the word of the other and reduce nuclear arms in the world and make the world safe for humanity forever. I just hope that can happen. But I want to tell you something, Mikhail.’

Reagan then held Gorbachev and looked him right in the eye.

He said, ‘I am not like any other president of the United States. I do not believe in nuclear matching mutually destructive forces. I don’t believe in the balance of power. If in fact we don’t become friends, I just want you to understand right here and now that I’m going to do everything in my power to dominate the Soviet Union militarily. So, let’s just see if we can’t go inside and become friends.’

Looking back from now, President Reagan, Margaret Thatcher and John Paul II were central players in ending the Cold War. I would also add Mikhail Gorbachev to the list, because without an open mind in the Kremlin, it would have been much more difficult for Reagan to do what he did in ending the Cold War in a peaceful manner.


‘The Moment I Knew Reagan Was Going to Win the Cold War’

Cho: President Reagan was successful in ending the Cold War against the Soviet Union without escalating it into a hot war. That was a truly remarkable achievement. When did he come up with the idea?

Laffer: Dick Allen (Richard Allen) was Ronald Reagan’s first national security adviser. He did not last long with Reagan and was gone in three months.

Dick Allen, Jack Kemp, Reagan and I had a meeting just before the 1980 presidential election. Reagan asked Dick, ‘To start off this discussion, I want you to give a summary of U.S. military policy in the post-World War Two era.’ Dick Allen, who had quite a sense of humor, said, ‘Yes, sir. We’ve been doing basically two things throughout the entire post-war period. We’ve been harassing our friends and we’ve been cajoling our enemies.’

Reagan looked at Dick Allen and said, ‘Excuse me? What did you say?’ He said, ‘Sir, we’ve been harassing our friends and tormenting them, while we’ve been treating our enemies nicely and cajoling them.’ Reagan sat back and looked sort of quizzically. ‘Well, what were the consequences of those policies?’

Dick Allen looked at him straight in the face and said, ‘Sir, you can see that we have almost no friends left in the world, but we have lots of enemies.’ Everyone was roaring and laughing, but Reagan wasn’t. He leaned back, looked at all of us and said, ‘I guess we’re just going to have to do two things. We’re going to have to make our friends stinking rich with supply-side economics and scare the bejabbers out of our enemies with Star Wars.’

That was the moment that I knew Reagan was going to win the Cold War.

Cho: The Reagan administration took on a poor economy from the previous administrations.

Dr. Laffer: When we took over the U.S. on January 20, 1981, we found a country that had been driven into the ground. There was bad management for at least 16 years under Johnson, Nixon, Ford and Carter. All four of them ran the country into the ground and left a pile of trash and rubble, which was called America. We reached inside this trash pile and found way deep down in the rubble, this little market that we polished on our shirt. We made it shine bright — it said U.S.A., Inc.

We did just what a businessperson does when it takes over a company that has been run into the ground. When you take over a company that has been run into the ground, you rebuild the capital stock. It costs a lot of money to put the capital stock back together. It costs a lot of money to put on protections around the factory — that’s defense spending. You also have to cut taxes on the workers to incentivize the workers to buy and product good products.

Cho: That’s how the U.S. became a mighty, prosperous nation.

Dr. Laffer: The key reason why the U.S. is as successful as we are is our economic prowess. Japan has also always been an economic powerhouse, which is why Japan is so much more powerful and important than other countries with a population of over 100 million.

The U.S. is much smaller than countries such as India and China. Yet, our power exceeds our size because of our economics. The key to getting power is not because you’re big. It’s because you’ve got a good economic system. In my view, it’s not about being number one — it’s about doing things right and making sure the economy prospers to help people as much as possible. In that sense, I think Harding and Coolidge did a great job in the 1920s along with Kennedy and Reagan who both made America great. I think Trump is doing a great job on getting America back to being strong.


Properly Using ‘Debt’ as a Tool

Cho: Some opponents of Reaganomics say that Reaganomics has led to a financial budget deficit.

Dr. Laffer: We did run a big deficit, but the prosperity that was created in the U.S. was second to none. Spending the money. Cutting taxes. Increasing defense spending. All together was the perfect combination to create prosperity in America under Reagan.

Borrowing is neither bad nor good. Borrowing is a tool you can use to create prosperity or create despair.

It is stupid to borrow money to pay people not to work. But it’s very smart to borrow money to invest and increase rates of return on your investment.

Let me ask you the question: how much would you borrow if I lend to you at 1% and you’re guaranteed 20% returns?

Cho: As much as I could.

Dr. Laffer: Now reverse those numbers. Let’s say it costs you an interest of 20% to borrow money, and your return for investing is 1%. How much would you borrow?

Cho: Nothing.

Dr. Laffer: Absolutely not. Borrowing is not a problem — it’s a tool. It’s a tool that can be either misused or used correctly. When Reagan and Donald Trump came in, they used it correctly. When Barack Obama and George W. Bush came in, they used it incorrectly. They borrowed money to pay people not to work.

Featuring Dr. Arthur Laffer, Father of Supply-Side Economics [Part 7]
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