Fiscal policies based on the Keynesian economic theory, as a theory of economic recovery, are underway during this Covid-19 crisis, and the government is only getting bigger. In this final installment, I asked Dr. Laffer to talk about the secret to overcoming the problems of Keynesian Economics.

Interviewer: Hanako Cho

Cho: In the previous interview, you mentioned that the government should fulfill their proper role but stop when they hit the limit. The government has a tendency to grow bigger. How should we put a limit on the government to keep them from getting too big?

Dr. Laffer: Now you’ve asked the right question. Are you ready for this?

Put politicians on commission. Don’t pay them a fixed salary. Pay them on performance.

If the economy grows at 3%, the politicians should get their pay fair and square. If the economy grows at 4%, pay them double. If the economy grows at 5%, pay them triple. But if the economy grows at 2%, don’t give them any pay. If the economy grows at 1%, they should pay us because they did a bad job.

They should be just like businesspeople. If businesspeople make a bad product, what happens to their salaries and their profits? If businesspeople make a good product and do really well, they make lots of money. I have no problem with government officials making money as long as I do too.

Cho: That’s the incentive.

Dr. Laffer: That’s it. Now I’m giving you a caricature of the incentive. But you know what I’m saying. Government salaries are the same no matter what they do, and that’s wrong. If there is no performance pay, they’re going to try to boss on everything like a coronavirus adviser when he gives advice. ‘Lockdown. I have the power [laughs].’ It’s all personal preference.

It will be the demise of democracy. It will be the demise of all freedoms. We must get politicians to be put on commission, and we have to get that into the U.S. Constitution.

 

Absence of Commissions Lead to the Demise of Democracy

Cho: Could you address this point about the demise of democracy a little bit more?

Dr. Laffer: I flew to Casablanca in Morocco to give a talk for the tax departments of all the sub-Saharan African countries. They all came and all they wanted from me was, ‘How can we collect more money?’ I said, ‘You know, you’re making a mistake on this.’ I also asked them, ‘What is the dream? You all have children?’ ‘Oh yes, we have children.’ ‘What is the dream for your children?’ ‘Oh, I want my child to work for the government.’ Every one of them wanted their child to get a government job.

The roads, the buildings, they’re all government-run. The schools are all government-run. There’s no industry. They want their children to work for the government because it’s the only power, but why are they all poor? Because they’re all government-run.

There is implicit corruption in the government. If you can hire anyone you want and it doesn’t matter, who are you going to hire? Your friends, your friend’s kids, your kids. Why did Biden’s son, Hunter, do so well in China? And I don’t mean that nastily, I do a lot for my children too. Because he’s his son.

That’s why you need to get a small government, and to do that, we need to put government officials on commission.

They get paid well if they produce good products or economic growth. If they don’t produce that good product, if you don’t get growth, you don’t pay them. And if they do damage to the economy, you take money from them.

If you do a good job for your country, your country prospers and everyone in your country becomes rich, you should get paid more than if you do a bad job. If you’re a teacher and you’re a good teacher, your students learn a lot and get promoted quickly, don’t you think you should be paid more than if you are a bad teacher and your students all flunk, do badly and don’t come to class?

All I’m suggesting, is we use merit pay for politicians and government workers, and we should run the government like a business.

I don’t think democracy can survive if we don’t [put government officials on commission or merit pay] because everything will be run by cronyism and corruption unless people can make more money by doing a better job.

The reason capitalism works is because people who are successful get paid more than people who are unsuccessful. It will be the end of all freedom and prosperity too.

If you don’t have good government, you can’t be prosperous as a country. Government is a very important function.

Cho: You place an emphasis on incentives, but why don’t Keynesians like Paul Krugman think about the importance of incentives as you do?

Dr. Laffer: I think incentives are hugely important.

Mr. Krugman does say that he does not deny incentives and that they have a possibility of changing people’s behavior, but he regards them lightly as we are innately very diligent. He does sometimes say, from time to time, unemployment benefits cause unemployment, but not very seriously.

If you look at unemployment, for example, we have 26 weeks of unemployment benefits and then after 26 weeks, you lose them. Guess what happens to the unemployment rate when we go from the 26th week to the 27th week? It all of a sudden drops to a small fraction of what it was in the 26th week. Once you cut off unemployment benefits, people go right back to work.

Guess what happens when one state lowers its taxes versus another state? All these people in the high-tax state move to the low-tax state, one of the fastest growing states in the nation. Nevada, Texas, Tennessee, Florida, South Dakota, New Hampshire, Wyoming. They’re all the fastest-growing states, and why? They have no income tax.

Guess which are the slowest growing states? New York, New Jersey, Connecticut, California, Iowa, Pennsylvania, Vermont, Illinois. Oh, Illinois is the worst. They have the highest taxes in the nation. It’s true that everyone doesn’t move in one day, but huge numbers of people are moving.

Now, can I ask you a question? If what Krugman says is true, why do countries tax speeders on highways?

Cho: They want to get you to drive more slowly.

Dr. Laffer: And it works. Why do they tax cigarettes?

Cho: They want to get people to stop smoking.

Dr. Laffer: It works as well. It’s not that Krugman’s bad or wrong, he’s not following the edicts of his profession. Economics is all about incentives. It’s all about incentives, profits and becoming wealthy, it’s all about consuming. People work hard so they can buy things. If they’re not allowed to buy things because of taxes, they don’t work as hard. He never talks about how taxing the rich will stop them from creating jobs and innovation.

Now I don’t know why he’s so popular, but everyone wants to do something with the distribution of income. And every time they try to do that, they are thwarted by the consequences of bad taxes. If taxes don’t matter, you and I can sit here with a little chart and decide who should have how much income, and we just take taxes and do government transfers. It would be so easy, but unfortunately that’s not the way the world works.

Unfortunately, we need rich people to work. If we don’t have rich people working, the poor will suffer enormously.

Cho: When you explained the substitution effect last time, you said that those who were taxed will have less incentive to work and those who receive the tax will have income without working, which will reduce their production and end up shrinking the economy. It seems like Keynesians have the false assumption that the size of the economic pie is unaffected by taxation.

Dr. Laffer: If you tax people who work and pay people who don’t work, you get a lot of people not working. When you tax people they substitute out of work into leisure because it’s not worth it. They work less because they earn less for every hour they work. That’s going to lead to a shrinkage of the economic pie.

Japan has gone from the second biggest nation on earth, really close to the United States back in 1990, to very small now. And they just keep on doing the same thing, the same thing, the same thing. And the Americans are doing the same thing too, by the way, not just Japan.

If you and I have our ways [through supply-side economics], we’ll create a political economy of growth for Japan and the U.S. Our people will become wealthy, and our rich people will stay rich. The dream has never been to make the rich poor. It’s wonderful being rich. It’s cool to walk into a store and buy something.

The trouble is some people can’t do it because they don’t have any income. Our job is to create an economy where they get jobs and earn income. The [American] dream has always been to make the poor richer.

For 30 years in a row, Paul Krugman has been writing a nasty piece about me called Cranks and Charlatans. He says how Reaganomics is finally dead, calling me a crank and a charlatan.

Paul is just an angry person. He’s got a chip on his shoulder. He’s angry at everyone and everything, I’ll bet you he never had a date while he was in high school. And he probably didn’t even have a close friend. No wonder he doesn’t like the world. These people like Paul Krugman and Bob Reich are angry, and you can see it by the way they talk and write. They have a grudge.

 

Economics as a Miracle to Create Prosperity, or a Tool to Control

Dr. Laffer: There’s a philosophical difference between myself and Keynesians like Krugman that is underlying our views of economics.

The difference between me and them, forgive me on this, is I love economics because it explains the beauty of the earth. It explains the beauty of the economy. It explains the miracle which is prosperity. The miracle, which is advancements in technology, medicine and all these wonderful things we have. I sit back and look at the economy and I thank the Lord for having such a wonderful system, that it works so beautifully to create so much wealth and prosperity for all these wonderful people.

Their side looks at it and says, ‘How can I use that economy to control people?’ How can I use it to tell them to do what I want them to do? How can I use it to boss people around?

It’s a totally different philosophy.

And that philosophy, in large part, comes from your circumstances in life. If you’ve had wonderful parents, a wonderful upbringing and wonderful family, you aren’t angry at the world. You’re very pleased. You love the world.

If on the other hand, you had a bad upbringing, no one liked you, then you’re angry. And I’m too old to want to be angry. I don’t want to be angry. I never have wanted to be angry. I love what the economy does, what the free market does. And I love being able to study it.

But I study it not so that I can control it. I study it so that I can understand it and appreciate it. And be awed by it. Again, I view the economy as one of the most beautiful things that ever was created on earth.

This Earth is so wonderful. Why would you want to change it? Why would you want to get angry and hate people?

Well, you see the difference. [Keynesians] don’t feel that way. They feel that the Earth is full of injustices. It’s full of wrongs, it’s full of all these horrible, hateful things. It’s true that there are some racists and bigots and misogynists. But that’s not what the Earth is. And the economy is not something that’s horrible, that creates inequities.

The economy is something that’s wonderful and creates prosperity. So that’s our difference.

 

Progressive Income Tax Is a Guaranteed Way of Keeping Poor People Poor

Going back to your question of why Keynesians think that the size of the economic pie is unaffected by taxation, it’s because they have a pre-desired agenda.

They have an agenda that requires them to be able to redistribute income through government control. A high progressive income tax doesn’t work. Not only will it keep the economy from growing but it will also take away opportunities from the poor to succeed.

Let’s say you’re 20-years old, a black youth, poor, not very educated here in the United States. You’ve got some special skill that don’t require all these other prep schools, and all of a sudden you smile because you’re going to be an entrepreneur. You’re going to provide people your skill, and people are going to pay you and you’re going to make a lot of money. All of a sudden, you end up with a tax and IRS auditing your income. You don’t know how to hire lawyers and accountants; you don’t know how to hire deferred income specialists. The progressive income tax is a guaranteed way of keeping poor people poor and making sure that the youth can never get the prosperity of the rich.

There’s nothing more than high taxes and government bureaucrats that keep prosperity down.

Imagine a single mother with a child who lives in Philadelphia. She’s making $29,000 a year, and she gets all these government welfare programs. Imagine that she says, ‘I don’t want this life. I want a better life.’ And she goes to work and studies at night, saves every penny and makes $58,000 a year now in Philadelphia. She doubled her income. But she’s got payroll taxes, income taxes and all these other taxes before recalculating all the welfare spending that she would receive. The more income you make, the less welfare you get.

So her welfare is greatly reduced because her earned income is too high and she loses her welfare, and that mother with a child in Philadelphia today has the same amount of spending power earning $58,000 a year income as she had earning $29,000 in income. The additional income she earned from the earnings is lost because they take the welfare away from her.

This is called the welfare trap. It’s an effective tax rate of 100% on this poor mother and she’s probably a minority, she’s probably black. She probably didn’t have much education. It’s terrible what this government does to people. These people are kept from ever becoming prosperous.

My hope is how to bring these people back into the mainstream and let them have the wonderful life I have. And they can’t get my life with welfare and taxes. They’ve got to work for it. That’s why I wrote about enterprise zones in 1974 to make tax-free zones in the black inner-city areas where poverty is so strong that there are no income taxes, no payroll taxes, very little regulations, restrictions and requirements, no minimum wage, so they’re allowed to make income and keep it.

It just makes me very upset here when I see people like Krugman and these others who are doing things that really hurt the very poor and minorities and challenge people. They always do it in the name of honor, in the name of fairness of helping the poor. It’s just not true.

 

The Difference Between Keynesianism and Marxism

Cho: Keynesians don’t seem to be thinking about production. They seem to think that all we need is demand. That sounds like a kid who is counting on his parents to send him money. On the other hand, supply-side economics sees the value in this flow from work motivation to producing and supplying.

Dr. Laffer: I’ll use an example that my own professor Edward Shaw used billions of years ago.

He said, ‘[Keynesians] believe that supply is like a rubber womb which will expand unembarrassingly and accommodate any fetus of aggregate demand. All you need is demand and saying the jobs are there. That’s it. And that people work no matter how much you tax.’ Of course, we don’t believe that. We believe that people work because they want to buy things. Would you work as hard if they didn’t pay you? Why do you like the paycheck? Because you like buying things.

Why do countries export goods? They sell goods to other countries to buy goods from other countries. Keynesians don’t believe that.

You’re right about the child assuming that the money is sent here by the parents. Just, ‘Hey, write a stimulus check. There you go, $1.9 trillion. Make it a little bit more this week.’ Look at how stupid that is.

 

Run by a Few Elites, Why is Keynesian Economics So Popular?

Cho: You have a deep faith in the economy, and the natural state of your economics is designed to bring out the best in each individual. Keynesian economics seems to be very arrogant with the idea that a small number of elites should just control the economy.

Dr. Laffer: All of these people, Krugman included, want to be head of big corporations, but they can’t do it by making good products. They do it by co-opting the power of the corporation, regulating it, and taxing it, running it. That’s how these elites get all of their power.

That is why we have to make sure that the government is run on commission, rather than on laicism.

Here I am and all my friends who believe in my economics, who believe in individual entrepreneurship and believe in the individual initiative. How many of them do you think go into government? None. If you believe in freedom and if you believe in individual initiative, why would you ever go into government? You would go into entrepreneurial activity. You’d start a business. You’d do something cool and neat, and wonderful because you believe in your freedom. All those people who believe in controlling other people’s lives find government employment really nice. Therefore, there’s a reason why government is full of people who are socialists and Keynesians.

It’s a natural selection. You’ve gone to the DMV to get your driver’s license and find the long lines that you have to wait in. The people are rude right? At the post office, these people don’t give a damn about who you are. They don’t care. ‘It’s my lunch break. You’ll have to wait for an hour.’

If they were in the private sector, they could be out of a job. But they can do this, they have control over you, because they’re government employees. You’re not the strict consumer, you’re the servant to them.

Cho: Why is it that Marxism and Keynesian economics are so similar in the end, even though they are two different things?

Dr. Laffer: A true Marxist economy is not Keynesian. In Cuba, when someone decides to sit on his tush and not work, he does not get a paycheck. He gets a rifle butt in the face. In East Germany, during the Communist control of East Germany, they would come and put you in jail if you decided you didn’t want to work this week.

That isn’t Keynesian. With Keynesian economics, if you decide not to work, they give you a check. ‘Oh, you poor dear. You stay at home. I understand, here’s your check.’ You’ve got to show up for work in a Marxist country, period. You have no option. So it’s a very different model.

Now, when I was a young graduate student, I was the darling student of the top American Marxist professor. His name was Paul Baran, and Paul Baran did not believe in Keynesians at all. Paul Baran believed that capitalism was doomed because Marxists could do a better job at allocating capital and input capitals.

Marxists believe that the government can control the means of production better than capitalists can because they don’t need to advertise. They don’t need to have big buildings. They don’t need to have fancy lunches. They don’t need to waste all that money on all that stuff. They can just go directly to what the people need.

Keynesians and socialists believe in paying people not to work and taxing people if they are successful. In all honesty, it’s the Keynesians and the socialists who believe in taking from each according to his ability and to each according to his need. I have a certain amount of respect for Marxists. I have no respect for Keynesians and socialists. They are just not economists, that’s all.

 

Outlook on China’s Economy?

Dr. Laffer: I got involved with China in 1970 and on. In the beginning stages of the development process, China had used capitalism dramatically from the old feudal state in 1970. 94% of all production in China came through state-run enterprises in 1970. Today I think it’s 8%. That’s a tax cut.

In 1994, China pegged the Yuan to the US dollar. They basically outsourced their monetary policy to Alan Greenspan. They put in a sound currency, which is one of the prime pillars of supply-side economics of sound money. And lastly, China has opened up its borders for trade with the world like you’ve never seen. We have three pillars of supply-side economics: tax cuts, sound money and free trade. These three pillars have rocketed China to incredible prosperity.

In Japan, right after World War II, MacArthur put in the tax codes in Japan, which means the tax rates on the rich were very, very high. The first thing the Japanese did was very politely cut the taxes. Once they got control, they cut taxes dramatically. You can just see this country growing so rapidly, and for the first part of Japan, they were making cheap little toys that sold all over the world. Made in Japan was a sign of low quality. As the years went on, it became a sign that it was the highest quality and then it went socialist. Between 1989 and 1990 was when they had the tipping point in Japan with the first big tax: wealth tax as a consumption tax in 1989 or 1990. That was the beginning of the end of Japan. If you remember my chart, I showed government spending as a share of GDP in Japan.

I believe that is what’s happening in China. They’re coming to that point, where now they’re going to become Keynesian and Fabian socialists. China is going to succumb to buying people off with government money. I believe China’s growth rates will come down dramatically in the next 10 years.

 

Winning the War

Cho: How long do you think it will take for us to ultimately get out of the Keynesian economy?

Dr. Laffer: I think we’re starting to win in the United States. Let me take you back in history and forgive me for being optimistic now, okay? I’m an optimist.

The highest marginal income tax rate in 1945 was 94%. The highest marginal tax rate today is 37%. When Kennedy was president of the United States, the corporate tax rate was 52%. Today it is 21%. And in 1976 there was one state in the United States that did not have a separate death tax. Today 35 states out of 50 do not have a death tax.

In 1957, in every state in the nation you were required to join the union. Now we have right to work in more than half the states in the nation. In the 1950s and ‘60s it was against the law to sell a product below what the manufacturer said you could sell it for. You couldn’t have discount houses. There was no Walmart. There was no Costco. There was no Target. Now you can discount prices if you buy it from the manufacturer and sell it at whatever price you want.

In 1974, to buy a share of stock in the stock market, the law was you have to pay 32 cents per share. That was your commission. Today the commission is 0%. I’d say it was 1978, all the truck regulations, all trucking fees were regulated by the government. All airline passenger fees were regulated by the government, the Civil Aeronautics Board and the FAA, the Federal Aviation Association. Now it’s free. Air travel is so much cheaper and so much safer. I could go on and on, but we are winning the war. It may take us a while and we have to live through Joe Biden I’m sorry to tell you. And you have to live through your prime minister. But we will win. And you are doing the work of the Lord.

And let me tell you, you should be very proud of the job you’re doing, very proud.

Cho: I feel like I can be optimistic.

Dr. Laffer: You could be optimistic, and you should be very happy because in this Earth you’re just here for a short while. You’re supposed to have a lot of fun when you’re on this Earth for that’s what it’s for. It’s fun, but also doing good, being nice to other people, helping other people. Don’t be a Keynesian. Don’t be an angry person. Don’t dictate and yell at people, make them do things they don’t want to do. Being on this Earth, it’s fun to be joyful, happy. Enjoy your life. But also make sure you do good for other people as well. Do good for yourself and other people.