America, From Inflation to Recession
An Interview With Dr. Laffer


Cho: The Consumer Price Index (CPI) jumped from 1.4% at the end of President Trump’s term to 8.5%, 15 months after Biden’s inauguration.

Dr. Laffer: I expect the number to come down to 7.7% or 7.6%, in that range. That’s because the numbers being dropped out of the inflation calculations were fairly large. But then, in the three months preceding the election, the numbers that are being dropped off are very small, so I expect the index and the inflation rate to increase dramatically just before the election. This would be very unpleasant for President Biden’s Democratic Party.

Now, what we also know is that the Producer Price Index (PPI) inflation is much higher than the consumer price inflation. The PPI is the prices of goods in the stage before they were sold to the public. The PPI inflation has been much higher than consumer price inflation, which means that the inputs of products being sold have risen in price, a lot more than the final prices.

The other thing is that the Federal Reserve has printed so much money that there’s no way they can contract the money supply to stop inflation. They just can’t do it. The money supply is conducive to more inflation. The PPI is conducive to more inflation. The monthly pattern of CPI is conducive to more inflation.

This implies that there’s going to be even more inflation for the next four or five months. The only thing that has not increased as much as inflation is our wages. Real wages are going down.


Inflation Triggered by Massive Government Spending and Decreasing Labor

Cho: What are the main causes of the inflation?

Dr. Laffer: Well, I think that the one really big main cause is the government spending of the Biden administration. When they gave all that money to people for not working, people bought things that they didn’t produce, which stimulated demand. When you stimulate demand and you don’t stimulate the supply, that leads to higher prices. That’s number one.

Number two is, they gave these people so much money that low-income workers had enough money to quit their jobs. And so the amount of labor going into the U.S. economy is very low. I mean, total employment today is less than it was in February 2020 by a 800,000 workers. There’s less supply of goods coming on stream because these people aren’t working. And there’s more demand for goods because these people have been paid all these means-tested payments, transfer payments, and they’re buying things like mad.

It’s a deadly combination. Once the inflation starts, if you raise your price, the next guy has to raise his price. It’s a feedback loop that is very hard to stop.


Federal Reserve Chairman Has Neither Insight Nor Guts

Cho: What necessary steps can the Federal Reserve Board (FRB) take to reduce this inflation?

Dr. Laffer: Today’s inflation is very similar to the inflation of the late 1970s. Now, the inflation of the ‘70s was caused by something different, but it was very similar in this form. What [FRB Chairman] Paul Volcker did was he raised interest rates to be way above the rate of inflation.

Now, when we took office on January 20th, 1981, when Reagan took office, the prime interest rate in the United States was 21 and a half percent. The effective federal funds rate was over 19 percent. Inflation was running at somewhere 13, 14, 15, 16 percent, in that range. So the interest rates were way above the inflation rate, which meant that it contracted the system and brought inflation under control.

Cho: He had the guts to do it, right?

Dr. Laffer: He had the guts to do it, he did it and it worked. And Paul Volcker was the professional’s professional. He had the understanding, the talents, the skills, the knowledge to really know what he should do. It’s like operating a very complicated piece of equipment. You need to be really well-trained and have lots of experience. This Federal Reserve does not have either.

Now, we also cut the tax rates under Reagan, as you know, and the economy boomed. We had more goods being produced and tighter money, and the inflation rate just disappeared. But even as it brought inflation under control, it took four years to do it.

Cho: Will Powell be able to raise interest rates as high as Paul Volcker did in the ‘70s?

Dr. Laffer: I don’t think so. They don’t even know what Paul Volcker did. They’re raising the rates 25 or 50 basis points a month. That’s not enough.

They are even purchasing mortgage-backed securities. It seems they didn’t learn any lessons from the 2008 depression.

And from 2008 to 2021, the U.S. monetary base increased from $830 billion to $9 trillion. It’s very hard to work with an environment of $9 trillion worth of debt. It will be harder than the ‘70s to curb inflation under such massive money supply.

Think about it.

The Congressional Budget Office (CBO) is projected to have deficits of a trillion dollars a year for the next five or 10 years. Now, imagine if they stopped buying bonds.

Who’s going to buy those bonds? No one. So what’s going to happen? The interest rates on those bonds is going to go way, way up. The price of the bonds will go way, way down.

You’re going to see a very serious consequence of this bad economic policy of the Biden administration. The consequences are going to be high inflation and high unemployment. Stagflation is what we call it. It happened in the late ‘70s and ‘80s, and that’s what’s going to happen. I think it’s going to be probably as bad as it was back then.

Inflation is a killer of economies. There’s nothing that can bring a country to its knees quicker than an unsound currency.


Inflation Has Already Created Large Tax Hike,

Dr. Laffer: There are two effects.

Think about what the inflation has done to the capital gains tax.

Now, the capital gains tax has not changed. But if you would just make enough money to offset inflation, you have an illusory capital gain, meaning the investments’ returns are zero in real terms, which is taxed at the capital gains rate. That means you’ve raised taxes dramatically. In other words, we have the capital gains taxes going up because we have all sorts of illusory capital gains.

Secondly, the companies that depreciate their plants and equipment are depreciating them at historic costs, not at current replacement cost, which means they’re understating their depreciation. That means they’re overstating their profits, which as you know, is a problem.

Cho: But the Biden administration is suggesting that raising corporate tax is the key to stopping inflation.

Dr. Laffer: The corporate tax has effectively increased dramatically because of under-depreciation. That’s happening right now.

Corporate profits are overstated during inflation, and they have to pay taxes on it. Thank God for Trump’s tax cut (2017 TCJA). Otherwise, we’d be in real trouble.

Inflation Is Already Out of Control

Cho: Do you think this inflation is going to get out of control?

Dr. Laffer: I think it’s already out of control. How are you going to offset the $9 trillion monetary base that the Fed increased?

The government’s going to try to do something. They’ll sell oil out of the reserve; that they’ve done. They’re going to sell diesel oil out of the reserve; that they’ve done. They’ve reduced some tariffs; that they’ve done. Now, they’re going to try to control wages and prices, investigate companies. You’re going to see all of the stuff that happened under Jimmy Carter happen under Joe Biden. They’re going to try to stop it by government action. And, of course, that’s not how you stop inflation.

We have all sorts of areas in the economy that we can improve enormously. We need healthcare price transparency. We could get a low-rate, broad-based flat tax. We could get spending restraint. But none of that’s being done, and Biden will do any of these policies.


Who Knows What the Biden Administration Will Do?

Cho: The Ukraine crisis also fueled this very badly.

Dr. Laffer: Oh, don’t get me started. Russia’s invasion of Ukraine was unconscionable. Now, I think Biden thought that our engagement in Ukraine would make him very popular here in the United States like Bush junior and senior with the Iraq War. But that’s not happening. His popularity is going down. He’s desperately looking for something to do.

Do you know how much money we’re putting into Ukraine? There are about 40 million people in Ukraine, so that’s about $1,000 per person in Ukraine.

I’m going to say a sentence that I’ve said to you many times but let me say it again: whenever politicians are either panicked or drunk, the consequences are rarely attractive.

Cho: With the Ukraine crisis, oil prices are going up.

Dr. Laffer: The first thing Biden did when he took office was closing the Keystone XL pipeline from Canada to the U.S., bringing oil down from Canada to be refined in the United States. It was almost completed, and he closed it. Then, he also stopped allowing people to drill oil in the reserves. So over the last 15 months, U.S. oil production has dropped quite substantially, between 6% to 8%.

Oil is used in many more things other than just fuel. It’s heating houses, fueling cars, fueling airplanes, fueling trucks. But it’s also the primary component of fertilizer. You use oil to make fertilizer to fertilize the fields, to grow corn, to grow cattle, do all of this stuff. Now, fertilizer prices have gone way up, which means that farmers are not using fertilizer as much. This means that our production of food has gone down as well.

He’s suggesting we should buy oil now from Venezuela and Iran. Now, why he wouldn’t just reduce the impediment to U.S. oil production is beyond me. We make our oil cleaner than any other country in the world. We have many more safeguards to protect the environment. We’re much more efficient at dong it, and it gives us more employment here in the U.S. But no, no, no, he’s not going to do that. This is where we sit with the administration, sitting here looking at the oil crisis, trying to stop it from coming from Russia and now, looking for alternative sources from Iran and Venezuela. It is, again, crazy.

I don’t see oil prices coming down. In fact, I think they’re hitting new highs every day. And of course, you know what damage that’s going to do to Japan.

The Biden administration needs to save Putin’s face and put an end to the war so it doesn’t continue to disrupt trade and slow economic growth.

Cho: What’s going to happen next?

Dr. Laffer: I believe that the Republicans are going to pick up the House, and they might even pick up the Senate in the next election this November.

If that happens, you have two years where you have a Republican-controlled Congress and a Democrat President trying desperately to become popular. And growing much older, too. He’ll be two years older and under a lot of stress. You’ll see all sorts of investigations. You’ll see all sorts of other things go on that are very unpleasant for the President. Then you will see the big election in 2024.

Every day, we get closer and closer to the midterm elections. Once that election happens, you have a period between November and January. That period is called the lame duck session. That’s where the Democrats have their last chance at doing something before the new Congress comes in. That’s the most dangerous period of all. They’re willing to do anything desperate because they’re leaving office anyway.

Today, we are in a very similar situation to before the election of 1978 that put the Republicans in control of the House and the Senate. Then, we came into 1980 and you saw Reagan winning the presidency. That’s what I think is happening. I think the politics is going to lead to a lot more hardship in the next two or three years, but then you’re going to get good political results.

America, From Inflation to Recession
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