It’s Not The Recession: Slumping Into Secular Stagnation
Pre-Midterms Conversation With Dr. Laffer: Sharing Good News, Issues Over Labor Force Participation Rate and Secular Stagnation

This interview was conducted on October 31, 2022, by Hanako Cho.


What Can and Can’t the House Do?

Dr. Laffer: The Republicans will stop this Democratic onslaught, but they can’t reverse it, Hanako. There are some things they can reverse, but lots of things they cannot reverse. The Build Back Better bill that was passed — it’s passed. It’s the law. The President signed it. You can’t undo that.

But the Republicans have control of the purse, of the budget, so the House Ways and Means Committee can block funding for some of these programs, which would effectively kill those programs until the Democrats get control again. If that happens.


Good News From the Laffer Family: Laffer Expects 14th Grandchild, Son-in-Law John Lindsey Wins Michigan Senate Seat

Dr. Laffer: Now, I have two pieces of absolutely wonderful news for you.

My son-in-law, John Lindsey, won his primary in Michigan for State Senate in the 17th district of Michigan. He was the first Trump-endorsed candidate this election cycle. He was opposed by an incumbent senator, and he was opposed by the DeVos family. Betsy DeVos and all the big-money people in Michigan spent lots of money against him, and he won 61-39%. [It was a] huge landslide victory. This is the first time an incumbent senator has been unseated in Michigan since 1984, so this is a huge thing.

Now, I don’t know if I told you about my son-in-law. I have six children, and he’s married to my youngest, Allison. She’s 37, I think. They have two children, William and Violet, and the other great news is, she is expecting a third child. They know it’s a boy, and that makes my 14th grandchild. Woohoo!

John Lindsey spent seven years in the army as a Special Forces Green Beret — three tours of duty in the Middle East. He has served his country really well. He is a graduate of Yale University, which is where I went, along with one of my other daughters, my father, both my brothers, my nephews, nieces, so he has a family tradition there. He’s from that area of Michigan. He’s just a wonderful man, Hanako. I just love him dearly. And I love my daughter more than life itself. I mean, I have four daughters, and my daughters are just wonderful. That’s my good news.

But very seriously, he is someone you want to watch: Jonathan Lindsey of the 17th district of Michigan. It was redistricted because Michigan lost one congressional seat. He had a district there that he was running in, which is where he was raised, but he defeated an incumbent senator. That incumbent senator was backed by the wealthiest families in Michigan. They went wholehearted because they hate Trump, and so they went wholehearted against my son-in-law.

I know Betsy DeVos well. I asked her, and she told me flat out that she would not go against my son-in-law. The vice president, Mike Pence, asked her about it, and she said that they would not go against my son-in-law. Larry Kudlow called them, and they said they would not go against my son-in-law. All of those promises she broke. She went against my son-in-law, all of the DeVoses, and we beat the machine in Michigan — the Republican, bad machine. We not only beat the incumbent senator, we beat the incumbent senator 61-39. That’s a huge victory. Just for the record, my son-in-law knocked on 10,000 doors. Every day, he started early in the morning and went knocking on doors. That’s a huge number. That shows the drive, the initiative, that young man has. I’m very proud of him.

Now, we also had a lot of volunteers, but he, personally, knocked on 10,000 doors. So that’s my good news. We have another grandchild. Come 14th, it’s on its way. And he won the election. You should watch him carefully. By the way, he’s running against the Democrat in the general election, but it’s a 65% Trump district.


The Labor Force Participation Rate Hasn’t Recovered. Here’s Why.

Cho: One quick thought on the job participation rate. As you stated before, about 10 million people are still not participating in the labor force. They are not coming back to the workforce, right?

Dr. Laffer: Yes.

Cho: But the wage is increasing. That is really affecting the inflation rate as well, right?

Dr. Laffer: Yes.

Cho: We are wondering why Americans aren’t coming back to the workforce despite wages being very high compared to Japan.

Dr. Laffer: Let me just say, it is true that wages are high, but they have not risen by as much as inflation. Real wages are not all that high, number one. Taxes on those people are increasing as well. It’s not enough to just have your wage increase be equal to inflation. Your wage increase has to be much more than inflation because there’s an additional tax on those workers.

The people who have left the labor force are primarily low-end workers, not high-end workers. These are people who don’t love their jobs. They are not the people who go, ‘Oh my God. I can’t wait to get into the office to work.’ These are people who find work off-putting. They find work tedious, unpleasant. They are also the ones who get the government spending checks. Therefore, they’ve been given a lot of money by Biden, and they just choose to use that money to quit work because they don’t like their work.

That’s why you find a large drop in the participation rate, and that’s been going on for a while now. That’s also why you see a huge increase in our debt-to-GDP, which is a serious issue now because interest rates are rising. The Fed’s balance sheet is about $9 trillion, and every 1% increase in the interest rate is a huge increase in government spending. You know that from Japan. But in the U.S., interest rates are rising much faster than they are in Japan. The fiscal solvency of the U.S. government is at risk. It is really at risk. I think our debt-to-GDP is about 125% of GDP. Now, Japan is much, much higher at around 250%.

U.S. interest rates, though, are rising. The 10-year bond yield is a little over 4%. Now, it should be 8% or 9%. It’s going to go a lot higher, Hanako, as far as I can tell. I’m just an economist, a boring old economist looking at things, but let me just tell you that I think interest rates should be in the 8-, 9-, 10-percent range on the 10-year bond. They’re not, and so that’s where I think the real problem comes with Biden over the next two years. But the next two years will be a split government, number one, and number two, will be very contentious because what is really needed now is the election in 2024 and the new president in 2025.


It’s Not The Recession: Slumping Into Secular Stagnation

Cho: Are you expecting a deeper recession in the U.S. next year?

Dr. Laffer: If you look at what happened, I don’t know if a ‘recession’ is what I would call it, Hanako. We did very well under Trump until February of 2020. Then, of course with the pandemic, output dropped dramatically then it came back. But it never came back to where it was.

If you look at the trendline of where we should be, we are a number of million jobs lower than that. GDP growth, while it bounced back some, didn’t bounce back as much as it had fallen. Now we’ve had two quarters of negative growth. The first estimate is 2.6% in this latest quarter, which is not great. If it were with a bunch of other quarters of 2.6%, it wouldn’t be terrible, but with two quarters negative and then only 2.6%, it’s not a good number. If you look at the insides of that number, if you sort of open up the hood and look inside there and look at all the components, the components do not fill you with confidence. That’s what we have on the GDP number.

Everyone talks about a recession, but my view is a secular stagnation like Japan has had. I think the U.S. is going in the direction of Japan: very slow growth for a long period of time. I’ve talked to you about Japan’s stock market. In December of 1989, the Nikkei was at 38,900. The Nikkei today is at 27,800 after 33 years, Hanako. That’s a big bear market. Back in the late 1980s, Japan was the next strongest nation on Earth in an economy. That’s not true today. Your country has declined substantially over the last 30 or 35 years.

The U.S. looks like it’s starting to go on that path. That’s what I’m worried about, not a recession. You cannot solve it by government spending. A poor person cannot spend himself into wealth. It just can’t. And a country can’t tax itself into wealth and prosperity. It doesn’t happen. That’s what Biden has been trying.

So now we look at the future. I think we’ve stopped the hemorrhaging for the next two years. I think the Republicans will do a fairly good job. Then we have to really look hard and tough to find someone who’s going to be a great leader. It may be Trump. It may be DeSantis. I don’t know who, but we need to have a good, solid, fiscally responsible president to bring that prosperity back. We need a Reagan. We need a Kennedy. We need someone of that ilk.

It’s Not The Recession: Slumping Into Secular Stagnation
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