We interviewed Dr. Arthur Laffer, an American economist, about issues with governmental measures taken by the U.S. against the coronavirus pandemic and discussed ideal policies to combat the corona recession.

(Interviewer: Hanako Cho)

Balancing Health Consequence With Economic Consequence

Cho: I’d like to ask you about the importance of opening the economy. You appeared on Fox TV several weeks ago and stated the importance of balancing out economic consequences with health consequences. What would happen to our economy if lockdown measures continue?

Dr. Laffer: Let me go through it fairly slowly and moderately carefully.

Now, I’m not a medical doctor. I’m not a virologist nor a biologist, especially not an immune system specialist. Although it doesn’t make me an expert, I read technical journals and articles in this area nonstop to the point where it makes me comfortable enough that I can understand what these people are talking about.

There’s a cost and a benefit to government actions. Now, when you look at the benefits of government actions, hopefully, those are health benefits that will reduce the incidence of the coronavirus. They will reduce the damage done to the health of people and, most importantly, will reduce the number of deaths because of the coronavirus. That’s the ideal health consequence of government actions.

These government actions occur at the federal level at the White House and Congress, but they also occur at the state level with governors and state legislators, as well as at the local level. There are very big differences in the levels of where government intervention comes in the controls on the health, and this is social distancing, closing down businesses, all these type of things.

Now, we have a lot of knowledge of the coronavirus. We know it’s a coronavirus, and that it’s a special type of virus with a very different shape and history. We know that it affects older people very strongly. In the United States, the deaths are disproportionately allocated to old males and especially with comorbidity. There is a huge differential.

Regionally, it is also true that the coronavirus affects different regions. For example, on a proportionate basis, New York has twice as many deaths as the next highest death state. Some states in the U.S. have almost none. Even within states, some cities have far more deaths than others. For example, in New York City, there are far more deaths than there are in the rural areas of New York.

The virus has very differential effects, and when you look at what policies you should do in balancing health considerations with economic considerations, you should profile. You should look at a person’s age, gender, whether that person has comorbidities, where the person lives, what the person’s business is, whether they come into contact with a lot of people. For example, a bar in Nashville is very crowded with drunk customers coughing on each other, and that’s a very different business than a farmer trying to farm his fields. We have profiling of all that.

When you look at the damage done to the economy, which is the counterpoint here, the number one damage done to the economy is lost businesses because you shut down businesses. You force people to quarantine and self-isolate, so that cuts down things. But it also has a long-run effect because of the policies carried out have debt associated with it. That debt is growing very rapidly in the U.S. as well.

What you want to do is balance the health consequences of the actions with the economic consequences of the actions. When you look at this, in my mind at least, you want to make sure you profile. That is not what we have done in this country at all.

There have been certain businesses that have been listed as essential, but other businesses have not and closed down. The people who run them will go bankrupt. They will lose their businesses. Now, that’s the start of how you balance the health consequences with the economic aspects. Prosperity is the best cure for diseases anywhere.

 

“It’s Not Just the Disease That Kills People”

Dr. Laffer: Rich countries have much higher life expectancies than do poor countries. Rich and prosperous areas of the U.S. have much higher life expectancy than do depressed areas of the U.S. Poor people have much lower life expectancies than do rich people. But it’s not only life expectancy that matters, but the quality of life also matters. Suicides, assault and abuse all correlate. Bad economics has very big health consequences as well.

It’s not just the disease that kills people. Poverty kills people as well. What you want to do is balance all of these, but the U.S., especially New York, has not done a very good job of that. My view is that you should take the science and economics, and do the analysis. What the federal government did was put in what they call a stimulus. They put in a stimulus package of $2.3 trillion, and they just increased it by another $600 billion, totaling something like $3 trillion on top of a deficit of $1 trillion. With the slowdown on the economy, we’ll add another half a trillion. So if you look at all of this together it’s about $4.5 trillion on top of a GDP of maybe $21 trillion. You’re talking about a 20%-plus increase in the debt load of the U.S.

There is a huge increase in debt-to-GDP, and that has a very big consequence on economic growth. It puts the U.S. in the same category as Italy, Japan and other very slow-growing countries right now.

 

Governments Don’t Create Resources, Yet Redistribute Them

Dr. Laffer: I would say that of the CARES Act we had, two-thirds of it was bad. Two-thirds of it was redistribution and to pay people who aren’t working for the hardship they’re suffering. That sounds awfully wonderful. These are people who were impacted by the coronavirus and they can’t work. It seems only compassionate to give them money.

Cho: Are they entitled to receive it?

Dr. Laffer: That’s what the government says. But let me just say this about the government: the government does not create resources. The government redistributes resources. So every dollar given to someone who has been impacted by the coronavirus has been taken away from someone else.

Whenever they help one person, they are hurting another person. It’s a zero-sum game. Do you follow me on that?

Cho: Yes, that’s true.

Dr. Laffer: Government spending is taxation. Let me give you the example I tried to use with the President and some others. Let’s imagine there are only two people in the world, farmer A and farmer B. Let’s imagine farmer B gets unemployment benefits. Who do you think pays for that? Farmer A. You’ve got to remember that with all of these bailout programs, the bailout of one group is the damage being done to the other group. The government doesn’t think that way.

The government makes the case that these people did not deserve to be put unemployed. They didn’t see the virus coming, and it’s our job to help them. Well, you’re hurting someone else by helping them. All I’m saying here, it’s not that you don’t help people, but that you understand the context that giving away other people’s money is not compassion. But that’s what governments do.

The money that the government spent that I think is very well spent, is resource money for research in a disease control. All of this money spent on trying to find antibodies, trying to find a shot that will protect you from getting this, whether it be immunity or trying to get a vaccination of some sort, all of that is very good. All of the effects of trying to get face masks for people and other health things are wonderful. But that was a small portion of the total bill.

Cho: The Japanese government has already decided to distribute $1,000 per person, so I’m curious about what the U.S. is doing.

Dr. Laffer: We had the PPP, the Payroll Protection Program, where any small company that maintains its employment gets paid about two months’ worth of payrolls for that company.

Cho: Sounds nice.

Dr. Laffer: Oh, it sounds very nice, but remember, it comes from someone else. It’s not only nice now, but the total amount of the PPP was about a trillion and a half dollars. The CARES Act was about three and a half trillion dollars with the deficit.

Cho: Three and a half trillion dollars?

Dr. Laffer: 3,500,000,000. It’s got a lot of zeros. If you’re dealing in Yen, it’s even more zeros.

Cho: Yeah, more zeros [laughter].

 

Gaming the System

Dr. Laffer: There are about 350 million people in the U.S., so that comes out to $10,000 per person. When you look at the Payroll Protection Program, this is a very sophisticated program that is put through banks here in the U.S., and there are very strict qualifications for doing that. There are very strict filing and eligibility requirements to have the loan. It’s a loan at first, but after four months of following all the conditions, it becomes a gift, a grant. In programs like this, the clever, well-hailed people can figure out government programs better than poor people.

The people who take advantage of these programs are the people who are very skilled at manipulating government programs, rules and regulations. They have lawyers. They have accountants. They have specialists who do all of this, so it becomes a game to see who can get the money.

Cho: Is that what led to unexpected consequences?

Dr. Laffer: Oh, it’s led to very humorous consequences. Harvard University, which has an endowment of something like $67 billion, were forced to give it back because of bad press. But Princeton University, Yale University, Stanford, all of these people figured the system out and got lots of money. Those are the ones that everyone talks about, but there are lots of others who got away with it without getting big published articles. It’s a game of how you redistribute back to people, so it’s far from being something that helps.

Let me give you another example. I think Boeing got a grant of 25 billion dollars paying some of their expenses for the next several months. I want to ask you the question: why do we care who owns Boeing? Let’s imagine the government did not give them any money. Let’s imagine that in the next two or three months, Boeing went bankrupt. If they went bankrupt, the company’s still there — the buildings, the machines, the workers. They’re all fine. It’s just that the investors lost their money.

And so Boeing would go into bankrupt protection. Very shortly thereafter, people would bid to buy the company, get the company out of bankruptcy and Boeing would operate just as it always has without government support. The whole reason why people invest in companies is because they are willing to take that risk in order to make profits. Sometimes their investments work, sometimes they don’t. When they don’t work, it’s not the role of the government to bail them out.

There is no reason why the U.S. should bail out American Airlines or Boeing or a lot of these companies. It makes no sense. All of this Payroll Protection Act, I think, makes no sense. People have losses. When you get a pandemic like this, it hurts the economy a lot.

It hurts everyone except for two groups: government employees and college professors. All the socialist sections of the economy are protected. Isn’t it amazing? I’m sure Japan has not fired any employees of its government, and I’m sure they’ve not cut their wages either.

Cho: No, they’re protected.

Dr. Laffer: They are totally protected. While everyone else loses money, they get protected. That’s the same thing in the U.S. That was where my thoughts are, that we should not have done those programs. Those programs were redistribution, which reduce the strength of the economy and made it much tougher on the rest of us.

 

Unemployment Benefits Incentivize People to Not Work

Dr. Laffer: We have a debate in the U.S. right now. Should there be a fourth stimulus? I’m doing a proposal to waive the payroll tax. If you want people to get back to work, you want to make work more attractive. And what you want to do is make hiring people more attractive.

Cho: One-third of the government revenue will be lost due to the payroll tax cut, right?

Dr. Laffer: If they don’t do that, they’ll spend it some other way, believe me. My view here is, of course, I would prefer the government to have done nothing except for medical expenditures. That’s what I’d like them to have done. We have unemployment benefits, and of course, if someone’s unemployed, they should be getting their unemployment benefits.

But what the government did was they added $600 per week to those unemployment benefits. That’s adding almost $32,000 of income. Who wants to go to work if you get your regular unemployment benefits and, in addition, you get $32,000 a year?

Cho: That’s ridiculous. It really harms the work ethic right?

Dr. Laffer: Yes. It does a lot of damage to the work ethic. But that’s what they did with the money. In many places, I think in over half of the states in the U.S., you literally make more money as a person unemployed than you do on the job. You can see what type of perverse incentives they’re doing.

I am all in favor of helping people in trouble, and unemployment benefits are exactly for that. But increasing the unemployment benefits so that it’s more attractive to not work than it is to work makes very little sense.

 

Phone Call From President Trump & Enactment of Payroll Tax Cut

Dr. Laffer: I got a phone call from the President in March, and I suggested to him a payroll tax cut to incentivize people to work. The payroll tax for employees, which covers the cost of social welfare, is 7.65% of the employee’s gross wage. If you get rid of that, you’ll have a $1 trillion cut.

For someone who has a yearly income of $60,000, they will be left with $4,050 through the payroll tax cut. This means that the employee doesn’t have to pay the tax until next year. The employer has the employer contribution which is also 7.65%, so it makes it cheaper for the employer to hire and retain their workers.

Cho: Do you think the Payroll Tax Act will be enacted?

Dr. Laffer: It’s close. It’s a close call because the President suggested he wants it. But the President said he would not take any stimulus package without a payroll tax cut, which is wonderful.

But what that means is, Chuck Schumer and Nancy Pelosi are going to oppose it. The two parties are fighting again, as if they can’t work together on beating the disease. They can’t even do that. So I don’t know. I would put it at 30, 40% chance that we’ll get a payroll tax cut, and maybe a 20% chance that we’ll get a full waiver for two to four months.

But it is expensive. You’re right on the deficit. It would add about $800 billion to the deficit. What you do is cut the employee’s contribution by 7.64%, which means that the employee doesn’t have to pay the tax until next year.

That’s an increase in the employee’s pay by 7.64%. The employer has the employer contribution, which is also 7.65%, so it makes it cheaper for the employer to hire people, retain workers, and even increase the workload for the given workers by 7.65%. The employers and the employees get big bonuses.

Cho: I hope Japan does the same.

Dr. Laffer: Well, it’s $800 billion so it’s a lot of money. Would I prefer them to do nothing? Probably. But they’re going to do something, and it’s much better than any of the other stuff they do. Lastly, the money and this plan would stop on December 31. So if you don’t hire workers before December 31, you don’t get any benefits.

Therefore, people will try to find flowed increases in production to get the economy to start quicker rather than delay the start. There’s a very big incentive of bringing production and employment into the present and away from the future which is wonderful. It gets the economy jump-started very quickly.

Cho: That’s why Steve Mnuchin said that the second half of the year will be great in terms of economy.

Dr. Laffer: Yes, that is exactly why. There are two reasons why, and that was one reason I hope. The other reason is the $600 weekly unemployment benefits I told you about. They don’t last very long. Once that stops, the people will come back to work.

 

Benefits of the Payroll Tax Waiver

Dr. Laffer: There are a couple of other points I want to make on the payroll tax that are important. Number one, every person in America who works and gets paid pays the payroll tax. So it’s enormously broad-based. There are all sorts of tax cuts like accelerated depreciation or capital gains tax cuts that are very sporadic and hit only certain groups. This hits every working person in the country. Every single one.

It also hits every single businesses in the country, whether it be small or large businesses, charitable businesses, not-for-profits or banks. There is no special privilege for any one type of business over another. Here in America, it’s very in vogue to say, “Let’s help small businesses.” Big businesses are just as good as small businesses.

The government should not be choosing one size of business or one type of industry over another. The payroll tax waiver prohibits the government from picking winners and losers, which I think is a very good idea. When the government picks winners and losers, it causes corruption.

Government officials help companies they like. I know it is [laughter]. I’m just joking with you. The payroll tax waiver prohibits corruption in government.

And let me tell you the last thing about why I love the payroll tax waiver. When you do government spending, the first thing that has to happen is collecting the revenues through either taxes or borrowing. Collecting revenues is not cheap.

I did a study with John Childs maybe seven years ago where I looked at the total cost of collecting $1 in income taxes. These are out-of-pocket costs. These are hiring lawyers, accountants, auditors defending about tax audits and the people in IRS. I looked at and compared all of the out-of-pocket costs with the revenues that the government collects. Out of every dollar the government collects, people have to spend 30 plus cents in collecting the money and then spending it.

Every company in the world has to file taxes, have lawyers and accountants, and it’s a huge thing doing all of these legal compliances. The nice thing about a tax cut is that there is no cost of having a tax cut. In other words, every dollar of payroll tax cut which is worth about $1.35 in government spending, each dollar is about 35% more efficient in a tax cut than it is in government spending.

It first incentivizes workers by 7.65%, it incentivizes employers by 7.65%. It incentivizes moving production up because it has a deadline. It eliminates the picking of winners and losers because it covers every employee and every employer, large or small. It’s anti-corruption. It also is using tax cuts rather than spending increases, which is about 35% more efficient per dollar. You see why we’d like to have this done, rather than more government spending.

 

Payroll Tax Waiver is a Replacement for Government Spending

Dr. Laffer: It’s a replacement for government spending. If you’d asked me what I’d liked to have done in the beginning, I would have like the government to do have done nothing except for the medical spending.

Now if you told me, “Would you rather have a payroll tax waiver or nothing?” I might choose nothing. But if you have a payroll tax waiver or some additional government stimulus, wasteful spending, I’d much rather have a payroll tax waiver than a big news spending program on the part of the government.

Cho: Right. I hope your government with Trump will choose the payroll tax waiver.

Dr. Laffer: Well, as soon as you get to travel, come on over and visit, and we’ll go through and see what happened. We’ll do a rundown of what actually happened in the U.S. and Japan.

Cho: We already spent $1 trillion for coronavirus measures, so we have a $12 trillion deficit.

Dr. Laffer: It’s like watching a drunk person fall and hit himself. You can’t help but laugh, but it’s really sad.

Cho: It’s terrible for the future generation.

 

Reminiscing President Reagan’s Speeches

Dr. Laffer: I’ll give you a Reagan story. It was in Dallas, Texas in 1984. As you know, I was on the executive committee of the Reagan-Bush finance committee. There were 12 of us. It was the big Republican convention where Ronald Reagan was renominated to be president of the United States for the Republican party.

He gave a speech, and I think you’ll find this funny. He said that the government spends money like drunken sailors, which is funny on its own. He said, “But there are two differences. Number one, in the next morning, the drunken sailors will be sober. Congress will not be sober the next morning. And number two, drunken sailors spend their own money, not someone else’s money.

When he said this, the audient just roared in laughter. Reagan was so wonderful. I thought you’d enjoy that.

Cho: It’s so true, yes.

Dr. Laffer: It’s just so true today too. There’s also another one. Do you know who Tip O’Neill was? He was the 1980s version of Nancy Pelosi.

Cho: I don’t know him.

Dr. Laffer: He was an old Congressman from Massachusetts that was the Speaker of the House, just like Nancy Pelosi. He and Reagan had their differences all the time. Tip O’Neill was a spender just like Nancy Pelosi, but he was very fat. He was almost like a Sumo wrestler. In one of the speeches, Ronald Reagan said, “The Congress of the United States is just like Tip O’Neill, big, fat and out of control” [laughter].

I loved Reagan so much. He was so wonderful. He, next to Obuchi, is my favorite politician. Whenever politicians spend money, excuse me, whenever politicians make decisions when they were either panicked or drunk, the consequences are rarely attractive.