Dr. Laffer spoke with us about Margaret Thatcher, a former U.K. prime minister and an old acquaintance of his, about Thatcher’s tax cuts and qualities as a politician.

Interviewer: Hanako Cho

Cho: You helped bridged the gap between Mrs. Thatcher and Mr. Reagan.

Dr. Laffer: My godfather and Reagan’s kitchen cabinet member, Justin Dart, had an apartment in London. He had taken Ronald Reagan over from California to Britain, and when Reagan came over, he had a party in London. Margaret Thatcher was also there and that was the first time Reagan had met Thatcher. Reagan said he doesn’t remember meeting her there, but he was sure that was the first time they met.

He was telling me about this, “You know, Arthur, I had met Margaret Thatcher before. You remember your godfather, Justin Dart, at his apartment in London? I went to a party and she was there. But I don’t remember meeting her. There were so many people and I just don’t remember her at the time. But that was supposedly the first time I met her.”

Reagan said the real first time they met was at the G7 in Ottawa, Canada. Now, the story of G7 is as follows. Everyone calls each other by their first name, and Reagan got there a little late. The meeting had already started so he walked into the meeting and looked at the other six who are sitting at the table. Then, he waved his hand at shoulder level and said, “Hi, everybody. I’m Ronnie.” I don’t know if you see the humor in the president of the United States calling himself Ronnie, but he said, “I’m Ronnie.”

He said, “Arthur, you wouldn’t believe this. That Pierre Trudeau fellow,” he was the prime minister of Canada, “That Pierre fellow was rude to Margaret Thatcher. He was saying nasty things. This was the first meeting I had been with them. I’m the new kid on the block. I don’t know the rules, but it made me really angry to hear him say these things about Margaret Thatcher. I kept my own counsel, but I was fuming angry. I said nothing, and we took a coffee break. I went over, saddled up next to Margaret Thatcher, and I said, ‘You know Margaret? I was hearing this Pierre fellow talk, and the rudeness he spoke about you was just offensive and made me angry. I just want you to know that I would’ve said something, but I’m the new kid on the block, I don’t know what the rules are.’

And she just looked at me, Arthur, and just said, ‘Oh Ronnie, you never mind. We girls know when boys are acting like boys.’”

When Reagan told me this story, one of my friends happened to be videoing him. So I got this video of Reagan telling me about the first time he met with Lady Thatcher. I was having dinner with Thatcher in New York at the 21 Club with a couple of friends, very small. So I decided to surprise her.

I had setup a little screen in a private room, and I had this video of Reagan telling me his first encounter with Margaret Thatcher and this story I just told you. I played this video on the screen to Lady Thatcher and she started crying, ‘Oh, that’s so lovely.’ It was just so cute. She was such a lovely lady. I wanted my friends to know who Lady Thatcher was in just the same way I wanted them to know who Ronald Reagan was. The person I knew was not the president of the United States on TV.

At this dinner, everyone who came in was all hyperventilated, “It’s Lady Thatcher, the prime minister of —” and it was just so annoying and irritating. What I did was during the cocktail hour, I set up two chairs in the reception before we went to dinner, and I had her sit in one of the chairs. I’d then bring each one of the guests to sit down with her, just the two of them. I’d walk away, and they could chat for a few minutes and get that excitement down a level. It worked out very nicely.

All of a sudden, one time I went over to her and I said, “Lady Thatcher, did you notice that man over there?” “Well, yes I did, Arthur. What about him?” I said, “You know I brought him over here.” “Yes, I had a very nice chat with him and he was a very nice fellow. What are you trying to get at?” I said, “Well, Lady Thatcher, on his way walking over here to sit down with you, he took off his wedding ring.” And she goes, “Oh no.” She was just a girly girl. It was just so much fun, to see these people as humans. Lady Thatcher was just the most wonderful person you’ve ever seen.

Thatcher’s Two Achievements

Cho: In your opinion, what were Mrs. Thatcher’s main economic achievements?

Dr. Laffer: There are a lot of ones she did, but two of them really stand out. The first thing she did was a very strong political and economic move with Keith Joseph — privatizing the nationalized industries in Britain. She privatized coal, iron, railroads and all of these industries. It was very unpopular at the time and she got strikes, but this tiny girl with this little high voice was able to stand up to all the attacks of British men and do the right thing. It was amazing what happened.

The second thing she did was the tax cuts. She reduced the highest tax rates in Britain from 98% to 40%. She was just amazing in tax cuts, and when she did, you can see the change in Britain overnight.

These are the two things I always remember about Thatcher. I always just sit back and I’m aghast that she was able to do that.

Monetary Policy That Led to Thatcher’s Downfall

Dr. Laffer: But she stuck with fixing the British pound to the German mark and that’s what caused the high inflation. The U.K. government thought that preventing pound appreciation would maintain the competitiveness of British goods. (Note: Goods and raw materials can be imported at a lower cost when the pound appreciates, so inflationary pressure can be absorbed.)

Unfortunately, nothing could have been further from the truth. British goods had to become non-competitive to allow capital to enter the U.K. and increase productivity. If supply increases in relation to demand, inflation would’ve never happened.

As shown in the chart, from early 1988, British inflation rose from a little below 4% per annum to well over 10% in late 1990, destroying along with it one of the best governments the U.K. has ever seen.

It’s the exact same mistake that Ireland made when they did their big tax cuts. They were part of the euro, and of course, their currency couldn’t appreciate.

What happened with us when we did our big tax cuts in the U.S., is that the dollar appreciated by almost 80%. That’s why we never had inflation. If we had done just the tax cuts and kept the exchange rate fixed, we would have had double-digit inflation too.

But we didn’t because we let the exchange rate absorb the inflationary pressures.

Unfortunately, Alan Walters was the one who wanted her to have fixed exchange rates.

That’s when the inflation rate went way up in Britain. The reason the inflation rate went way up was because they fixed the pound to the mark.

Therefore there was no way of letting the exchange rate rise and take care of the pressure. The inflation in Britain became very unpopular, and she lost the election in November 1990.

Thatcher’s Outstanding Execution and Her Ability to Act

Cho: The economic growth rate surpassed 5% in 1987, and the country prospered under the Thatcher administration. What political qualities do you think made it possible for her to carry out these achievements?

Dr. Laffer: She was about as politically principled as any person I’d ever seen in my life. The very traits I told you I’d disliked about her in the first meeting, those traits became her biggest asset in the serious areas when she became prime minister.

For instance, I spent a lot of time with her on explaining the tax cuts, along with Nigel Lawson, Keith Joseph and the others by the way. When she saw it clearly, she did it. She didn’t waffle around like most politicians. No. “Well, do it now,” and she did it. That was a wonderful trait. Reagan was also very good on that, but not as good as Thatcher.

Thatcher was amazing. When she made up her mind, she just did it. And the people in her party did not like her. She was a little girl Trump. She became very unpopular and popular at the same time just like Trump.

But she was cute, she was pretty, she was smart and strong, and she was a great leader — every human characteristic you can combine to make this wonderful, wonderful person. There’s this image of a very petite, feminine thing and then all of a sudden, these words would come out of her that were strong and powerful. She was the role model that I had for all of my daughters.

Tax Cuts Benefit Everyone

Cho: There are many critics who say that Margaret Thatcher’s tax cuts widen the gap between haves and have-nots. How do you respond to these criticisms?

Dr. Laffer: Let me start off with tax cuts for the rich. If you look at it from a static standpoint, it’s completely correct. These are tax cuts for the rich. But the world is not static. People respond to incentives and taxes change the incentives for activities.

If people didn’t respond to incentives and everyone worked just as much at any tax rate as they did at any one tax rate, then you would have all tax rates above the average income at 100%, and you would subsidize all the tax cuts below the average up to zero so that everyone came out the same.

If you actually did that, if you actually taxed everyone above the average income 100% and subsidized everyone below the average income 100%, everyone would come out equal. There would be no income whatsoever.

The whole reason for cutting taxes is to change behavior.

Now when you assume that behavior does not change, and you say, “This is a tax cut for the rich,” that’s a very, very stupid argument. It’s a political argument that doesn’t understand anything about economics. The reason you cut taxes on the rich is to help the poor and the disenfranchised. That’s why you do it.

You lower taxes on the rich so that they will earn more income and pay more taxes. Then, you can reduce taxes and the economic growth will benefit the poor, the minorities, the disenfranchised, the young, the undereducated and all the people in society you want.

If you look at things statically, it’s like dodgeball. Do you know the game?

Cho: Yes, I’ve played dodgeball before.

Dr. Laffer: Good. If people didn’t move, you just throw the ball at the person. He’s not going to move and whack, you got him.

But as you know, they move. This is the reason you cut taxes on the rich because that’s where you get the best effects.

Everyone says, “Oh, you’re doing it just to help the rich.” No, you’re not. You’re doing it to help everyone. But the people who are criticizing you are too dumb to understand the truth. You’ll see that with Biden if he gets his taxes through. And you’re seeing it in Japan.