Art Laffer, an economic adviser to former President Ronald Reagan, told Newsweek that the economic downturn the United States is experiencing may not be ending anytime soon.
“There’s nothing that can bring an economy to its knees more than high inflation [and] high tax rates,” Laffer said during a recent interview. “I think today’s economy looks worse than it did under [former President] Jimmy Carter, and you saw what happened following Jimmy Carter. We had a political revolution that led to a long era of prosperity with Reagan through [former President Bill] Clinton.”
Along with his noted work as an economist, Laffer has worked in academia and frequently discusses economic issues on news programs. He is known for developing the Laffer Curve, a theory that illustrates the relationship between tax rates and the amount of tax revenue collected by the federal government. He also served as an economic adviser to former President Donald Trump during his 2016 presidential campaign. In 2019, Trump awarded Laffer the Presidential Medal of Freedom for his work in economics.
Discussing President Joe Biden’s economic policies, Laffer said the president “inadvertently…raised taxes a lot.”
“With this inflation, people are pushed into higher tax brackets. We have had very large increases in taxes purely and simply because of inflation,” he added.
Laffer drew parallels between current economic issues and those during Carter’s presidential administration in the 1970s. He cited several ways in which he said Carter hurt the economy, such as by placing an “excess profits tax on oil companies.”
Laffer said the work of Paul Volcker, who was appointed by Carter to head the Federal Reserve and stayed on for much of Reagan’s time in office, helped the sagging economy during that time from languishing further. He said a combination of Volcker raising interest rates “to way above the inflation rate” and Reagan making “huge tax cuts” resulted in “enormous increases in output for employment and production.”
“Volcker made it so you had less money. And when you have more goods and less money, you’re going to have a falling rate of inflation, and that’s exactly what happened,” Laffer said.
On June 15, the Federal Reserve raised interest rates by three-quarters of a percentage point in an attempt to fight the nation’s continuing surge in inflation. Financial experts have explained that the current inflation is being caused by more people having more money, but there are too few goods to buy. This results in a rise in prices. The Fed is seeking to restore a balance in supply and demand with an increase in interest rates by making it more expensive to borrow money.
Laffer explained that a different approach was taken during Reagan’s administration. Volker, he said, restricted growth and let interest rates seek their own levels. With interest rates being extremely high, it made it more attractive to hold onto bonds. Biden’s administration has tried to dictate the interest rate instead of letting markets resolve the issue, according to Laffer.
“They’ve made a horrible mistake of it all the way long,” Laffer said. “Not only have they been too late, but they haven’t done the interest rates where they should be. Stop buying all the government bonds.”
Had the Fed not gotten involved with interest rates, Laffer said they would be “much, much higher” than they are currently, but it would “get inflation under control just like we did.”
While Laffer does see major economic problems in the U.S., he still feels a recession can be avoided. First, though, he said “inflation needs to be solved really quickly” and then Biden must focus on other economic issues.
“You can solve some of them very quickly. Biden can reverse his policies on energy. If he announced he should get rid of Build Back Better and we’re not looking for more spending to cause more inflation, I think that would be positive for the economy as well,” Laffer said. “If the Fed said, ‘We aren’t going to buy any more bonds, and we’re going to let the market clear the interest rates,’ that would be great for the economy….[T]hat’s what I would do right away.”
Asked whether the U.S. could be facing yearslong economic problems, Laffer said, “You could be, yeah.”
He did say he hopes the political process allows for a quick and effective turnaround, “but it has a long way to go before that happens, and, unfortunately, the victims of a bad economy are almost always the people who didn’t cause it.”