We have written about the wisdom of Art Laffer in numerous previous posts -- including some from the depths of the financial crisis of 2008 - 2009, such as this one: "What NOT to do about the market right now."
Recently, Art Laffer gave an interview with Michelle Makori on Kitco News (affiliated with Kitco Metals, of Montreal) in which he addressed some very important issues which are front and center in many of the discussions we are hearing from Wall Street and also conversations we are having with company management teams in the current economic situation.
Specifically, the subject discussed is inflation, which is of course extremely destructive to both businesses and households. Much of the angst on Wall Street over the past several months has to do with inflation, and with the concern that, in order to curb inflation, the Fed needs to increase interest rates -- even if it means causing a recession.
In fact, some commentators have explicitly argued that higher rates of unemployment are the only thing that will bring down inflation. Most notably, Larry Summers -- former US Treasury Secretary (from 1999 - 2001), former director of the National Economic Council (from 2009 - 2011), former Chief Economist of the World Bank Group (from 1991 - 1993), former President of Harvard University (from 2001 - 2006), and current professor at Harvard -- has been on record since June saying that the US economy needs to see multiple years of unemployment above 5.5% or 6%, or at least one year of unemployment as high as 10%, in order to curb inflation.
For examples of Larry Summers making these proclamations, see for example here, here, and most-recently here.
While his position may represent an extreme example, it crystalizes much of the conventional wisdom dominating the inflation discussion in recent months -- the idea that in order to tame inflation, the country just needs to "take its medicine," even if that leads to recession and dramatic increases in unemployment.
That's why this new interview with Art Laffer is so important -- because it directly refutes that prescription, and argues that the best way to deal with inflation is through pro-growth policies that enable the economy to produce more goods and services (and which, by the way, will actually lead to more employment).
Here are a few key quotations from Art Laffer in the above interview:
Beginning at about 08:45 in the video
"No -- you don't need a recession to bring down inflation. That's a Larry Summers model. We don't need a recession. In fact, when we got rid of inflation with Reagan, we had one of the biggest booms ever. In the 1920s they did the tax cuts: a huge boom, and prices actually fell during that period. John F. Kennedy, with the huge tax cuts in the 1960s -- a huge boom: the go-go 60's it was called. Inflation was down and we had a surplus in the budget. That's what we really need is pro-growth fiscal policy, and also other regulatory policy, and we need tight money policy by letting interest rates be higher than the rate of inflation. That's what we need and that would solve it, very quickly, without a recession."
At this point, interviewer Michelle Makori asks Art Laffer to specifically address the arguments of Larry Summers, paraphrasing that argument as: "It's very unlikely that we're going to see inflation come down to target range without a significant economic downturn [. . .], a significant interval and 6% unemployment."
Art Laffer responds:
"If the demand for a product drops, what happens to the price? It goes down. Now, if the supply of the product increases, what happens to the price? It goes down. Which way would you prefer to have it? A crash in the economy to get the price down, which is what Larry Summers says? Or my way: increasing the supply of goods and services so we have a boom, that brings down inflation, which is what we did with Reagan, Kennedy, and the 1920s?"
We strongly encourage everyone to watch this recent interview in its entirety, and consider these points whenever someone argues that we need a recession or high unemployment (both of which are catatrophic for individuals, families, and the economy in general) in order to reduce inflation.
There is a better way: economic growth!
As Art Laffer says in the above interview: "You grow out of price increases. If you have higher prices -- you produce more goods!"
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