Inflation Will Remain High Until 2026

(July 16th, 2022- Michelle Makori)

Reagan’s former economic advisor, Arthur Laffer, expects inflation to continue to accelerate, and to be well outside of the preferred range of 2 percent until 2026. Laffer, who is Founder and Chairman of Laffer Associates, nevertheless believes that inflation can be tamed.

The June inflation figure was 9.1 percent, the highest since 1981.

“You don’t need a recession to bring down inflation,” said Laffer. “We need tight money, and tax cuts to increase the supply of goods and services.”

Laffer, who advised U.S. Presidents Ronald Reagan and Donald Trump, explained that when taxes are cut, this causes firms and individuals to produce more, which reduces prices.

He said, “if you have a bumper crop in apples, what happens to the price of each apple? It goes down. If you have a bumper crop in the production of goods and services, what happens to the price of each unit? It goes down, the inflation gets stuck.”

Laffer spoke with Michelle Makori, Editor-in-Chief and Lead Anchor at Kitco News, at the FreedomFest 2022 conference in Las Vegas.

Fed Policy and Inflation

Laffer confirmed that he is “pessimistic” about the Federal Reserve’s monetary policy. He said that “they don’t know what they’re doing,” and suggested that the Fed needs to raise rates above inflation.

“We need someone who wants to solve the problem, not someone who wants to make political points,” said Laffer, referring to Fed Chairman Jerome Powell.

“It doesn’t look like there’s any lid on [inflation],” he continued. “It’s increasing at a faster rate, and there’s nothing out there that would cause me to believe it’s going to slow down.”

Laffer also pointed to a lack of competent management at the Fed, saying, “There’s no Paul Volcker on the Fed Board, there’s no Alan Greenspan, there’s no Arthur Burns, there’s no McChesney Martin.” He said that the current Fed board is appointed based on “characteristics other than their expertise.”

Tax Cuts as the Cure?

Central banks around the world are hiking interest rates and selling assets to quell inflation. On Thursday, the Bank of Canada raised its key interest rate by 100 bps. Economists like Larry Summers predict that these measures will cause a recession.

The conventional view is that the cost of reining in inflation is lower GDP.

Supply-side economists like Laffer, however, do not believe that a recession is inevitable. Although Laffer said that aggressive Fed policy is necessary, he also affirmed a role for fiscal policy.

He even said that lower inflation can be accompanied by an economic boom, explaining “When we got rid of inflation with Reagan, we had one of the biggest booms ever. In the 1920s, they did tax cuts, causing a huge boom, and prices actually fell during that period.”

President Reagan signed the Economic Recovery Tax Act in 1981, which lowered the top marginal tax rate from 70 percent to 50 percent. Reagan also reduced estate taxes, capital gains taxes, and corporate taxes.

“Every time we’ve lowered the tax rate, [the economy] has boomed,” said Laffer.

Laffer went on to explain that his preferred tax policy would be a flat tax of 13 percent on business profits and personal income, while eliminating all other taxes. If such a policy were implemented, he said “this economy would take off like a Jack Rabbit… that’s what we need to do on taxes.”