A Conversation with Arthur Laffer - p2

ac: What about the future course of social security and concerns for the coming generation?

AL: One of the neat things about the United States as opposed to any other country is that we have been making marginal improvements in Social Security since Ronald Reagan came into office. As you know we have reduced Social Security benefits by the 1986 tax act, which subjected 50% of social security benefits to the income tax. In the '93 tax passed by Clinton, it put 85% of social security benefits into the income tax structure. Clinton also got rid of the retirement test. As you may remember, Allan Greenspan and the Blue Ribbon Commission extended retirement out over a number of years. All of these together have really reduced the detrimental impact of the defined benefit plan which we call social security. Just to give you a number which I hope is about right, when Reagan came into office, the unfunded liability of Social Security was a little bit over one year's worth of GDP. Today, it is a little less than one year's worth of GDP. So we have continuously, and with small little bits, we have made major progress toward bringing social security into a fully funded type system. My guess is that the Bush proposal to take 3% of the payroll tax and privatize it and put it into bonds or stocks or some blended funds will be another significant improvement in Social Security. I am very optimistic about social security.

ac: What's your position on health care?

AL: I don't know much about it so I am going to skip that question. When you get to my age, Al, and I know you know what it is like, I don't want to think about health care.

ac: Okay, last question on this list and the flavor of the month. What do you think about the growing concern about China?

AL: I think China is one of the most exciting places. As you may know, I was one of the first Americans to go to China. I went in 1969 with George Schultz and John Erlichman. What China has done since 1978 is unbelievable. They have become a supply side, sound money country. And I don't know the numbers exactly but I think in 1979 something like 83% of all production in China went through the Government. Today I think it is down to 33%. China has fixed the yuan to the dollar. They followed sound money and big tax cuts and as a result are really coming out of the development stage as being a very serious and positive power in this world. I couldn't be more excited than I am. Their natural alliance is with the U.S. I am very excited how good supply side policies have really brought China into a major development power.

ac: Were you quoted accurately recently questioning the Chinese yuan as not being worth paper that it is written on arguing that it should stay pegged to the dollar?

AL: Yes that is true. If the Yuan changes its value vis á vis the dollar whether it goes up or down, that will inure to the detriment of the yuan. There will be a run on the currency and they will go under just like the Argentine peso did, just like the currency crises of 1998. China has clearly understood the problem and has so far, and let's hope it continues, been unwilling to debauch their currency because once they become an unhinged paper currency, they won't float: they will sink.

ac: Did you read Pete Petersen's best-selling book "Running on Empty," which certainly has serious concern for America's economic future, which certainly is in contrast to your view?

AL: You know at my age I try to avoid unpleasant things and Petersen is one of those people that I find unpleasant.

ac: Even though he is a Republican?

AL: I beg your pardon . . .

ac: Even though he is a Republican?

AL: I beg your pardon!

ac: I saw where you were part of a post-election news conference of supply side economists in New York that said that Glenn Hubbard would be a good successor to Allan Greenspan. My question is whether you think that Greenspan has done a good job as head of the Federal Reserve?

AL: Let me say that I think Greenspan has done an exquisite job. I am a huge Allan Greenspan fan. I think that he has made a few mistakes which were very understandable. The Y2K problem was Allan Greenspan's problem. In '99 he expanded the monetary base way too much but being in that position means that you have to be responsible. He took the careful course, which turned out not be very good. But overall I think Allan Greenspsan has done one of the best jobs on monetary policy ever.

ac: Let me change course and take you back more than 40 years to Yale. Was Yale important to you? How did it influence your thinking and your career?

AL: Yale at that time and place was absolutely spectacular, in every single regard. As you may know, I come from a family of Yalies: my father went there, my brothers went there. So I came with a tradition of Yale. I didn't do very well in my first year there, some of my classmates who succeeded also did not do very well either. Yale had a terrific Econ department. I never became a Yale type of an economist, like our colleague Bill Nordhaus. But I thought it was just an excellent place where a person could really perform well.

ac: Would you go there again if you had your choice?

AL: I cannot imagine being anywhere else but Yale.

ac: When you met with me and that group of international journalists last Summer at the Republican convention, it was really clear to me that you follow international relations and individual countries very closely. What is your view of America's role in the world at this point?

AL: You know we are the leader by far in every single endeavor. I mean there is no pretense to quality on this planet because the U.S. militarily, economically, socially and also politically is far advanced over every other country. The U.S. role is one of leadership and not one of being the most popular, not one of being the neatest guy. We lead in every single field. We need to assume the role of leadership and not always worry about other people's opinions.

ac: Do you feel that leadership has dropped or is starting to drop?

AL: No, I think it is absolutely the reverse. I lived in Germany as a young man and went to the University of Munich. At that time which was 1960 or 1961, the U.S. had a leadership role, very similar to what it is today. John F. Kennedy led the U.S. — a fine, fine leader, especially in Germany where he gave those wonderful speeches. I think we have the same leadership role today. I can remember back then the riots against the U.S., everyone cursing the U.S. It is the same thing today. When you are the top person, the decision and the buck stops with you. You have to make a decision; you can't abdicate. There is no country that can provide enough assistance to us to really warrant an equal role. They just don't.

ac: Your answers and theories are those of an optimist. Do you agree with that and why are you as optimistic as you seem to be?

AL: I am a realist. Anyone who is not as optimistic as I am is a pessimist. This world has been providing incredible advances forever. It is unbelievable. Go back, Al, to when you were a teenager and what the world looked like -- what cars were like, what people died of, what they drank, the pollution, the unwanted pregnancy.

You can't believe how we have been improved. I mean pollution. I was raised in Cleveland on the shores of Lake Erie. If Christ had come back to the Earth and had chosen Cleveland when I was a young man, he wouldn't have had to walk on the water. Heck, anyone could do that. Now, Lake Erie is clean. I am not saying that we don't have lots of problems. We do. The neatest thing about this country and this world is how we have been solving problems. They are not getting worse, they are getting a lot better. I really believe in the incredible power of free market economics and democratically elected governments to solve the problems of the world. And so far I have not been disappointed.

The conversation wraps up page 3