Economists Art Laffer and and Kevin Hassett spoke with fellow Trump administration economic team alum Larry Kudlow on Kudlow’s Fox Business program on July 15, over Sen. Joe Manchin (D-W.Va.) delaying President Joe Biden’s Build Back Better agenda until August.
The three former Trump economic advisors also believe that the United States is already in a recession and that inflation will not fall below 2 percent until Biden is out of office.
Manchin is currently opposing policies put forward by his party’s leadership at a time when fuel prices have skyrocketed and inflation is at a record-high.
The senator from West Virginia has for a month stalled massive tax hikes and “climate change” subsidies being put forward by the Democrats in Congress, saying he would not support a Senate compromise bill after the package passed in the House, until July’s inflation numbers were released next month on Aug. 10.
“I see the stock market breathing a sigh of relief, over Joe Manchin, that there won’t be any more tax hikes, that whole reconciliation bill is dead in the water,” Kudlow said.
“We’re not going to get a trillion dollars of spending, a trillion dollars of taxes on successful individuals, small businesses, on large corporations.”
Manchin told Senate Majority Leader Chuck Schumer (D-N.Y.) that he would only back a moderate spending bill that includes provisions on health care and premium drug subsidies, according to the WSJ.
The senator said that he would support a package that raises taxes, but wants concessions like a reduction in medication costs, the promotion of domestic energy production, a two-year extension of Obamacare subsidies, and a reduction of the budget deficit to control inflation.
“The [Federal] Reserve: are they going to raise interest [rates]? How much more, and how much damage is that going to be? And then make a decision [about] what we can do and how much we can do?” Manchin said he pressed as answers he needs from Schumer before he changes his “no” vote to anything else.
The Democrats are desperate to get their bill through Congress before the August recess, when legislators start focusing most of their time on their bids for re-election in November.
They attempted last year to advance an infrastructure bill—which included many other provisions, such as funding initiatives to combat climate change, expand the child tax credit, and provide universal pre-K—that would have increased taxes by nearly $2 trillion. But Manchin shot it down in December 2021 due to concerns about rising inflation.
The Democrats are now trying to push the bill using reconciliation in the Senate, which allows legislation to move forward with only a simple majority, instead of the 60 vote majority otherwise needed.
The party needs Manchin’s support to break the 50–50 tie in the Senate to push the spending legislation through Republican opposition.
Manchin requested that any handouts to so-called green energy initiatives be reduced from more than $500 billion to $300 billion or less, and has opposed sending money to the EV industry and the Direct Payment program.
Hassett, a former senior advisor and chairman of the Council of Economic Advisers under Trump, told Kudlow that many senior Republicans were still worried about Manchin’s true intentions. Many jobs and families in Manchin’s home state of West Virginia are supported by the state’s mineral resources industries, which are under threat of being regulated into non-existence by the federal government.
“The other thing to keep in mind is that there’s going to be like a lull in inflation in the next report, because gas prices are going down a lot, and so the top line CPI next time is probably going to be like a point three or point four,” Hassett said, voicing concerns that this could be used as an excuse to sign off on the tax hikes.
“The final thing to say is that we are clearly in a recession, you know. I’ve been saying it for months, but it’s clear with the industrial production and the negative GDP now.”
The fact that the next inflation report will be much lower has caused fears that Manchin is positioning to still support the spending and tax legislation in September.
“I think Joe Manchin knows exactly what he’s doing. He knows that. Schumer wants the August recess to begin Aug. 5, and you’re not going to get these numbers until the week after and the week after that. I might be wrong,” Kudlow said.
He added that the “core inflation rate is actually creeping up, excluding food and energy. And you’ve got things like that Cleveland, Federal Reserve tracker where they take the top 8 percent and the bottom 8 percent out, and that, you know, the rest of the 80 percent, the bulk of prices are rising now … I think the weight of the evidence [of a recession] is still going to be pretty bad.”
Already in Recession
Laffer, a former economic advisor to Reagan and Trump, said that two consecutive declines in quarterly results so far this year fits the definition that the United States is in a recession, which he believes started in December of last year.
The three economists then panned the Biden’s recent comments downplaying inflation, calling it “transitory”and pointing to low unemployment numbers.
“If you go back and look at the start of just about every recession, initial claims for unemployment insurance (we’re at about 250 steady today) do and then they got worse. But 250 is basically what you look for in the labor market for a recession signal,” Hassett said.
“Initial claims in the last six weeks have gone from 200 to 244. And so the initial claims are actually looking exactly like a recession signal as well. And so, we know that inflation is transitory and we also know that the labor market is now starting to signal recession along with every other piece of data.”
Institutional Inaction on Excess Cash
Kudlow noted that cash that bought the bonds issued by the Federal Reserve still sits close to $9 trillion, showing that the central bank has done little to reduce the excessive amount of money in the economy.
“I know gasoline prices will bring down the top line CPI next month. The fact is, how certain can we be that the monetary part of the inflation, which is the biggest party thinker, anyway, is over how they hadn’t really done anything.”
“They’re just starting to let a few things run off. They still own all those mortgages, and they still own all those treasuries,” he said.
“It’s not so much pegging interest rates; they’ve got to get rid of the excess cash. It’s the excess cash that they used to buy all the bonds from the deficit spending of the unnecessary Democratic rescue package; that’s one of the principal causes of the inflation.”
Laffer agreed that the excess cash pumped out by the Fed is one of the major causes of recent inflation, leaving it now with only two options: tightening both the money supply and cutting taxes.
“It’s very scary. I mean, it’s gone up four fold,” Laffer said regarding the deficit. “Not just 10 percent, 7 percent, 9 percent; it’s gone up 300 percent.”
“I don’t know what they can do about this. It’s already out,” he said of the borrowed cash. “What can they do?”
Historically, inflation goes down when the interest rate is higher than the inflation rate.
Laffer concluded that the Fed can “have money tight enough so that with tight money and tax cuts, we can have an increase in the supply of goods and services, and a reduction in the quantity of money. And those two together are the only way I know of topping out on inflation, they’re bringing it down.”
“We’re not going to get supply side policies until after the 2024 election, I would guess. And so therefore, the Feds gonna work on its own and it’s gonna go way too slow,” Hassett warned, saying that supply side policies are what’s needed—not further tax hikes.