The Perfect Economic Storm: Strong Growth and Lower Inflation
When capital goods orders came in four times more than expected—0.9% versus the expected 0.2%—and wholesale inflation was less than expected, it created what one commentator called “a perfect world of strong growth and lower inflation.” But according to Art Laffer, former Reagan economist and supply-side economics champion, this shouldn’t have been a surprise.
“If you look at supply-side economics, this is exactly what you’d expect,” Laffer said. “I think the world is starting now and we’ll already just be on a rocket ship going forward. I have never been more opportunistic about the future of this country than I am today, on taxes, government spending, fundamentals, regulations, trade. It’s all coming through.”
Laffer, one of Reagan’s top advisors, says this moment is actually more spectacular in terms of growth and all other indices than it was during the Reagan era. But there’s a key difference: it’s working quicker than Reagan’s policies did.
Why It’s Working Faster Than Reagan’s Tax Cuts
Reagan’s tax cuts took about two years to really kick in because they had to make deals with Democrats, specifically with Tip O’Neill at the time. “He got a little weak advice because Art wasn’t there yet, and so he delayed the tax cuts,” Laffer explained. “But this time, they’re coming through quickly and causing business investment.”
When you lower tax rates, you get more business investment, and that’s what’s showing up in those capital goods numbers. The back-dating of write-offs for expenses to January 20—the day of Trump’s second-term inauguration—is why we’re seeing all of these capital expenditures right now.
This immediate implementation, without the delays and compromises that slowed Reagan’s policies, means the supply-side effects are kicking in much faster. Businesses are responding to the incentives immediately, rather than waiting for political negotiations to conclude.
The Energy Revolution and Affordability
Laffer thinks it’s really important to look at the energy side. The fall in gasoline prices is due to the expectation that there’s going to be a lot more production of energy, not just in the U.S. but around the world. “That really changes people’s lives. That hits the pocketbook very quickly.”
Energy production is a key component of the supply-side revolution. When you increase the supply of energy, prices fall, which directly improves affordability for consumers. This is a supply-side proposition: more goods and services available means lower prices, which means better affordability.
“We’re going to have tax refunds coming through because people haven’t adjusted their withholding and Secretary Bessent has been exactly right on that,” Laffer noted. “That’ll help with people feeling the tax cut even more next year.”
The Tariff Payout Debate: Checks Versus Tax Cuts
There was a disagreement about how to handle tariff revenue. Some suggested using it to pay down the deficit, but Laffer had a different idea: “What I think should happen is we should get a tariff pay-out but it should not be in a check, a dividend check, it should be cutting the payroll tax rate on both employers and employees who were the ones who did it to create a surge in output, employment, and production.”
The revenue losses from cutting payroll taxes would be very small, Laffer argued, because if you make it time-sensitive for employers, you can get a jump in economic activity. “We do not need to send a check out because if you pay, which would you prefer, David? To give checks to people who don’t work or to cut tax rates on people who do work?”
The key is making sure we incentivize production. If you’re worried about affordability, affordability is always more goods available, which is a supply-side proposition. This is a supply-side policy to really get this country going, win the mid-terms, and then win re-election in 2028.
When asked if checks could just go to taxpayers, Laffer was firm: “No, can’t do it that way. It has to be for the incentive to work. Because you need to see it there that your tax rates are lower, your after-tax is higher if you work more or if you go get a job. Not for what you did do. This is not an equity thing. This is not, you know, all the feeling and stuff. This is about facts.”
The principle is simple: “You need to cut tax rates on people prospectively to work, otherwise it will make them not work. If you give a guy a million dollars, they usually don’t work overtime that week. So you don’t want to give them a check.”
As Laffer has taught for decades: “Incentives matter. And they matter on the margin.”
The Latin American Revolution Against Socialism
There’s a revolution taking place against socialism in Latin America. Countries like Chile are about to throw the socialists out. Colombia is about to get rid of Petro and put in free markets. If Venezuela gets rid of Maduro and that socialist scheme they’ve had for a couple of decades, we may see the end of socialism in Cuba as well. That could be the first time Cuba has seen any kind of resemblance of a free market in 60 years.
David Malpass, former World Bank President, confirmed this trend: “Yes, I think it’s already happening. You didn’t mention Bolivia and Argentina as well. What is sweeping across Latin America is the desire for people to get better lives. That means to have jobs. That means to be allowed to work, to have sound money, and that is sweeping.”
Don’t forget the resources in Latin America, whether in Venezuela or Mexico or really across the region. The shift toward free markets and away from socialism could transform the entire Western Hemisphere.
A Turning Point for Latin America’s Economic Future
Don’t forget the resources in Latin America, whether in Venezuela or Mexico or really across the region. The shift toward free markets and away from socialism could transform the entire Western Hemisphere.
Explore How Market Reforms Could Reshape the Hemisphere →Extending the Supply-Side Revolution
Malpass sees mechanisms for extending the supply-side revolution. “There could be another reconciliation bill. Pretty soon President Trump will be able to celebrate one year of his, from his inauguration with huge success, so he has a State of the Union message that could be about growth.”
Malpass pointed to Laffer’s championing of capital gains tax cuts: “If you cut the rate on capital gains, you’re going to get a windfall for the government and better allocation of capital across the country. So you’ve got all of that along with the payroll tax cut that Art’s talking about that could go into a reconciliation bill and get done quickly and be in time for operating all through 2026.”
The Political Strategy: Making Democrats Vote on Record
Laffer, who knows a lot about politics as well as economics, sees a political opportunity: “There’s no money-back guarantee on my advice because I’m not an expert, but yes it can be done. But the one thing I want to do is have the tax cuts in the reconciliation bill and watch how the Democrats vote.”
“Let them be on the record, for not cutting capital gains tax or not cutting payroll taxes for workers, and they be against affordability. They have been against it all the way along with their inflation and transfers and all that garbage from the last administration. But now I want them to assert, just assert, we’re pro-affordability or against affordability.”
The only thing for affordability, Laffer argues, is an increase in the supply of goods and services. “It’s a supply-side approach 100%. The more services and products that you have in the economy, the lower inflation is. You can have both strong growth and low inflation. Maybe the Fed will begin to understand that.”
Sound Money and Price-Rule Monetary Policy
Malpass had a final word on monetary policy: “We could switch to a price-rule monetary policy and defend the dollar, and that was core of the supply-side revolution in the 80s. The stable dollar enabled investment.”
The idea is simple: you want to make sure the dollar you earn today is worth the same tomorrow and maybe next year. A stable dollar enables investment because investors know what their returns will be worth in the future. This was a core component of the supply-side revolution in the 1980s, and it’s just as important today.
The Supply-Side Formula: Tax Cuts and Sound Money
The supply-side revolution, according to Laffer and Malpass, comes down to two key components: tax cuts and sound money. “We do have a supply-side revolution that’s tax cuts and sound money, and that always works, so that’s happening now,” Laffer said.
Tax cuts create incentives for work, investment, and production. Sound money creates stability and enables long-term investment. Together, they create the conditions for strong growth with low inflation—exactly what we’re seeing in the current economic data.
The Shutdown Disappointment
The government shutdown was “a big disappointment,” Laffer acknowledged, “but it only goes to show you what happens when jealous people look and realize what they couldn’t do, we did do. Trump deserves all the credit for all of this along with Johnson and Thune. They just did an amazing job and we’re off to the races.”
Despite the shutdown, the economic momentum continues. The supply-side policies are working, and the data is showing it.
The Future: More Tax Cuts and Continued Growth
Looking ahead, both Laffer and Malpass see opportunities for more tax cuts through reconciliation bills. Capital gains tax cuts, payroll tax cuts, and other supply-side measures could be included in legislation that gets done quickly and operates all through 2026.
The political strategy is clear: put Democrats on the record voting against tax cuts and affordability. Make them choose between supporting policies that increase the supply of goods and services (which lowers prices and improves affordability) or opposing those policies.
FAQ
What is supply-side economics and why is it working now?
Supply-side economics focuses on increasing the supply of goods and services through tax cuts, deregulation, and sound money policies. Art Laffer, one of Reagan’s top advisors, says this moment is more spectacular than the Reagan era because the policies are working faster. Reagan’s tax cuts took two years to kick in due to political compromises, but current tax cuts are taking effect immediately because they were implemented quickly without delays. The back-dating of expense write-offs to January 20 is driving immediate capital expenditures.
Why does Laffer oppose sending checks from tariff revenue?
Laffer argues that tariff revenue should be used to cut payroll tax rates for both employers and employees, not sent as checks. The principle is “incentives matter”—you need to cut tax rates prospectively to incentivize work. If you give someone a check, they may work less. If you cut their tax rates, they have more incentive to work more. The goal is to incentivize production because affordability comes from more goods available, which is a supply-side proposition. Checks go to people regardless of work; tax cuts reward work.
What’s happening with socialism in Latin America?
There’s a revolution against socialism sweeping Latin America. Chile is throwing out socialists, Colombia is getting rid of Petro for free markets, and if Venezuela gets rid of Maduro, Cuba could see its first free market in 60 years. Bolivia and Argentina are also shifting. Former World Bank President David Malpass says this reflects people’s desire for better lives—jobs, the ability to work, and sound money. This could transform the entire Western Hemisphere toward free markets.
What additional tax cuts are being proposed?
David Malpass suggests another reconciliation bill could include capital gains tax cuts (which Laffer champions as creating a windfall for government and better capital allocation) and payroll tax cuts. These could be done quickly and operate through 2026. Laffer wants these in a reconciliation bill to force Democrats to vote on record—either supporting tax cuts and affordability or opposing them. The strategy is to make affordability the issue, with supply-side policies as the solution.
What is price-rule monetary policy and why does it matter?
Price-rule monetary policy means defending the dollar’s value so the dollar you earn today is worth the same tomorrow and next year. This was core to the supply-side revolution in the 1980s because a stable dollar enables investment—investors know what their returns will be worth. Malpass suggests switching to this approach, arguing that sound money (stable currency) combined with tax cuts is the formula that “always works” for supply-side economics, creating strong growth with low inflation.
