Art Laffer blasts Obama's budget proposal

This is a rush transcript from "Your World," February 2, 2015. This copy may not be in its final form and may be updated.


UNIDENTIFIED MALE: Phil, you're a little feisty here this morning. I see you shivering. Look me in the eyes, buddy. Tell me what it is.


NEIL CAVUTO, HOST: Think Phil is feisty? Try the president, out with a $4 trillion spending plan that will really leave you shivering.


UNIDENTIFIED MALE: Yes, a shadow, I see. You can start this winter #sixmoreweeksofwinter.


CAVUTO: And if you think Phil's got one up on the president, think again, #you'relosingyourshirt, because this guy's budget is predicting 10 years of tax hikes totaling some two trillion smackers.

Art Laffer is hoping that the president would be more like New York's mayor and Groundhog Chuck last year, just drop it altogether.

Art, of course, that's no laughing matter. As we know, that Chuck lost his life as a result of the mayor dropping him. But I digress.


CAVUTO: You're saying now, with the president's budget, we're looking at many, many years of trouble, aren't we?

LAFFER: Well, if it were to go through, yes, we would be, but I don't think it will go through, Neil.

I mean, he is the perennial groundhog. I mean, he just comes back with the same thing every time. It just doesn't stop. Bill Murray has nothing on him.

CAVUTO: But, you know, at least Bill Murray after a while realized that I was repeating and I have got to stop repeating.

But he says this -- this forecast sees deficits staying around 2.5 percent of GDP over the next 10 years, as if that's great progress, because any deficit, as smart guys like you remind me, gets added to the debt, which is not coming down, I take it.


And I don't think interest rates will stay this low forever, Neil. I mean, all the debt held by the public is short-term. The Fed owns almost all of the long-term debt. So, as soon as interest rates start rising, they will rise very much as an expense of the federal government. They won't have the long-delayed effect.

So, if rates rise and you have all this debt sitting out there, you're going to have a serious deficit problem just by interest on the national debt alone.

CAVUTO: What about offsetting that? I know I sound like a literal apologist here, that the rates are rising because the economy is picking up and that means we are going to get more revenues coming in.

You say what?

LAFFER: Well, that would -- no, that would be wonderful if that were true.

CAVUTO: Right.

LAFFER: I hope that's true. I mean, I would love to see it.

But what you have seen is the real yield, the TIPS yield, what they call the TIPS yield, the inflation-adjusted yield...

CAVUTO: Right. Right.

LAFFER: ... is dropping -- it's almost to zero again, the 10-year. And that's ridiculous.

That's really the best forecast of the economy, given the policies this president is putting forward. He doesn't reflect in any way, shape or form what happened in November. I mean, we took the House, we took the Senate, we have all the statehouses; 31 governors are Republican; 31 legislators, if you count Nebraska, are Republican.

This Republican Senate and this Republican House is going to last as far as the eyes can see, and yet he still just goes through with the same old, same old.

CAVUTO: Well, I don't know about as far as the eye can see. Republicans are on defense two years from now, right, in the Senate. But you're right, I know what you're saying...

LAFFER: Well...

CAVUTO: ... that he is fighting the election results.

But he does say in this budget that he gets $1.8 trillion in deficit reduction over the next 10 years. Is that to say that even with the escalating debt, it would be $1.8 trillion worse without what he's doing, because that doesn't make sense?

LAFFER: No, no. What he assumes is that all of his taxes give you revenues and that he's going to get all of his taxes passed and they're all going to come through and there's not going to be any supply-side response to it.

But let me just tell you, that's not the way the world works. If you tax people who work and you pay people who don't work, which is what his proposal is, you're going to find a lot of people not working, many more than you expected.

CAVUTO: All right, then, if he is already saying goodbye to the sequestration cuts, which, as you have indicated when we first came up with them, they were kind of a namby-pamby attempt at budget discipline, but they were better than nothing. I think those were your words.

LAFFER: Yes, they were. Yes, they were.

CAVUTO: But he's abandoned those, because austerity seems, I don't know, so 2013, as I said.


CAVUTO: Then what? What do we do? Because he's abandoned them. The Republicans aren't really fighting him tooth and nail on it, so what does that mean?

LAFFER: Well, Neil, the sequestrations also included defense, as you know.

CAVUTO: Right.

LAFFER: And given the ISIS and all that, the Republicans would really like to relax the rules on spending for defense. And, of course, what's really helpful is that sequestration keeps us from spending more.

If you look at an economy, government spending is taxation. I mean, we don't have a Tooth Fairy working at the Treasury anymore. Whenever you spend, you have to take it from someone else. And that is taxation, as my colleague Milton Friedman repeated time and time again, and as Obama seems to not get time and time again.

If we can keep government spending declining as a share of GDP, which it has been for the last four or five years, as the stimulus spending has worn off, if we can keep that happening, we can keep this economy growing. If we went the way of Obama, I think we'd have a big, sharp downturn again.

CAVUTO: Do you think that we will ever see a time when a president, Republican or Democrat, submits a balanced budget? This one has a half- trillion dollars in the red.


LAFFER: Yes, I do think we're going to see that.

And let me just say, Neil, really seriously -- and I know we have talked a lot about it, you and I -- is that it's not a Republican or a Democrat issue.

CAVUTO: Oh, no, no, no.

LAFFER: It's not a liberal or conservative, it's not a right-wing or left- wing. It's economics. And I think it could well be a Democrat who proposes a balanced budget or a Republican.

Once they get the growth model in their minds, once they understand that taxes do deter people from working and producing and taking risk, once they understand that, then we could get a balanced budget, but we will only get it through economic growth.

CAVUTO: And it starts with the president submitting one, you know?

LAFFER: Yes, it really does.

CAVUTO: Right.

LAFFER: And then it has the Congress following through with it and then it has the legislature going on and spreading to the states.

CAVUTO: You're right.

LAFFER: You know, with Reagan, it took a long time to get this machine rolling, but once you got it rolling, it didn't stop. I mean, it went right through Bill Clinton. It stopped, well, unfortunately, with W.

CAVUTO: It did.

LAFFER: It stopped in 2001.

CAVUTO: You're right. You're right.

LAFFER: But we can...


CAVUTO: But that was then, and we're doubling on it now.

LAFFER: But...

CAVUTO: But thank you, Arthur. It's always a pleasure.

LAFFER: Well, thank you, Neil. It's a real pleasure being with you.

And enjoy Groundhog's Day. It's one of the days I really feel welcome in this world, little groundhog that I am. What can I tell you?

CAVUTO: I hear you. I hear you. There's some -- some news there. Different groundhogs, different story. All right.

LAFFER: That's true.

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