‘We are in great shape’: Falling oil prices fuel optimism, former Reagan economist says

Key Concepts

• Oil Deflation: The significant drop in oil prices and its broad economic impact.
• Supply-Side Economics: Tax cuts, deregulation, and increased domestic production (like oil drilling) to stimulate economic growth.
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. Anticipation of negative CPI prints.
• Reaganomics: The economic policies promoted by U.S. President Ronald Reagan, emphasizing supply-side economics.
• Housing Affordability: Challenges related to the cost of housing and potential solutions like increasing supply and adjusting capital gains taxes.
• IRS Regulation on Partnerships: A recent IRS rule impacting business partnerships, viewed as a tax increase.
• Dollar Strength/Stability: The importance of a strong and stable U.S. dollar, and concerns about its recent performance.
• Monetary Policy: Discussions around price rules and a return to a monetary standard (potentially linked to a commodity like gold) to stabilize the currency.

Economic Impact of Falling Oil Prices & Supply-Side Policies

Larry Kudlow opens the discussion highlighting the underreported economic impact of falling oil prices, dropping from approximately $80 to $56 per barrel. He argues this deflationary pressure, combined with supply-side policies like tax cuts and deregulation (“drill, baby, drill”), could lead to substantial economic growth – potentially 5% to 7% quarterly gains. He expresses frustration that economists and mainstream media aren’t adequately acknowledging this impact.

Art Laffer corroborates this, referencing the oil price decline under the Reagan administration, falling from $40 (Kudlow corrects to $20, Laffer clarifies in 1972 dollars it fell 75%) to $5 per barrel. He suggests current prices could fall to $25 per barrel, representing a “enormous hit” and a significant economic stimulus. Laffer also emphasizes the positive impact of reducing immigration to 1.5 million per year, which he estimates would reduce the labor force by approximately 200,000 people per month, further boosting employment figures. He cites the period from January 1983 to June 1984, where the US experienced a 12% compound growth rate for six consecutive half-year periods (18 months).

Steve Moore agrees, stating that oil is a “master resource” and its price decline lowers the cost of everything produced, including food. He points to falling prices in areas like eggs, airline tickets, motels, and hotels as evidence of this effect. Moore anticipates the CPI will reach 2%, while Kudlow confidently predicts negative CPI prints are “coming.”

Supply-Side Policies & Deregulation

The conversation repeatedly emphasizes the benefits of supply-side economics. Kudlow highlights the existing “business boom” driven by capital expenditure (CAPEX), factory construction, deregulation, and increased domestic oil production. He jokingly suggests “drill, baby, drill” could even “end communism in the Western Hemisphere.” He lists numerous consumer goods – computer keyboards, eyeglasses, fertilizers, pharmaceuticals, etc. – whose prices are impacted by lower oil costs.

A key point raised is the shift in perception regarding fossil fuels, attributed to Donald Trump and Landman, making it “cool” to support the industry and dismissing concerns about climate change. The US is currently producing almost 14 million barrels of oil per day, with the situation in Venezuela adding to the supply. Kudlow frames this as Trump strategically using oil resources to exert influence.

Moore and Laffer also discuss potential further deregulation, specifically regarding a recent IRS rule impacting business partnerships. Moore describes this as a “massive tax increase” imposed by the Biden administration without Congressional approval, urging its removal.

Housing Affordability & Tax Policy

The discussion shifts to housing affordability. Kudlow mentions a potential restriction on large investors (REITs and private equity funds) purchasing single-family homes, questioning its effectiveness and labeling it as government meddling.

Laffer proposes a more market-oriented solution: suspending the inflation tax on capital gains. He argues this would allow older individuals to downsize and increase housing supply. He stresses the importance of indexing capital gains to account for inflation, suggesting it could be included in an upcoming reconciliation bill.

Concerns About the Dollar & Monetary Policy

John Tamney, a libertarian economist, is cited as criticizing Kudlow and Moore for not being sufficiently vocal about the dollar’s slight weakening. Moore and Laffer both affirm their support for a strong dollar.

Laffer advocates for a return to a “price rule” and a “monetary standard,” rejecting “unhinged paper currencies.” He envisions a stable dollar with no inflation, advocating for a flat monetary policy for the next century.

Logical Connections & Synthesis

The conversation flows logically from the initial observation of falling oil prices to a broader discussion of supply-side economics and deregulation. The impact of oil prices is presented as a catalyst for economic growth, amplified by policies that encourage production and reduce government intervention. The discussion then branches into specific policy proposals related to housing and tax reform, ultimately concluding with concerns about the dollar’s stability and the need for sound monetary policy.

The central takeaway is a strong belief in the power of supply-side economics, deregulation, and a stable monetary environment to drive economic growth. The speakers consistently emphasize the positive impact of lower oil prices and advocate for policies that further stimulate production and reduce government interference in the market. They express optimism about the current economic trajectory, attributing it to the policies implemented under the Trump administration and anticipating continued positive results.