Trump’s Art of the Spin

NEW HAVEN – Blinded by a surging stock market and a 50-year low in the unemployment rate, few dare to challenge the wisdom of US economic policy. Instant gratification has compromised the rigor of objective and disciplined analysis. Big mistake. The toxic combination of ill-timed fiscal stimulus, aggressive imposition of tariffs, and unprecedented attacks on the Federal Reserve demands a far more critical assessment of Trumponomics.

Politicians and pundits can always be counted on to spin the policy debate. For US President Donald Trump and his supporters, the art of the spin has been taken to a new level. Apparently, it doesn’t matter that federal deficits have been enlarged by an estimated $1.5 trillion over the next decade, or that government debt will reach a post-World War II record of 92% of GDP by 2029. The tax cuts driving these worrying trends are rationalized as what it takes to “Make America Great Again.”

Nor are tariffs viewed as taxes on consumers or impediments to global supply-chain efficiencies; instead, they are portrayed as “weaponized” negotiating levers to force trading partners to change their treatment of the United States. And attacks on the Fed’s independence are seen not as threats to the central bank’s dual mandate to maximize employment and ensure price stability, but rather as the president’s exercise of his prerogative to use the bully pulpit as he – and he alone – sees fit.

There are three basic flaws with Trump’s approach to economic policy.

  1. First, there is the disconnect between intent and impact. The political spin maintains that large corporate tax cuts boost US competitiveness. But that doesn’t mean deficits and debt don’t matter. Notwithstanding the hollow promises of supply-side economics, revenue-neutral fiscal initiatives that shifted the tax burden from one segment of the economy to another would have come much closer to real reform than the reduction of the overall revenue trajectory has. Moreover, the enactment of fiscal stimulus in late 2017, when the unemployment rate was then at a cyclical low of 4.1% (headed toward the current 3.6%), added froth to markets and the economy when it was least needed and foreclosed the option of additional stimulus should growth falter.

Similarly, Trump’s tariffs fly in the face of one of the twentieth century’s greatest policy blunders – the Smoot-Hawley Tariff of 1930, which sparked a 60% plunge in global trade by 1932. With foreign trade currently accounting for 28% of GDP, versus 11% in 1929, the US, as a debtor country today, is far more vulnerable to trade-related disruptions than it was as a net creditor back then.

Ignoring the cascading stream of direct and retaliatory taxes on consumers and businesses that stem from a tariff war, Trump extols the virtues of tariffs as “a beautiful thing.” That is painfully reminiscent of the 1928 Republican Party platform, which couched tariffs as “a fundamental and essential principle of the economic life of this nation … and essential for the continued prosperity of the country.” Trump ignores the lessons of the 1930s at great peril.

The same can be said of Trump’s recent Fed bashing. The political independence of central banking is widely regarded as the singular breakthrough needed to achieve price stability following the Great Inflation of the 1970s. In the US, passage of the so-called Humphrey-Hawkins Act of 1978 gave then-Fed Chairman Paul Volcker the political cover to squeeze double-digit inflation out of the system through a wrenching monetary tightening. Had Volcker lacked the freedom to act, he would have been constrained by elected leaders’ political calculus – precisely what Trump is doing in trying to dictate policy to current Fed Chair Jerome Powell.

2) The second critical flaw in Trump’s economic-policy package is its failure to appreciate the links between budget deficits, tariffs, and monetary policy. As the late Martin Feldstein , to the extent that budget deficits put downward pressure on already depressed domestic saving, larger trade deficits become the means to fill the void with surplus foreign saving. Denial of these linkages conveniently allows the US to  for self-inflicted trade deficits.

But with tariffs likely to divert trade and supply chains from low-cost Chinese producers to higher-cost alternatives, US consumers will be hit with the functional equivalent of tax hikes, raising the risk of higher inflation. The latter possibility, though seemingly remote today, could have important consequences for US monetary policy – provided, of course, the Fed has the political independence to act.

Finally, there are always the lags to keep in mind in assessing the impact of policy. While low interest rates temper short-term pressures on debt-service costs as budget deficits rise, there is no guarantee that such a trend will persist over the longer term, especially with the already-elevated federal debt overhang projected to increase by about 14 percentage points of GDP over the next ten years. Similarly, the disruptive effects of tariffs and shifts in monetary policy take about 12-18 months to be fully evident. So, rather than bask in today’s financial-market euphoria, politicians and investors should be thinking more about the state of the economy in late 2020 – a timeframe that happens to coincide with the upcoming presidential election cycle – in assessing how current policies are likely to play out.

There is nothing remarkable about a US president’s penchant for political spin. What is glaringly different this time is the lack of any pushback from those who know better. The National Economic Council, established in the early 1990s as an “honest broker” in the executive branch to convene and coordinate debate on key policy issues, is now basically dysfunctional. The NEC’s current head, Larry Kudlow, a long-standing advocate of free trade, is squirming to defend Trump’s tariffs and Fed bashing. The Republican Party, long a champion of trade liberalization, is equally complicit. Trump’s vindictive bluster has steamrolled economic-policy deliberations – ignoring the lessons of history, rejecting the analytics of modern economics, and undermining the institutional integrity of the policymaking process. Policy blunders of epic proportion have become the rule, not the exception. It won’t be nearly as easy to spin the looming consequences.

Reagan’s Supply-Side Warriors Blaze a Comeback Under Trump

Like perms, Members Only jackets and Duran Duran, their economic theories were big in the go-go 1980s. Now they’re back.

On a Tuesday evening earlier this month, several dozen Washingtonians gathered in a ballroom at the Trump International Hotel, ostensibly to enjoy an open bar and watch a new PBS documentary about money. In reality, the event also served as a rally for a small clique whose fierce devotion to supply-side economics made them influential figures in the 1980s, and has won them renewed clout and access under President Donald Trump.

Invitations listed the hosts as Stephen Moore, a habitué of conservative think tanks, and Art Laffer, the supply-side economist, who did not end up attending. Larry Kudlow, the director of Trump’s National Economic Council and one of the president’s closest advisers, showed up in a pinstriped suit. “Larry Kudlow is my best friend in the world,” gushed Moore in opening remarks, noting that Laffer and Kudlow served as co-best men at his wedding to his second wife, Anne, who sat in the front row. Taking the floor next, Kudlow gazed out at the room and offered a shoutout to Adele Malpass, a RealClearPolitics reporter and former chairwoman of the Manhattan Republican Party, whose husband, David, has just taken over as president of the World Bank on Trump’s say-so.

Those decades of free-market machinations are now paying off, as a quintet of Ronald Reagan administration alumni — Kudlow, Laffer, Forbes, Moore and David Malpass—united by undying affection for each other and for laissez-faire economics, have the run of Washington once more. Members of the tight-knit group have shaped Trump’s signature tax cut, helped install each other in posts with vast influence over the global economy, and are working to channel Trump’s mercantilist instincts into pro-trade policies. Blasted by their critics as charlatans and lauded by their acolytes as tireless champions of prosperity, there’s no denying that the quintet has had an enduring impact on decades of economic policy.

Most recently, in late March, and partly at Kudlow’s urging, Trump announced his intention to nominate Moore to one of two open seats on the Federal Reserve Board of Governors, the body that sets the tempo of the global financial system.

The announcement prompted protests from economists across the ideological spectrumGeorge W. Bush’s top economist, Harvard’s Gregory Mankiw, said Moore lacked the “intellectual gravitas” for the job—who warned that appointing Moore, a think-tanker with no Ph.D., would politicize the Fed. Soon, it emerged that Moore had made a mistake on a 2014 tax return that led the IRS to place a disputed $75,000 lien against him, and CNN dug up scathing comments Moore had made about Trump during the presidential primary.

Whether Moore can survive the scrutiny and pass muster with the Senate will be a test of the supply-siders’ renewed cachet. They believe they can pull it off.

“I understand there are imperfections,” Kudlow told POLITICO. “I think it can be worked out.”

Moore described some of his recent conversations with Trump, which often turn to Fed Chairman Jerome Powell.

“I think his criticism of Powell is excessive and could be counterproductive,” Moore said, because it could actually provoke Powell to prove his independence by defying Trump’s wishes. Generally speaking, Trump wants Powell to keep interest rates low to decrease the chances of any economic slump before the president faces voters again next November.

Moore also recounted how he and Laffer, who began advising Trump in 2016, helped place Kudlow in his current posting.

Roughly a year into Trump’s term, as Trump’s first NEC director, Gary Cohn, prepared to depart the post, the duo sprang into action. Moore said that during this period, whenever he and Laffer engaged in their semiregular consultations with Trump, they would have some version of the following exchange:

“You know, Mr. President, you’re missing one thing,” Laffer or Moore would say.

“What is that?” Trump would ask.

“Larry Kudlow,” Laffer or Moore would tell him.

We just drilled the message over and over,” Moore recalled. “‘Larry, Larry, Larry, Larry.’”

At the same time, Moore said, the pair worked the press. “We made a concerted effort to make it seem like a fait accompli that Larry would get the job.”

That included knifing a few of Kudlow’s rivals. “We had a campaign to say ‘this person’s completely unqualified,’” he said, though he declined to name their targets. “I think we took them down,” he added.

It proves that in Washington, appearance is reality, sometimes,” Moore continued. “So that was highly effective.

During that same period, following the 1974 midterms, Laffer first drewhis famous Laffer Curve — a representation of the idea that at a certain level of taxation, lowering taxes would theoretically spur enough growth that government revenue would actually rise—at a meeting near the White House with Wanniski, Dick Cheney, then an aide to President Gerald Ford, and Grace-Marie Arnett, another free marketeer active in Republican politics.

Reagan would go on to fully embrace supply-side theory, a shift from the party’s traditional emphasis on fiscal discipline, appointing Laffer to his Economic Policy Advisory Board.

Then as now, supply-side economics was criticized for favoring the rich and derided by critics as unrealistic “Voodoo Economics.” The critics got an early boost from a 1981 Atlantic cover story in which Reagan’s budget director, David Stockman, aired his doubts that this novel theory was working in practice.

The piece ruined Stockman’s standing with Reagan—Laffer calls him “the traitor of all traitors”—but Stockman’s young aide, Kudlow, now 71, remained a loyal supply-sider and struck up a relationship with Laffer.

Reagan would go on to appoint Forbes as the head of the Board of International Broadcasting, which oversaw Radio Liberty and Radio Free Europe, and Moore worked as the research director for Reagan’s privatization commission. Malpass, meanwhile, worked in Reagan’s Treasury department. Representatives for Forbes and Malpass said they were not available for interviews.

In the 1988 presidential primary, another supply-sider, the late New York congressman Jack Kemp, lost out to George H.W. Bush, curtailing the crew’s influence within the party.

But they stuck together. Moore, now 59, first became close with Laffer and Kudlow in 1991, after he recruited them to participate in an event celebrating the 10-year anniversary of Reagan’s first tax cuts for the libertarian Cato Institute.

In 1993, Kudlow and Forbes teamed up to craft a tax cut plan for New Jersey gubernatorial candidate Christine Todd Whitman, who went on to unseat incumbent Democrat James Florio.

Meanwhile, Kudlow hired Malpass to work for him at Bear Stearns, where he had been flying high as the investment bank’s chief economist.

The next year, Kudlow crashed to earth—he left the bank and entered rehab for alcohol and cocaine addiction. Laffer stuck by Kudlow, hiring the investment banker to work for his consulting firm in California when he emerged.

In 1996, Forbes, backed by Moore, entered the Republican primary and lost out to Bob Dole, but the group takes credit for getting Kemp picked for the bottom half of that year’s ticket, which lost to incumbent Bill Clinton.

At some point, Forbes, Kudlow, Moore and Laffer became inseparable in the eyes of their peers.

You could call them the Four Musketeers of the supply-side movement,” said Avik Roy, an editor at Forbes involved in some of the group’s advocacy. Or you could call them the “the supply-side Beatles,” as Moore does—or “the four amigos,” as anti-tax crusader Grover Norquist does. “There’s a fourness to them,” observed Jack Fowler, vice president of the conservative National Review.

Malpass, 63, who has maintained a lower public profile over the years, qualifies as something of a fifth musketeer.

“They’re a little rat pack. There’s no doubt about that,” said one New York financial world player who keeps in touch with the group. “They’re all pretty straight guys. They’re not criminals. They don’t do anything weird, outwardly. You know what I’m saying? They like talking about supply-side economics. They get hard talking about tax cuts.”

Whatever you call them, there’s no denying their impact on American society. The group has argued that the best way to manage the economy is to make life easier for the producers of goods and services—by limiting taxes and regulations—so that producers are incentivized to supply more of these goods and services to the market, and that taming deficits is less important than spurring growth.

Before Reagan took office and empowered the supply-siders, the top marginal federal income tax rate in the U.S. had remained somewhere north of 60 percent since the Great Depression. Under their influence, Reagan briefly pushed the top rate below 30 percent, and it has not returned to anything near the pre-Reagan status quo since then.

Before Reagan, the national debt-to-GDP ratio had been declining since World War II, thanks in large part to the old Republican school of fiscal discipline. Since Reagan, the debt ratio has been climbing back toward its wartime peak. Trade and migration barriers have also come down. American society has become both wealthier in real GPD terms and more unequal. These trends have persisted thanks to a post-Cold War, bipartisan free market consensus, and to the bipartisan Keynesian response to the last financial crisis—but it was the supply-siders who really got the party started.

And they have not stopped partying since. Members of the group have continued to actively socialize with each other over the decades, with some spending New Year’s eves together. At one birthday party for Laffer in New York, they presented the aging economist with a signed poster of the Jedi master Yoda. “I’m short, a little bit fat. I’ve got big, green ears,” Laffer explained. “I look sort of like Yoda.”

In 2015, Forbes, Laffer, Kudlow and Moore created the Committee to Unleash Prosperity, a group intended in part to counter the emergence of the “Reformicons,” a rival gang of Republican eggheads who felt the party had gone too far in the direction of laissez-faire policies favoring the rich.

Among the other 29 committee members listed in a press release were both Malpasses, Kevin Hassett, now chairman of Trump’s Council of Economic Advisers, and Andy Puzder, who was Trump’s initial pick for labor secretary until allegations of domestic abuse unearthed by POLITICO derailed his nomination.

The group sought, with considerable success, to vet Republican presidential candidates for their supply-side credentials and to influence their platforms, holding large private dinners at Manhattan venues such as the Four Seasons and the 21 Club, so that committee members and other notable invitees—like Rudy Giuliani and Roger Ailes—could feel out the candidates.

Before meeting with the larger group, candidates would huddle with the committee’s founders to receive economic tutorials. Or in the case of Ohio Governor John Kasich, to give one. “We were all sitting there, and he would talk for an hour,” Moore recalled. “We’re like, ‘No, we’re supposed to be talking to you,’ and he’s talking to us.” Moore called the episode “Classic John Kasich.”

Though the events were supposed to be off the record, journalists often attended, and an otherwise lackluster February 2015 dinner for Wisconsin Governor Scott Walker made headlines when Giuliani barged in, proclaimed he did not believe that President Barack Obama “loves America,” and insisted a POLITICO reporter could print the quote.

Almost every serious Republican candidate participated in the dinners—but when Trump’s campaign first came calling early in the mogul’s bid, Moore said the committee passed.

It just seemed like a joke to me that he was even running. I was like, ‘No, we’re a serious organization,’” he recalled. In hindsight, Moore said, “That was stupid.”

Meanwhile, Trump defied the committee’s free market orthodoxy on issues like trade and immigration, drawing public criticism from both Moore and Kudlow, and feuded with the laissez-faire Club for Growth, which Moore had co-founded in the late ’90s.

At the same time, Kudlow—who spent two decades in media as a National Review editor and CNBC host—was also eyeing a 2016 Senate run in Connecticut, but he did not jump in.

As the voting started, it became clear that Trump was emerging as the likely nominee, but he continued to have trouble attracting experienced advisers. In March 2016, then-campaign manager Corey Lewandowski invited Kudlow and Moore to meet with Trump at the candidate’s midtown office. (Laffer—who moved from California to Tennessee in 2006 for tax reasons—had already met with Trump and begun advising the campaign on a tax plan.)

The duo hit it off with the apparent nominee, and Trump asked them to help refine his tax proposal, which he had first unveiled in September 2015. According to “Reagonomics,” Trump wanted the pair to make his plan “bigger and more beautiful” than Reagan’s tax cut, but he also needed to trim the projected cost of his original proposal, which was about $9 trillion. The populist Steve Bannon, the book says, pushed Trump to trim the cost by jacking up his original plan’s top income tax rate. The supply-siders fought back, making charts for Trump that showed when Reagan slashed taxes on the wealthy, the share of tax revenue paid by the top 1 percent actually went up. Ultimately, Trump’s new proposal reflected a compromise position between the two camps, with a top tax rate that was higher than the original plan’s, but lower than the current effective rate.

At the March meeting, Trump also mentioned he was planning a trip to Capitol Hill to confer with congressional Republicans. Moore had heard a similar recent meeting with lawmakers had gone badly—they complained Trump was “arrogant”—and suggested that he and Kudlow, who personally knew much of the caucus, accompany the candidate to help “break the ice.”

Apart from a confrontation between Trump and Arizona Senator Jeff Flake, Moore said the approach “worked like a charm.”

After Trump won, the trio continued to advise on the tax plan. Kudlow and Moore pushed the plan on Capitol Hill, drawing on the same relationships with Senate Republicans that they hope will ensure a smooth nomination process for Moore. Malpass, who had begun advising Trump during the campaign and then went into the Treasury Department, also helped craft the plan.

After the tax bill’s passage in December 2017, Laffer and Moore turned their attention to their campaign to install Kudlow in the White House, which succeeded last March. (Two other members of the Committee to Unleash Prosperity, the grocery and real estate billionaires John and Margo Catsimatidis, were dining with Kudlow and his wife at the Italian restaurant Cipriani when Trump called to formally offer Kudlow the job.)

Once inside, Kudlow returned the favor, ensuring that Moore’s and Laffer’s writings regularly made their way to Trump’s desk.

The supply-siders began pushing Trump on trade, advising him to encourage a lowering of trade barriers on all sides, rather than raising them. Last June, Kudlow persuaded Trump to float the idea of the world governments eliminating all tariffs at a G-7 summit in Quebec.

Last month, Kudlow showed Trump an op-ed co-authored by Moore in the Wall Street Journal that criticized Powell. The op-ed reportedly pleased Trump so much that it prompted him to offer Moore the Fed job.

Kudlow also championed his former Bear Stearns protege’s World Bank ascension. “For Malpass, I worked very, very hard,” he said.

Moore has predicted that Malpass will gradually bring the supply-side gospel to the World Bank, which influences the economic policies of governments around the world.

To their friends, the prospect of the rat pack getting back at the economic levers is wonderful. “The economy is the best it’s been in a long time!” John Catsimatidis exclaimed.

Trump Considering Herman Cain, Former Pizza Executive, for Fed Board

 President Trump is considering nominating Herman Cain, who abandoned his 2012 presidential bid in the face of escalating accusations of sexual misconduct, for a seat on the Federal Reserve Board, according to two people familiar with the matter.

Mr. Trump has been considering tapping Mr. Cain, the former chief executive of Godfather’s Pizza, for several weeks but is waiting for a federal background check before officially nominating him to the Fed, one of these people said.

The decision to consider Mr. Cain signals the second time in weeks that Mr. Trump has floated candidates with deeply-held political views to fill a seat on the Fed, which is a traditionally independent body. Mr. Trump also plans to nominate Stephen Moore, a conservative economist and longtime economic adviser, as a Fed governor.

Mr. Moore’s potential nomination has been clouded by revelations of ethical and financial issues that surfaced in recent weeks, including a 2013 contempt of court charge stemming from failure to pay child support to his former wife. The White House has said it remains committed to nominating Mr. Moore, who is currently undergoing a background check.

Mr. Cain’s nomination is being supported by Larry Kudlow, who heads the National Economic Council and also recommended Mr. Moore for a Fed seat, according to a person familiar with the discussions.

It is unclear whether Mr. Cain will clear the background check. His presidential campaign came to a screeching halt after several women came forward with accusations of sexual harassment.

A Chicago woman said that Mr. Cain made an unwanted and rough physical advance on her when he was the chief of the National Restaurant Association, a lobbying group. Within days, a second woman who worked in the government affairs office of the restaurant association came forward with her own claims.

Mr. Cain has long proclaimed his innocence and sought to cast blame for what he called a smear campaign on political rivals and the news media.