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.
- 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 long stressed, 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 blame China 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.
More than 20 years ago, Harvard’s N. Gregory Mankiw, who would later serve as George W. Bush’s chief economic adviser, published the first edition of his best-selling Economics 101 textbook. Early in the book, trying to explain why economists are often perceived as disagreeing about everything, he wrote about the role of “charlatans and cranks.” When economists appear to be at odds, he wrote, you should be aware that sometimes the apparent dissent is coming from “some snake-oil salesman who is trying to sell a miracle cure.” He was referring to the people who told Ronald Reagan that cutting taxes would pay for itself, above all a guy named Art Laffer. As Mankiw noted, the charlatans and cranks were wrong: Reagan’s tax cuts sharply reduced revenue. And the same thing has been true every time tax-cut proponents have promised a miracle. Most recently, the 2017 Trump tax cut has led to a precipitous collapse in corporate tax receipts, twice as much as projected. Yet decades of being wrong again and again has done nothing to reduce the influence of tax-cut cranks on the G.O.P. On the contrary, their grip has gotten ever tighter. Even supposed Republican moderates like Maine’s Susan Collins justified their support for the 2017 bill by saying that it would pay for itself. And on Wednesday, Laffer will receive the Presidential Medal of Freedom. To be fair, Laffer is known for other things besides his utter faith in the miraculous power of tax cuts. He’s also known for warning about the dire effects of the Federal Reserve’s efforts to fight the financial crisis: “Get ready for inflation and higher interest rates,” he thundered a decade ago. Actually, no: Inflation has stayed low, and interest rates are close to their lowest levels in history. Now, anyone with a long career of making economic pronouncements will have made some bad calls. God knows I have. But what makes Laffer and others like them so special is both the utter consistency of their wrongness and the fact that their influence just keeps rising despite that wrongness. Or maybe I should say that their influence grows because of their wrongness. Constantly predicting great results from tax cuts for the rich and catastrophe should top tax rates go up is a bad way to devise economic policy but a very good way to ingratiate yourself with wealthy political donors. Attacking any policy that might have helped the economy while a Democrat was president was a pretty good career strategy too. What’s striking is that at this point the G.O.P. apparently has no use for economists who aren’t snake-oil salesmen. There are serious economists — like Mankiw — who happen to be conservatives, out of some combination of personal values and judgements about the proper role of government. I can respect their positions, even when I disagree. But they have no political home. Laffer’s medal, like the appointment of the fundamentally ludicrous Larry Kudlow as chief economist and the attempt to install Stephen Moore at the Fed, is like putting up a sign saying “Only charlatans and cranks need apply.”
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 spectrum—George 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.’”
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.
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.
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.