President Obama’s first budget forecast roughly eight years ago was much rosier than Trump’s. And there was nary a peep of criticism from the mainstream-media outlets and the consensus of economists.
.. the Obama policy didn’t include a single economic-growth incentive. Not one. Instead, there was a massive $850 billion so-called spending stimulus (Whatever became of those spending multipliers?), a bunch of public-works programs that never got off the ground, and finally Obamacare, which really was one giant tax increase.
.. So eight years ago tax-and-spend was perfectly okay. And the projection that it would produce a 4 percent growth rate perfectly satisfied the economic consensus.
.. So here’s President Trump reaching back through history for a common-sense growth policy that worked in the 1960s, when JFK slashed marginal tax rates on individuals and corporations, and again in the 1980s, when Ronald Reagan slashed tax rates across-the-board and sparked a two-decade boom of roughly 4 percent real annual growth. But the economic consensus won’t buy Trump’s plan.
.. Most of the Trump critics point to the decline in productivity over the past 15 years. They say, unless productivity jumps to 2.5 percent or so, and unless labor-force participation rises, we can’t possibly have 3 to 4 percent growth.
.. “Take off the muzzle and the economy will roar.”
Trump’s Economic Team of Rivals
The incoming president’s advisers are all over the ideological map.
Summing up his life lessons, he encouraged the students to lean in: “Everything I’ve done in my career, and everything that most of you have done to this point, is to take risks.”
.. During an interview on CNBC the day of his appointment, Mnuchin said his top priorities were tax reform and rolling back the Dodd-Frank Act – not exactly what all those voters demanding the return of lost industries in middle America were clamoring for.
.. Seeing China as an economic paper tiger (or dragon as the case may be), he also believes that the Beijing government is weaker than it seems and susceptible to pressure and coercion. Hence he is supportive of retaliatory tariffs and other measures designed to “level the playing field.”
.. The plan has four pillars: “tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit.” But trade is their real passion: They honed in on the entry of China into the World Trade Organization, which they said “opened America’s markets to a flood of illegally subsidized Chinese imports, thereby creating massive and chronic trade deficits” and “rapidly accelerated the offshoring of America’s factories
.. “Either you believe in markets, or you believe in government,” Kudlow has said.
.. Something’s got to give. How to square deregulation with abiding by environmental standards, as Cohn favors? How to square tariffs on imports designed to boost domestic production (Navarro and Ross) with the free flow of capital (Kudlow)? How to balance deconstructing Obamacare without price gouging and chaos in the health-care system that will surely hurt the working class that supported Trump? How to balance punitive tariffs with affordable goods? How to start mini-trade wars without the costs falling on, say, Walmart shoppers? How to juxtapose tax cuts that will benefit the 1% with the need to boost wages and employment for millions of disgruntled workers and unemployed who see Trump as a best last chance to turn things around?
The answer is that you can’t. If Trump’s goal is to create tension and conflict and see who emerges bloodied but victorious from the fighting, he’s setting up one hell of a battle.
.. Faced with competing and irreconcilable voices, it will be up to Trump to play the referee. That can take the form of active deliberation with his advisers, or passively waiting it out until someone emerges on top of the bureaucratic scrum. It’s certainly a recipe for a White House of conflict; whether it’s a recipe for sound and coherent economic policy is entirely another matter.
Larry Kudlow and Economics in the Trump Administration
Noah Smith (along with a fair section of the Internet) has some concerns about Larry Kudlow as chair of the Council of Economic Advisers: he’s overconfident, too much of a partisan, and fixated on nonexistent problems (e.g., inflation).
.. This is one of the important contributions that economics can make to public policy: the understanding that the world is complicated, and the dedication to uncovering rather than masking that complexity. In a presidential administration, you would expect this perspective to come from the Council of Economic Advisers.
.. What concerns me is that he has been working as an economist for decades—that is, he makes money by thinking and talking about economic issues—yet his conception of the discipline seems limited to the simple, theoretical relationships of Economics 101.
Most of Kudlow’s thinking about economic issues appears to boil down to three ideas.
- The first is that tax cuts increase economic growth—a mantra that conservatives have repeated for decades, yet is not supported by reviews of existing research.
- The second is that expanding the money supply will necessarily generate high inflation, on which basis Kudlow predicted a “major inflationary plunge” just as the Great Recession was beginning.
- The third is that an expensive currency—what politicians call a “strong dollar,” but Kudlow calls “King Dollar” (with the capitals)—is good for the economy.
.. That’s the essence of what I call economism, the subject of my new book: a worldview that assumes that society operates according to a small set of fundamental principles, and that public policy can be shaped on that assumption.
.. With Kudlow as chair of the CEA, Donald Trump is giving up even the pretense of trying to understand economic reality, instead doubling down on a handful of abstract slogans that have little to do with our current challenges. That’s hardly surprising, given that Trump is basically just an extreme caricature of contemporary conservatism
The Keynesians vs. Kudlow
Trump needs some pro-growth voices in the White House.
The real reason the Keynesian tong dislikes Mr. Kudlow is that he disagrees with their assumptions. He thinks tax cuts that change incentives produce more growth than do government transfer payments. He thinks the Keynesian “multiplier” model that $1 in spending produces $1.70 in growth is nonsense, as do most people who didn’t get a Ph.D. at MIT or Princeton.
This is precisely why Mr. Trump could use Mr. Kudlow on his economic team. So far the President-elect has chosen economic and financial advisers who are blank policy slates or best known for their ardent anti-trade and immigration views. His selection Wednesday of economist Peter Navarro to run a new White House National Trade Council puts another protectionist in the senior ranks. Mr. Kudlow is a free trader, and it would be useful to have at least one inside the White House.
Mr. Trump’s liberal critics don’t mind appointees who agree with them on trade and spending. They dislike Mr. Kudlow because they fear his pro-growth policies, like Reagan’s, will succeed too well.