Before Larry Kudlow was appointed the White House’s top economist, he had some interesting conversations with his new boss, President Donald J. Trump, I am told.
According to Kudlow’s account, Trump seemed receptive to all of his free market policies including those on free trade despite the president’s recent infatuation with tariffs and hard-core protectionism. According to Trump’s version of their talks, for all Kudlow’s well-known positions on free markets and free trade, he is now open to the government’s using such measures as tariffs on foreign goods to reverse trade imbalances.
In others words, what we have in the making is a recipe for disaster.
Let me say off the bat, I wish the best for Larry Kudlow, one of my closest friends in the financial news business. No one should doubt his qualifications—he knows more about policy and economics than the whole Yale economics department combined. He’s also a great salesman (thanks to his years on TV) for free-market capitalism, which is needed these days to combat the overwhelmingly statist economic positions of the Democratic Party and much of the media.
But the biggest problem Larry faces isn’t convincing some skeptical reporters that tax cuts produce economic growth and that free trade spreads global prosperity. It’s convincing his boss that economies run best when the government isn’t fiddling with them, picking winners and losers.
In short, Kudlow will have to do the near impossible and remake Donald Trump into a free-market capitalist if he is to have any real impact in his job.
Trump supporters, of course, contend that the president is very free-market. He cut taxes and regulations, after all, and the economy is growing. Indeed, the Trumpian masses will also contend that in his past life he was a great businessman (despite all those bankruptcies when he was a casino/real estate developer) because he thrived in the world of markets and risk taking. And, yes, they will say Trump did pass tax reform – much lower corporate taxes and some small decreases in personal income taxes—that were advocated by Kudlow during the 2016 presidential election.
First, a little lesson on the Trump tax cuts: They were big, but mainly for corporations and real estate developers (like Trump). They were pretty weak for individuals. Small businesses, the alleged backbone of the American economy, got some tax relief, but that relief paled compared with the riches that flowed to Corporate America (again for people like the president).
For the Record: I’m all for making the U.S. corporate tax rate competitive with the rest of the world (it had been among the highest, thus costing us jobs), and so is Kudlow. But spend a few private moments with him and if he’s honest, Kudlow will undoubtedly concede that Trump’s personal tax cuts shouldn’t even be spoken of in the same breath as Ronald Reagan’s back in the 1980s, or even the George W. Bush tax cuts much later, which dramatically lowered how much money the government was taking from people who pay the most.
Maybe that’s because Trump has been so late to the free-market party that he has yet to fully formulate it into a coherent economic theory. Recall that it wasn’t so long ago that Trump was advocating leftist economic policies supporting higher taxes and endorsing the Clintons (before he ran against Hillary, of course). He once suggested that he could renegotiate the national debt with bondholders such as the Chinese in the same “successful” manner he renegotiated the debt of his failing, junk-bond-bloated casinos without recognizing what he was advocating was a default. And he even threatened (through his former senior adviser, Steve Bannon) to raise taxes on some wealthy earners as a way to craft a budget deal before the notion was shot down by the GOP congressional leadership.
Then there’s Trump on trade, and that’s where he and Kudlow will have their greatest friction. Kudlow is telling people that he now believes (after slamming the president on the tariffs, of course) that Trump is merely threatening tariffs as a negotiating tactic – a lesson from “The Art of the Deal” to get better terms as the administration renegotiates trade deals including the North American Free Trade Agreement.
How does he know that? In fact, no one knows what Trump really believes when it comes to free markets and trade because he has had so many inconsistent economic views over the years and even during his first year in the White House. Consider: Just a few months ago, the White House’s top protectionist, Peter Navarro, appeared as if he was on his way out of the administration, as free-traders were taking the lead on policy. Now it's Navarro who is taking the lead.
Trump says he is in favor of dissenting voices on economic issues, which is why he wants Kudlow for the National Economic Council job presumably to outdebate the protectionists in the White House such as Navarro. But remember that Kudlow is replacing Gary Cohn, who effectively got bounced from the White House when he wouldn’t publicly support the tariff scheme that Navarro basically authored.
So much for debate on something that is so vital to keeping the economy growing. That’s why the stock market have been tanking recently. As Trump parrots Navarro’s talking points on protectionism, not just to fight back against China’s abuses of the system (which are real and dangerous) but also to attack allies, traders are calculating the impact on growth, and it isn’t good.
Wall Street knows that for every job saved in the increasingly automated steel production industry, we might lose two more from manufacturers when they are forced to pay higher prices for raw materials because of higher tariffs.
Larry Kudlow knows that as well, and at best Donald Trump isn’t sure, which is a good reason to doubt this marriage will last very long.