Larry Kudlow and Economics in the Trump Administration

By James Kwak

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). I’m not so worried that he’s on Team Republican; after all, Donald Trump gets to pick the advisers he wants, and they shouldn’t be rejected solely because they take political sides. But I am worried about what Kudlow’s appointment means for the relationship between economics and policy.

The world is a complicated place. Anyone who studies society in depth should learn to have respect for that fact. At any given moment, we have only a hazy understanding of what combinations of transitory phenomena and underlying structural factors produce what outcomes. (For Exhibit A, see the election that took place on November 8.) This tweet at the beginning of Game 7 of the Cubs-Indians World Series, channeling the great French historian Fernand Braudel, is one of my all-time favorites:

Contemporary research economists have become incredibly sensitive to the difficulties of explanation. The papers that get the most attention—like Chetty et al. on intergenerational mobility, or Autor-Dorn-Hanson on the impact of Chinese imports on labor markets—are no longer purely theoretical. Instead, they analyze large datasets, often compiled with tremendous amounts of effort, to try to tease out the relationships between different variables. Any empirical paper in a good journal will discuss which way the causal arrows points and include multiple robustness checks to try to ensure that the results are not the product of outlier observations or an idiosyncratic specification. Good economists know that the answer to most questions is: It depends.

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. The treasury secretary is a public spokesperson, a diplomat, and the manager of a huge organization; the director of the National Economic Council is a policymaking coordinator; and the director of OMB is a budget planner.

I don’t particularly care that Larry Kudlow doesn’t have a Ph.D. in economics. Paul Volcker didn’t have one either (as far as I can tell), and few Democrats would have seriously objected to him as chair of the CEA. 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.

The first two ideas are things you would expect to hear from a first-semester college freshman (like Jeb Hensarling in his Texas A&M days). They make sense on a two-dimensional diagram, but they are at best distant approximations of how the world works. The third—King Dollar—is just weird. The value of a currency is the outcome of various factors, such as interest rates, and it doesn’t make sense to think of that outcome in isolation from the things you would need to do to produce that outcome.

Studying economics is a process of indoctrination and then de-indoctrination. First you learn that competitive markets produce optimal outcomes; then you learn that this is only true in rare circumstances, that real markets are imperfect in a myriad of ways, and that in any case perfect market outcomes are not necessarily optimal in any meaningful sense. Larry Kudlow, whether naively or disingenuously, still seems to be stuck on Economics 101. 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, but that doesn’t make it any less concerning.

18 responses to “Larry Kudlow and Economics in the Trump Administration

  1. “is not supported by reviews of existing research.”

    Translation from the scientist: “wrong.”

    It is probably not the time for measured, cautious language.

  2. Most conservative heads and pols are disingenuous. They don’t deserve the respect that goes with calling then naive.

  3. Kudlow being a part of any administration is further proof that the world is going straight to hell in a hand basket

  4. Ray LaPan-Love

    How is it that the dollar could have reached a 14-year high back in November if interest-rates are primarily important in the currency’s value? Interest-rates have never been so low, for so long, and yet the dollar just kept on rising. But the demand for the dollar rises as it earns more interest, not less. And demand is what increases value above all else. Could there be an example of ‘economism’ here, an example of the hypocritical variety?

    LONDON (Reuters) – November 25, 2016

    “The U.S. dollar’s renewed surge and signs that it will build on current 14-year highs are leaving a trail of destruction through world currency markets and forcing policymakers to rethink mechanisms to deal with the fallout”.

  5. A strong dollar might be a good policy if one wishes to protect holders of (non-bond) assets traded in dollars such as stocks or real-estate. Say you think asset markets are overvalued and you want to engineer a soft landing for investors. Hold the dollar high, and then devalue it when assets show signs of weakness. That’ll cause assets to rise in nominal price to keep their real value the same, and give asset owners exit options.

    But I’d be surprised if Mr Kudlow’s schemes are that sophisticated :)

  6. Ray comparatively speaking our rates are high, the countries who buy our debt like Japan still have near zero ten year rates, so a 2.5% return looks attractive to them. Private investors who want to gamble some what can lean toward equities and the return is higher.
    But for the most part, these inwestwers (people with money) have already made their interest in the past with the 30 year high interest E-bonds, they care not of the interest they make today, they care more about a return of their money, so by “law” they invest in bonds because bonds are the first to be paid back should a town or city default on their obligations. The cops, fireman, teachers and such all take the pay cut hit before Mr Bondy. This is because Judges and the like are heavily inwested in these bonds and they cant stomach a loss of any kind with their strenuous work. Every time a twenty year old shoots a cop they lose their collective minds as to why and must guard their securities as a result.
    This is why a complete default of obligations is needed to balance the scales of justice. Every time the interest rate rises even .25 percent, the additional straw on the middle class camel gets closer to the camels breaking point, by now the upper class only wants a return of their money, not a return on their money, and they have seen to that by manipulating lawmakers.
    Once justice obstructs wisdom, (which has been occurring for quite some time now), its game over, by all rights the game should be over by now, why it isn’t is anyone’s guess.

  7. Ray LaPan-Love

    Yes of course, our relative interest-rates are a factor but that doesn’t really make Kwak’s statement much less on an ‘economism’:

    “The value of a currency is the outcome of various factors, such as interest rates, and it doesn’t make sense to think of that outcome in isolation from the things you would need to do to produce that outcome.” (Kwak)

    The economism factor here being that even the explanation of the ‘relative’ benefit of an interest-rate factor… still falls well short of giving anything more than an Econ-101 level understanding of the actual factors. The first,. and far and away, most important of those factors being the stability of the dollar and the trust that investors have thereto. This explaining why “interest-rates” are in fact sometimes not at all important, and thus one can understand how the value of the dollar might hit a 14-year high while interest-rates are at historical lows. In fact, Kwak’s comment is so wrong as to be misleading in the respect that an uninformed reader might deduce that low interest-rates cause a currency to rise, instead of the other way around.

    Beyond that example of economism, Kwak is also showing some weirdness in referring to Kudlow’s favoring of a strong currency as “weird”. How is Kudlow’s opinion weird when he is so obviously and unashamedly panders to the rich? A strong dollar has allowed US investors to buy up more than 50% of all global market-share while also enjoying the benefits of cheaper imports. This purchasing power advantage being of course what the non-rich benefit from too, but only as consumers while a strong currency being detrimental to exports and thereby, consequently causing sluggish wages and incomes which offset those advantages.

    But low wages and incomes also help the wealthy by also keeping domestic labor costs low, and profits high, while also keeping the costs for the upper-class down on domestic products and on real estate. So its a win, win, win, and win again for the upper-class, and for the upper middle-class, that are the two groups which Kudlow is concerned with, almost exclusively, so how can that seem weird? Unless of course one has no sense of how Kudlow stands on this or on other issues, or… if one has some blind spots on his or her own understanding of who actually benefits from a strong currency, and who does not.

  8. Are any Keynesian economists attempting to get a meeting with Trump to teach him economics and explain why Kudlow and other economic appointees would be horrible choices? Rather than just write, which there is an abundance of, act. It isn’t hard to explain that tax cuts for the rich primarily stimulates investment demand, which is currently too high, and would primarily encourage asset bubbles, whereas tax cuts for others and particularly the poor would stimulate spending and the economy. If Kanye can get in the front door surely you guys can figure out a way. It’s the best hope.

  9. Robert Barro once remarked that Laura Tyson’s appointment as Clinton’s CEA chair was no big deal inasmuch as that position has no meaningful authority. Similarly, America is safer having Kudlow as CEA chair, where he can’t do much damage, rather than Fed governor! Of course, we still have to worry about “always wrong, but never in doubt” David Malpass on the Fed board.

  10. Ray LaPan-Love

    John, while your urging is commendable, those in power, even when the Dems have more control, have been first and foremost hell-bent on stimulating investment with the intent of winning the economic war that is going on globally.

    This does of course make bubbles more of to worry about, but that just expresses a problem with too much domestic liquidity as opposed to that of a global variety, and global in the respect of being invested by MNCs and US citizens.

    IOW, domestic consumption and wages are a low priority right now, there was a time when a symbiotic relationship between domestic employers and employees was crucial to a healthy economy, but foreign consumers have changed that virtuous-circle dynamic. And even though it is not talked about much, the war for global market-share has been paramount for decades now, and the US working-class slog is simply seen as a necessary sacrifice.

  11. Its all an illusion Ray, how does $20 trillion of public debt, $60 trillion of private debt and $200 trillion of unfunded liabilities translate into strength of any currency, it doesn’t. The illusion of full faith and credit is strictly on the backs of the middle class, which is the only thing holding the dollar together right now and well into the doomed future. We are going backwards as a country and the only result is a further destruction from the failed principles which brought us to this point. More domestic and foreign terrorism, higher costs to combat the terror, and more debt to finance the failed principles.
    We are spiraling out of control as a nation and once the curtain is lifted, you see an illusion which is perceived as risky or not and each citizen acts upon the illusion as they see fit.
    In other words, we are doomed as species and its only going to get worse from here on out, the answer was yesterday and yesterday is now gone.

  12. Ray LaPan-Love

    I am reasonably certain that the value of a currency in regards to exchange rates, has no bearing on the values of its domestic assets. Maybe I’m not understanding your comment quite, but a currencies value is neutral within its own borders insofar as prices are concerned. IOW, a “strong dollar” is not the same as dollar affected by price deflation, and thus a weak dollar is not weak due to price or asset inflation. The terms weak and strong only applicable to a currencies value in relation to other currencies and its purchasing power, or lack thereof, regarding imports or purchases in foreign lands.

  13. Ray LaPan-Love

    You don’t entirely understand the system, and so, I suspect that has caused some confusion which has brought about this relentless sense of doom. First off, you leave out the importance of trade deficits in regards to the leading factors which affect currency value, and you include minor factors, so I know that you just don’t quite get it. But I don’t have the time or the energy to explain the entire system, with all of its nuances, so maybe I can simply explain that there is no way to avoid what you call an “illusion”.

    A commodity standard is also based on trust and a promise that gives the “illusion” that promises will always be kept. But, a fiat system is better because the trust is not limited by the quantity of a commodity that a treasury may or may not actually have, or be willing to part with (Nixon).

    Instead, a fiat currency establishes trust based on a leap of faith in mankind that is not limited by the supply of paper or ink, but instead by estimates on productivity and outcomes. So, while there is an illusion factor involved, until those who fully understand the limits of the system are no longer able to justify their trust in the dollar, the debts you refer to are not a problem. This partly made true by the fact that the dollar has become even more trustworthy that what any commodity-backed currency has ever been, and thus the dollar has become like gold but without direct limits on supply.

  14. The system has been deeply corrupted Ray with a no return factor, you don’t have to explain anything to me, I trust no one and I can not be trusted.
    The cancer this nation has created will be its own demise in the form of fright, terror, and a lack of confidence with the future, you go on living in your own personal fiat bubble, and I shall live with mine and my very few loved ones.
    I have my everlasting health as the world crumbles around me, I need nothing more for me, its humanity which is under financed and in dire need of rebuilding and the boat has sailed as far i’m concerned. There is nothing more I can do for humanity without harming my everlasting health, a thing which I will not do.
    satan has won the battle as he always has, the human experiment ie (winning the war on woman) is failing once again and it will be a long, long time until we reach this point of history again, at which point, it will probably fail again for all the same reasons.
    Insanity is trying the same thing over and over again, and expecting a different result, this time is no different. Good luck with your survival skills, you will need them.

  15. Ray LaPan-Love


    From Wiki:

    Alarmist personality

    The alarmist person is subject to the cognitive distortion of catastrophizing – of always expecting the worst of possible futures.[3]
    They may also be seeking to preserve feelings of omnipotence by generating anxiety and concern in others.[4]

    And of course doomsayers have long preferred the realm of the unknowable, where gods, devils, and demons frolic and spite, and where the threat of wrath holds sin at bay.

  16. If no one sounded the alarm Ray, no one would make the difference, your reference to wiki is amusing, thanks for the laugh since it was on you.

  17. Jack O'Daniels

    IOW- the sky is falling

  18. Oh, man. The complexity scam. The reality is complex so only sophisticated tools can elucidate it. As any accomplished economist, your skill set is limited to curve fitting. You know how to overcome bias, but you don’t understand that you do it only by incurring a huge variance penalty. To use machine learning metaphor. The higher dimensional system you deal with and the shorter (stationary ) data sets you have, the simpler your decision rules must be. In other words, there’s a good chance Kudlow’s economism is a better guide to decision making than your economics.