The free trader will have to move carefully with the president.
“Misery acquaints a man with strange bedfellows,” wrote Shakespeare. Although the odds that President Trump was reminded of that observation when re-reading The Tempest must be regarded as low, they are somewhat higher that he might at one time have stumbled across the modern variant, about politics making strange bedfellows. Trump’s misery stems not from any doubts about his policies. He believes that his bonfire of the regulations has released the animal spirits of investors and the business community, and that his tax cuts will take the economy’s growth rate to a level it never achieved in the Obama years. Alas, he is not getting the credit he craves and feels he deserves, which he attributes to poor “messaging” by his staff.
Enter Larry Kudlow, an economist whose lack of the usual academic degrees makes him a great communicator, most often on the business channel CNBC, and a man who believes the economy can grow at annual rate of 5 percent, that tax cuts pay for themselves by stimulating growth (and therefore increasing tax revenues), who is unenthusiastic about increases in interest rates that might slow growth, and who can explain all of this in clear, catchy phrases. Just the man the president needed to replace Gary Cohn as head of the National Economic Council, which is supposed to gather comments on economic policy and present all views to the president, along with a list of his options.
Small problem: When Trump announced his tariffs on imported steel and aluminum, Kudlow labelled these tariffs as taxes on American consumers who will have to pay higher prices: “If ever there was a crisis of logic, this is it. . . . [Trump has] never been good on trade.” Fortunately, when strange bedfellows really, really want to cohabit, a problem like this can be solved. Trump says of Kudlow, “We don’t agree on everything, but in this case that’s good.” Tell that to Rex Tillerson, Steve Bannon, and a host of others who entered the White House through what they did not realize would become a rapidly revolving door if they quarreled with their boss, who has a private definition of “loyalty.”
On his side, Kudlow has had a sudden Damascene conversion on the road to his White House office. He now sees a virtue in tariffs, especially if the president is an expert negotiator, like the man who just hired him. Kudlow pointed out to reporters that Ronald Reagan, one of his heroes, “felt there were times when tariffs were appropriate, at least as a negotiating tool.” Besides, the role of the NEC is not to make policy but to execute it. “The way I learned it, with Reagan, is you present arguments, you put down options, and once the president makes a decision, that’s it. . . . Once he makes up his mind, you go out there and do what he wants.” Add that to the all-time list of great hostages to fortune.
We can reasonably expect the two will come together on several policy issues. Kudlow, who helped draft the first round of tax cuts, agrees with his new boss that a second round of corporate tax cuts would be good for the economy: they both want to make the expensing of capital items and some personal tax cuts-now due to expire in a few years-permanent. Damn the deficits and full speed ahead.
There is some logic to their position. As they see it, Janet Yellen was right that the 4.1 percent unemployment rate does not mean that we have a fully employed economy. Last month, although the economy created 313,000 new jobs, the unemployment rate did not fall because tens of thousands of workers got off their couches and re-entered the labor force. So there is room for more growth, perhaps to Kudlow’s 5 percent target, which a second tax cut might just produce in the near-term (and inflation thereafter). But explaining why rising fiscal deficits and consumer incomes and spending will not also increase imports and the hated trade deficit will tax Kudlow’s “messaging” skills.
They Trump and Kudlow both agree that we must launch a trade war with China to end its unfair trade practices. Trump wants Xi Jinping, whom he much admires, to suggest how China can reduce our trade deficit with his country by $100 billion per year, or by more than 25 percent. When that doesn’t happen, Trump plans to levy $60 billion-his advisers recommend $30 billion-in tariffs on Chinese goods, mostly high-tech and telecoms items, perhaps as early as this week. If he does initiate such a war-or more precisely, if he responds to the war China has been waging for decades-our commander-in-chief will find it a public relations benefit to have the TV-compatible Kudlow, with a reputation as a reluctant trade warrior, as his communicator-in-chief.
The president will also find Kudlow useful as the negotiations over renewal of the North American Free Trade Agreement reach their climax. The negotiating teams of all three parties seem stuck in concrete, with Trump on the verge of pulling out. Kudlow, having said withdrawal from NAFTA would be a “calamitously bad decision,” might try to explain to the president that the “deficit” he says we have in our trade with Canada only exists in the trade for goods ($23.2 billion). Add in our $25.9 billion trade surplus in services (financial, insurance, technical consulting, intellectual property) and we have an overall surplus of $2.7 billion. No amount of explanation can persuade Trump that when a nice Canadian couple drops $1,000 in his Washington Hotel we have exported $1,000 in services. Or that when he receives royalties from overseas television stations using a local version of The Apprentice, we have exported intellectual property. Or that when he receives royalties for use of the Trump name and organization in the firm’s new project in India we are exporting services. In short, if he believes what he is saying, the Trump organization contributes to our deficit by importing fine wines for Mar-a-Lago, but does not offset these by generating billions in the sale of services. Naughty.
America is now basically a service-based economy, with about 80 percent of our workers employed in service industries. Making concessions on services in order to gain concessions from our trading partners on goods is to protect our 19th century economy at the expense of our 21st century one.
Kudlow will probably decide it is best to let sleeping misrepresentations lie. The president and Canada’s prime minister Justin Trudeau are quietly negotiating over the heads of their trade representatives, and should reach an agreement, unless Trump really believes Canada must cut its (non-existent) trade surplus with us. Mexico will have no choice but to go along. Kudlow is now saying that the “upholstery” of NAFTA needs refurbishing, a vague-enough position to allow him to reassure the investment community that whatever deal is reached will not “calamitously” disrupt the international supply chain.
Right now, both of these strange bedfellows have a stake in making this marriage work. Trump gets an amiable messenger, Kudlow a job with some influence. But Trump is not famous for a history of enduring relationships.