Trump's Odd Choice for Economics Aide Isn't a Bad One

Lawrence Kudlow is often spectacularly wrong. Still, in the Trump White House his strengths outweigh his weaknesses.

An odd choice can be a good one.

Photographer: Bryan R. Smith/AFP/Getty Images

Lawrence Kudlow appears to be President Donald Trump's pick to become the top White House economic adviser. At first glance, this television personality is an odd choice to lead the National Economic Council. But that doesn't mean he's a bad one.

My differences of opinion with Kudlow go way back. He's an avid supply-sider who never met a tax cut he didn't like. He's famously claimed that virtually any reduction in marginal tax rates would pump cash into the economy at such a rate that the resulting growth would make the tax cut pay for itself.

I'm skeptical of this. I'm also more concerned with the demand side of the economy: how much businesses and consumers are looking to buy. Fluctuations in demand are the major cause of booms and busts. Like most economists, I think it's sometimes desirable for the federal government to boost demand by increasing spending or cutting taxes. I supported these measure when President Barack Obama proposed them in 2009 in hopes of stimulating an economy that was then crippled by the financial crisis.

Not Kudlow. He's skeptical of what he derides as the Keynesian notion that increases in government spending can boost economic growth. Kudlow is also an indiscriminate economic optimist, always declaring that faster growth and higher stock prices are just around the corner. He's often wrong. In 2007, just as the global financial crisis was breaking, he declared:

Too much is being made of both the subprime credit problem and the housing downturn. A recent Bank of England study shows that residential mortgage-backed securities in the U.S. total $5.8 trillion. Of that, only $700 billion, or 12 percent, are subprime….

What's more, the entire market in subprime debt is just 1.4 percent of the global equity markets. On any given day, a 1.4 percent drop in world stocks would erase the same amount of value as the collective markdown of all subprime-backed bonds to $0. It's just not that big a deal.

This sort of heedless cheerleading is not what one would usually expect from a White House economic adviser. It certainly wasn't the style favored by the last occupant of the office, Gary Cohn, the ex-Goldman Sachs executive who left because he couldn't stomach Trump's tariffs on steel and aluminum.

Still, Kudlow's positive attributes outweigh the traditional concerns.

QuickTake Free Trade and Its Foes

Crucially, he's an avid proponent of free trade. The White House is at war with itself over the issue. One group of insiders led by trade adviser Peter Navarro and Commerce Secretary Wilbur Ross sees international trade as a destructive economic force. They play off the president's protectionist impulses and were key in getting him to enact the tariffs that drove Cohn away.

Another group of insiders, now led by Treasury Secretary Steven Mnuchin, agrees with the consensus view of economists that international trade increases prosperity. Their mission has been to dilute or delay Trump's actions on trade.

Working in the latter group's favor is Trump's tendency to view the stock market as a gauge of his success. Free-trade policies tend to raise stock prices, while protectionist policies tend to depress them.

Kudlow's selection would re-establish the balance between the two sides. Indeed, Kudlow's long friendship with Trump and his ability to speak fluently about stock prices would give the free-trade side an advantage. Kudlow often used TV appearances to tie Trump's policy announcements to changes in stock prices, bolstering the case for free trade.

In the White House, Kudlow could use his experience communicating to a financial audience to focus Trump's erratic policy statements into a message the markets could understand. Clear communication reduces uncertainty, smooths the reactions of financial markets and lowers the probability of a crisis.

Kudlow won't be able to guarantee that Trump's wild policy swings won't spark a panic. He can't prevent the president from instigating a trade war. However, both those possibilities are so costly that every bit of insurance against them is worth buying.

(Removes erroneous reference to CNBC's "The Kudlow Report" in 12th paragraph.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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