Kudlow Predicts An Investment Boom

Kudlow channels his inner Gerald Friedman:

Larry Kudlow, picked to be President Trump’s new economic adviser, has privately told the White House that the nation’s economy is on the verge of 4 percent to 5 percent growth, or more than double the last decade. In a recent gathering with Trump, he said that many firms held back investing until the tax reform package passed and “some of that is already showing up.” What’s more, he told the president, “We’re on the front end of the biggest investment boom in probably 30 to 40 years.” The president responded, “Well, I couldn’t have said it any better.”

OK – I get that Friedman was looking at a progressive fiscal agenda whereas Kudlow supports Starving the Beast to pay for more tax cuts for rich people. My point is that both of them take a cavalier modeling of potential GDP. And when Friedman’s supporters try to argue that potential output has been growing by 3.5% per year since 2000, I noted that his is also Kudlow’s approach:

It is sort of funny that Kudlow and Novak were making a Keynesian economics argument given both of their disdain for Keynesian economics. Of course summing 8 numbers when the right approach would be to take the average of 8 numbers is a conceptual error that one would trust a first grader could point out. It is also interesting that Kudlow wanted to assume that potential real GDP always grows at 3.5% as he is likely going to be Trump’s chief economic adviser. Trump is even bragging that Kudlow now favors tariffs. And why not – Lawrence Kudlow’s entire career has been telling any lie that his political master want him to tell as long as there is another tax cut for rich people in store.

Brad DeLong has this silly idea that we should take modeling seriously:

The rule-of-thumb is that each 1% point rise in investment as a share of national product adds 0.1% point to the annual growth rate. To get from a growth rate of 2.5% up to 4.5% would thus require a 20% point jump in the investment share of national product—if you were to get it from investment. If you were to get it from employment growth, with Okun’s Law, you would need the unemployment rate to fall by 1% point per year—which means the unemployment rate would hit zero by the start of 2022. And there are no signs of a productivity growth recovery: given demography, labor productivity growth would have to consistently hit 3.75% per year in order to get to 4.5% per year real GDP growth.

When I read this, I noted over at Brad’s place:

I guess Kudlow thinks the FED will keep interest rates really low even if we soar past full employment and inflation takes off! Me thinks he learned the wrong lessons from the 1980’s when the Volcker FED made sure real interest rates soared in response to the 1981 tax cuts. Of course given that it is Kudlow, he likely does not know the difference between changes in nominal interest rates v. changes in real interest rates.

So what was the quip about something that happened over 30 years ago? Oh yea – we have very strong growth over the 1983 to 1985 period – something else the Friedman supporters are fond of noting. But of course that was the recovery from the deep Reagan recession. If one looks at potential GDP growth over the 1981 to 1992 period or even actual real GDP growth over the same period, the growth rate was closer to 3% per year in large part because the Reagan fiscal stimulus crowded out investment. Menzie Chinnrecently suggested:

Mr. Kudlow is apparently on the short list for new National Economic Committee chair. Maybe a good time to review some of his macro predictions.

OK – his track record on economic forecasts is dreadful. So why would this time be any different? Then again when people were filling out their brackets for March Madness the thought process was generally that no 16 seed had ever defeated a 1 seed.