Larry Kudlow on JFK, Reagan, Tax Cuts, and the Fed

Larry Kudlow, a Senior Contributor to CNBC and former Associate Director of the White House Office of Management and Budget in the Reagan administration, talks about a new book he co-wrote with Brian Domitrovic, “JFK and the Kennedy Revolution: A Secret History of American Prosperity,” as well as the odds we see tax reform passed and the future of the Federal Reserve.

Larry Kudlow is CNBC’s Senior Contributor, an informal advisor to the Trump administration, former Associate Director of Economics at the Office of Management and Budget in the Reagan White House, and founder of the economic consultancy Kudlow and Company, LLC.

EW: Mr. Kudlow, it’s a great pleasure to speak to you. Thanks so much for agreeing to talk about your new book on JFK and Reagan and hopefully a little as well about how the story can be applied to today.

LK: That’s the whole point. 

You know, after a year and a half I’ve finally been able to get Trump to use JFK’s name in speeches. He always wanted to use Reagan. It took me eighteen months. I was always nagging and then nagging Stephen Miller, a speechwriter, and finally, they put it in last week.

Trump’s full speech on tax reform from Springfield, MO. Trump says in the speech, “Before that, Democrat President John F. Kennedy championed tax cuts that surged the economy and massively reduced unemployment.   As President Kennedy very wisely said, ‘The single most important fiscal weapon available to strengthen the national economy is the federal tax policy.  The right kind of tax cut at the right time’ — at the right time, this is the right time — ‘is the most effective measure that this government could take to spur our economy forward.’  That was President Kennedy.

EW: That’s an interesting point to start with. I was going to ask you about positioning the book as a way to persuade centrists or Democrats that tax cuts aren’t necessarily a Republican thing only.

LK: Yes, that’s precisely what the book is about. I’ve been saying that broad-based tax cuts are best on a bipartisan basis, which is how JFK did it and how Reagan did it. Obviously, now you’re looking for Democrats and you’re not going to get a lot, but you might pick up three or four Democrats in the Senate. If you invoke JFK and his whole tax cutting tradition, which has basically been read out of the Democratic Party, if you do that a couple of people will start to think about it.

I’ll have to find the backstory when I go to the White House next week. I’d rather talk with his guys and see how a speech finally had JFK in it. I practically jumped out of my seat.

EW: You never know, it could be the beginning of a transition.

LK: I’m a JFK Democrat and a Reagan Republican. That’s how I characterize myself. That’s how Art Laffer characterizes himself too. We were all Democrats in the past; Trump was, I was, I’m not positive about Art, he may have been a Democrat long, long ago. But, I’ve never made any bones about it that I was a Democrat. Lots of Democrats went to work for Reagan and Reagan also used to be a Democrat. 

So, the politics of lower tax rates and economic growth are bipartisan and always should be. That’s one of the problems with Washington today – everybody hates each other and it’s so polarized. I was very happy to see JFK’s name crop up and it cropped up in a paragraph about bipartisanship.

EW: I’d like to go back to the 1950s. If you asked people about the 1950s economy, they’d have glowing things to say – a very stable, strong economy. You dispute that. Why is there a disconnect there?

LK: We don’t know why. But, it’s one of the urban legends about the post-war period, particularly in the Eisenhower years. It’s just not true and it’s an odd thing that that has grown up that way. 

Actually, if you look at the 1960 campaign between JFK and Nixon, Kennedy kept saying that we need to get the economy moving again. Nixon couldn’t say that because he didn’t want to criticize Ike. But, the reality is that during the Eisenhower years there were three recessions in eight years – in 1954, 1958, and 1960. In fact, if you go back a few years, we had four recessions between 1948 and 1964.

So, you have this urban legend that grows up and I think a lot of it has to do with culture, like these big corporations running America and everyone with a job with a corporation, would have it the rest of their lives. Labor unions were strong, but the rest of the country was not doing well at all. That’s why the economy was a big, big issue in 1960 and why it’s a predicate to our whole book.

The top individual tax rate was 91%. The economy was being choked off and never really recovered from the Great Depression, because you had massive wartime investment after 1941. OK, I get that. So, you were mobilizing the nation’s factories and plants and so forth, but if you take that out there’s nothing. We were still suffering from overregulation and extremely high taxes and we had a pretty good dose of post-war inflation, although that did go away in the 1950s.

So, we needed an economic tome and the main part of the book is the Kennedy part of the book where Kennedy turned his back on the New Deal and he refused to go the route of more taxing and spending and regulating. His economic advisers were the same Keynesians from the Ivy League. They said don’t cut tax rates, or maybe only have a targeted tax credit. But, they didn’t want an across the board tax rate reduction and they wanted to start spending again.

By the time you get to the latter part of 1961, they were looking at another recession and a stock market that had come way down. The sub hero fo the book is Douglas Dillon, who was a Republican. In fact, he was Eisenhower’s undersecretary of state and ambassador to France. He was also very wealthy. He said, “Let’s try something different. Let’s restore incentives and rewards and let people earn more on the extra dollar and start cutting these rates. Then his assistant secretary was a liberal Democrat from Harvard names Stanley Sairy, who was the first real tax reformer.

Secretary of the Treasury Douglas Dillon with President John F. Kennedy in 1961.

Then his assistant secretary was a liberal Democrat from Harvard names Stanley Sairy, who was the first real tax reformer. Sairy said lower rates and broaden the base by getting rid of loopholes. That was a revolutionary thought that hadn’t been around since the 1920s.

Kennedy started with an investment tax credit in, I think, mid-1962. Tremendous speech at the New York Economics Club on tax reform that fall and we quote that speech a lot. During 1963 they worked very hard to get a vote to pass in the House. Wilbur Mills was his Rabbi in the House and Wilbur was one of the top aides to a guy named Norman Turei who is a very, very dear friend of mine and he resurfaces in the Reagan years as undersecretary of the Treasury for tax policy. But, the main thing is in early 1964 when Johnson gets the tax plan through. I don’t think Johnson particularly believed in it, he was a New Deal spender but because it was Kennedy’s legacy post-assassination he supported it.

It worked beautifully until they started changing it and Johnson raised the income tax by eight percentage points in 1968. It was one of the biggest reasons for the recession.

Between, let’s say, 1950 and 1960 the economy grew by about 2% per year. Then Kennedy, after his tax cuts, jumps growth to 5% for something like seven or eight years. It was a great boom.

EW: Obviously you’re talking about a kind of bundle and including deregulation and a strong dollar.

LK: Strong dollar, yes. Deregulation less so. But, you’re quite right that the twin pillars are a stable dollar linked to gold to promote price stability and tax cuts. Those are the two pillars and Reagan used exactly the same pillars twenty years later.

EW: And Reagan’s plan was sold to him as JFK policy. Correct?

LK: That’s correct. There was a sort of Doug Dillon of that moment and it was Jack Kemp. According to senior staff that we quote, Kemp was telling everyone that they needed to reproduce the Kennedy tax cuts because remember in the 1970s, they were raising taxes. They were regulating the economy and the dollar collapsed after Nixon pulled us off the gold standard or the old Bretton Woods gold exchange. What you ended up with was stagflation and the way out was to go back to Kennedy policies.

Kennedy was the first tax cutting, hard money supply-sider. Reagan came later. Some people know that, but the Democratic Party today doesn’t acknowledge that.

EW: If I could, I’d like to play devil’s advocate on a couple of issues. 

When Kennedy cut taxes I think the marginal rate was something like 90%.

LK: Correct, it was 91%.

Purported to be the napkin that Art Laffer sketched his famous “Laffer Curve” in 1974 while dining at a Washington, D.C. restaurant with Dick Cheney and Don Rumsfeld.

EW: We’re starting at a lower level now, so is there less gain to be had from fiscal policy? The Laffer Curve would seem to suggest that there’s not as much gain to be had now.

LK: No, no, no. The problem today is – well, there are a lot of problems with today’s tax code, but, the issue is business tax rates. That’s the real issue today and it was the issue back then. We’re not competitive, we’re 10-12 points higher in the corporate tax rate compared to other industrial countries. 

It’s the same idea, but it’s a different application this time around and it’s not so much the individual side as it is the business side. Although there’s a lot wrong with the individual code that needs changing, to me the most powerful weapon is a business tax cut and that’s how we designed Trump’s plan.

EW: What do you say to people like Robert Gordon, who wrote a pretty interesting book on historical American innovation, that point to structural factors being the biggest factor that’s decelerated GDP growth?

LK: All economists say that, practically, that there’s just a new normal. Gordon’s a good guy and a smart man, but he’s wrong. He was wrong about the burst of productivity in the 1990s, he said it wouldn’t happen and when it happened, he said it wasn’t real. 

John Taylor has written some great stuff and he has a five year moving average of productivity. Under pro-growth policies on taxes and regulation, up goes productivity. If we get Trump’s business tax cuts, productivity is going to swing up. The economics profession has always been against this. They were against it when Reagan came in with his tax cuts. They’re wrong. They’re always wrong.

From John Taylor’s “Slow Economic Performance as a Phase in a Policy Performance Cycle.”

EW: I don’t want to put words in your mouth, but would you argue that the effect of the tax code and government policy is discouraging investment and that, in turn, limits productivity growth?

LK: Yes, that’s precisely it. Fred Smith, the CEO and founder of FedEx, arguably the greatest businessman of the last fifty years, says quite simply that we need to stop punishing investment. If you do that, you get tremendous capital formation and an investment boom and you get productivity to come back and, therefore, real wages.

EW: You’ve been around politics for a long time. What would say the chances are of tax reform getting done. Are we looking at 50-50?

LK: I think better than 50-50. I’m not sure about the timing. I hope they get it done this fall, but if not they can still get it done in the winter. There’s a lot of momentum for it.

EW: Are you discouraged in any way from the lack of legislative experience in the White House that could be hindering certain bills such as health care reform?

LK: No. I don’t really want to go through the health care debate. That’s a whole different subject and Congress let everybody down. But, on taxes, the GOP is quite unified and the campaign tax plan, authored by myself and Steven Moore, Steve Mnuchin and Steven Miller, is basically what you still have today. I think they can get it done.

EW: One last question about what’s happening at the Fed. Being an advocate for a strong dollar, are you encouraged by the recent tightening and would you be in favor of another term for Janet Yellen?

LK: No, she’s not my preferred candidate. My preferred candidate is Kevin Warsh. I think the Federal Reserve has to be reformed completely. Their Phillips Curve models are wrong. Growth does not cause inflation. Higher wages do not cause inflation. They don’t understand the role of the dollar.

EW: Are you in favor of eliminating the dual mandate?

LK: Yes, I would be in theory, but in practice, they just need to stabilize the dollar. That’s what you want – a steady, reliable price level. You can gauge that a lot of different ways – through commodity prices, bond spreads, dollar indices. But, let the markets tell you.

EW: Would Kevin Warsh be in the same mold as Paul Volcker?

LK: I wouldn’t use Volcker. Kevin understands what needs to be done and that he shouldn’t rely on wages and that there’s no Philipps Curve. Kevin knows that. He also knows the value of a steady dollar.

EW: Appreciate the conversation today. Good luck on the new book and in getting a tax reform package passed.

LK: Alright, thanks much.