Larry Kudlow: The Spectator Interview
I n a 1998 front-page story, "From Addiction Back to Influence in Tax Cut Fray," the Washington Post reported that Larry Kudlow, "the reigning optimist on Wall Street," was forecasting budget...
...But he steadfastly talked about two things...
...TAS: As we speak, the Fed has finally cut rates, a full point this month...
...Hundreds of millions of people cannot be wrong...
...TAS: Supply-side arguments weren't heard at all...
...We missed that opportunity...
...TAS: It was a focus-group document...
...The economy didn't grow worth a shake in the early '90s...
...It lasted two quarters, pumped up the economy and evaporated.The economy sagged right down again...
...That has been the most regrettable part of his tenure...
...I n a 1998 front-page story, "From Addiction Back to Influence in Tax Cut Fray," the Washington Post reported that Larry Kudlow, "the reigning optimist on Wall Street," was forecasting budget surpluses "hundreds of billions beyond those predicted" by government officials and consensus-minded economists...
...I was on a panel with Volcker the other day...
...He actually objected several times to Fed policies last year...
...deficit, or debt, have...
...TAS: You know him a bit, don't you...
...You have to ignore not only the Clinton boom after 1997, but the fact that personal income tax receipts rose more than a third in the wake of the Reagan tax cuts...
...And Al Gore ran as a business-bashing, left-wing populist, departing from Clintonomics...
...TAS: But now the Phillips Curve—this strange idea that economic growth above a certain level causes inflation—is back, along with the even more bizarre idea that to save the economy we have to destroy it...
...I was still at Bear Stearns so it was 45th and Park...
...Losing an election is not suffering...
...I loved the Mass...
...The economy did start growing after the Republicans took Congress in 1994, because that put an end to the threat of more tax hikes and over-regulation...
...I might have said Robert Mundell but he is older and winding down...
...TAS: And income flees massively toward various permutations of capital gains, like options...
...Clinton faced a Republican Congress...
...But what about my mother...
...She got very testy...
...I think it's true for Cheney, true for Rumsfeld, true for O'Neill.They are, pardon the phrase, more conservative now...
...The Democratic Party was on the verge of an historic policy realignment, but they frittered it away...
...Because if you're buying gold, you're not investing in your brother-in-law's new wireless application to get on the Internet, right...
...It was built into a number of investment decisions, as were valuations of assets owned by banks and savings and loans...
...There's a script here...
...KUDLOW: You see, what this journey is really about is changing along Christian principles...
...It provides important information about inflation...
...I was trying to be more restrained, calmer, things they taught me in treatment...
...It took me awhile to get my arms around it...
...I got into a rather testy debate with June O'Neill, because I pointed out that the CBO was grossly underestimating tax revenues...
...That is, reduce the money supply...
...He absolutely believes that...
...That's what I understand the Eucharist to be...
...TAS:This begins to make sense of the economy from the late '80s to the mid-'90s...
...True, he wanted to raise energy taxes ten years ago...
...After Reagan's tax cuts, revenues rose as predicted, national wealth soared, and in the long run we THE AMERICAN SPECTATOR ¦ March 2001 27 dissolved the deficit, though there was never any serious spending restraint, except later in defense.Yet in the last election, the Republican had a supply-side program and wouldn't admit it...
...TAS: What happened to him...
...KUDLOW: Well, one big mistake had consequences for years...
...So the resurgent Phillips Curvers at the Fed, whom Greenspan had joined by then, were proved wrong once again...
...James Baker undermined the dollar in 1987, and then Nick Brady and Lloyd Bentsen followed suit...
...How dare you lecture me on tax policy...
...Then by 2002 we'd have inflation of six or seven percent without lower tax rates to increase production and investment...
...Sobriety is one of the keys to my faith...
...But when he was nominated for Fed governor, his nomination was held up for many months by George Mitchell and the Senate Democrats...
...Please show me some clarity, some calmness, give me a sign, and it worked...
...But in his own way, brilliant...
...TAS: So then what happened...
...The fact that the Fed has 500 Ph.D...
...This is part of that mystery of faith, but I believe Jesus is with me...
...I lost jobs, lost all income, lost friends, and very nearly lost my wife...
...But boosting growth through improved incentives—tax cuts— will also help...
...But I don't want gold to be a hot investment...
...I wrecked my life...
...This has since happened—TAS] And that's not even counting the effect of improved supply-side incentives from a tax cut...
...nice lady who was utterly baffled by supply-side theory...
...And he did it...
...They were not as bad as the Nixon Administration...
...Clinton raised the top income tax rate from 31 to 40 percent...
...On economics, Nixon was the second-worst twentieth century president...
...The inflation rate fell from about 12 percent in 1980 to 2 percent in 1986...
...KUDLOW: His business failure was one of the reasons he drank so much...
...At cocktails, he drew the curve for them to explain how dropping tax rates from the prohibitive range would expand revenues...
...Second, the statutory capital gains tax rate was also reduced, though not until 1997...
...But I am not as hard on Bush as you...
...I remember in September 1998, I spoke to the CBO board, along with some other economists, and I gave a whole rap about capital gains...
...Then, after the spring of 34 THE AMERICAN SPECTATOR ¦ March 2001 1999, he relapsed into the standard, People's-Republic-of-Cambridge Phillips Curve nonsense...
...Knowing that he had to deal with the Washington press corps, he made a decision to play down some of the rhetoric...
...The Ford people had few good economic ideas...
...He was arguing with Dave Stockman, who had already jumped ship on us...
...But I've known him for twenty years...
...And then, almost miraculously, came the lower statutory capital gains tax rate...
...If you add the effect of new technology on productivity you are looking at five percent...
...Lower tax rates and the slowdown of the economy, and the need for religious faith...
...But the Federal Reserve promoted a good monetary policy for most of the 1990s...
...And He helps keep me sober every day and helps me to discharge my responsibilities...
...Better still to be lucky and smart...
...He is a free-market, new-economy, price-rule market watcher...
...One of the reasons Greenspan has been easing up on rates is because the NASDAQ has corrected over 40 percent...
...KUDLOW: If Bush keeps this up he will gain the country's support...
...TAS: From Clinton...
...TAS: He's had good luck...
...I think he was seared by that experience, and he has become more cautious in marketing a pure supply-side tax-cut model...
...KUDLOW: There's a lot to that...
...God plays a role, but it's more the spiritual God of your choice...
...I didn't really tell him much...
...We're in front of 300 people— enemy territory...
...I was not raised religious but I was searching for help...
...In the winter of 1993 I had spent a month in a treatment center here in New York...
...TAS: But you became a Catholic...
...Newt Gingrich didn't do it...
...The 1997 reduction in the capital gains tax rate was already throwing off increased revenues...
...My old life was taken and a new life has been born...
...TAS: What about Walt Wriston's Information Standard...
...KUDLOW: Show me a period of high growth, and I'll show you a period of low inflation...
...TAS: He was in the Office of Management and Budget under Ford...
...But depending on the Fed to lead the economy by pushing out too much money raises the possibility that the Fed could flood the market with reserves for the next 12 months to stimulate the economy...
...But that was another time...
...The supply when we at OMB sat down with Gingrich, and it was hard to know what his position was...
...Then one day Father C. John McCloskey appeared at Bear Stearns...
...By and large he didn't like Reagan's tax cuts...
...His many detractors considered his forecast to be "wishful thinking," in defiance of "mainstream economic models...
...are gone, the investors...
...My answer was yes, because that's what you're taught in the Jewish faith, though I had not been raised very religious and I hadn't been in a temple since I was fifteen...
...Probably most decisive, politically, was Reagan's decision to put James Baker, a great chief of staff, into the Treasury Department, and take Donald Regan, a good Treasury secretary, and put him in the White House...
...I don't know if I've had salvation, but I have had a change...
...Very clumsy looking...
...KUDLOW: Right...
...We started talking, and I told him—I don't know why because not many people knew about my problem yet—I told him that I was taking some steps that had recreated my faith in God...
...In the late '80s, when we devalued the dollar, the effective marginal tax rate on capital zoomed up again and the economy slowed and the rate of advance of the stock market slowed a lot...
...If I have a forecast and market events are proving me wrong, I need the humility to go back and ask myself something I don't want to ask: What did I do wrong...
...In that sense, Walt is right...
...We missed a chance in 1995, after we took Congress, to appoint a supply-side director of the Congressional Budget Office...
...The book had an impact on me, because in my own mundane, low-level way, I was on the cross...
...I wasn't showing up for events, for friends, for my wife...
...They would rather buy Gillette, Coca-Cola, and Philip Morris than Microsoft or Intel, much less the risky tech companies...
...It shows just how retro the economics profession is...
...All these rituals and rules...
...I wanted sainthood...
...He's a very eccentric man, very dogmatic...
...TAS: Still, compared to previous chairmen, he was almost a miracle worker for years...
...I still do stupid things, but I also go to confession...
...I underlined it...
...They'll never go back...
...We're unwinding the -isms of the twentieth century, which blocked progress in major parts of the world...
...is incapable of growing above 2 or 3 percent...
...TAS: The other setback...
...I said, "I'm not lecturing you...
...Gingrich got very angry...
...It drifts really from the summer of 1987 to say 1995...
...When it comes to financial markets he regards himself as self-taught...
...It's the last vestige of Keynesianism, although I'm not sure Keynes would have agreed with it...
...In a decade in which we start with trillion a year economy, and end with a $15 trillion a year economy that means hundreds of billions of extra revenue...
...I told him I had never been...
...That was the purest manifestation of what used to be called the "classical model...
...He is a giant figure in economics...
...KUDLOW: By 2010 it should reach 10,000...
...We are pledging our faith in him and what he taught and all of a sudden it clicked, that Jesus Christ does not want me to touch alcohol or drugs because I wreck my body and I wreck his body and I wreck my life...
...30 THE AMERICAN SPECTATOR ¦ March 2001 1 We should be seeing 5 or 6 percent growth early in a recovery...
...Just in a personal way: Here's why I go to Mass, here's what it's done for me...
...KUDLOW: Right...
...TAS: What about his advisers...
...Tax cuts might jeopardize the budget surpluses, bring back inflation, "overheat" the economy...
...In the early '80s, we always had trouble with Gingrich...
...I said, "Bushy, I'm sorry...
...The mix of companies will change...
...But I didn't say no...
...You get stale...
...But even with capital gains tax at 28 percent, where it was raised to in 1986, the reduction in inflation, from 5.4 percent in 1990 to essentially zero in recent years, increased the return on investment far more than the increase in income tax reduced wage and salary incentives...
...It's just that I didn't write it...
...And they're grinding jobs...
...The gold price went up from about $300 to $500 an ounce...
...TAS: The world has changed...
...KUDLOW: I think Larry Lindsey is a good man...
...In 1994, the New York Times published a full-page article, "A Wall Street Star's Agonizing Confession," about Kudlow's life and addiction to cocaine...
...But the bandwidth revolution will come and the Internet will take over economic life...
...But you still have to have a reference point...
...He conceded that enhanced productivity was raising the "speed limits" of the economy...
...This sort of pessimism comes from academic culture...
...Crucially, it has to pay after tax, adjusted for inflation...
...If your stock market is plunging, you are doing something from the best universities, God help us, all of whom, virtually, believe tax cuts will overstimulate the economy...
...You know what...
...Typical Gingrich...
...KUDLOW: No one...
...You're seeing it in Germany, England, Italy, South America...
...Took about a day, but it worked...
...It's the rule part that I've come to acknowledge and frankly love...
...The Dow Jones—which is really an old-economy value index—should keep rising, because the old dogs are learning new tricks...
...Coming out of a recession, that is nothing...
...KUDLOW: He was a deputy OMB director...
...In the short run, there is a trade-off between low unemployment and an "overheated economy...
...he came within an inch of losing his wife...
...I loved it...
...He literally wrote the book on the success of the Reagan tax cuts...
...Nonprofessionals investing in the market have a better grasp of these principles than the experts...
...Papa Bush had pretty smooth going, but W. had two big setbacks...
...KUDLOW: The truth is the opposite...
...His relapse means we have made no progress on the science of central banking...
...What made me do that...
...Then, "Do you believe in Jesus Christ...
...I was at Mass the other day and I was having some trouble, and I prayed...
...And I did...
...KUDLOW: I was going to Mass on Sundays...
...KUDLOW: I believe it is possible that the Holy Spirit can bring a certain ability to explain my faith...
...Down from 200 percent...
...And then country work in a business, and most are small businesses...
...They get involved in arguments about surpluses and deficits, government saving and paying down the debt: trying to "Japan-ize" the United States...
...Long-term interest rates have fallen...
...It has nothing to do with retail sales...
...The great disappointment is that Greenspan signed on...
...KUDLOW: Well, Bush's staff would not challenge the myth that Clinton's tax hike created the surplus...
...Because hundreds of millions of people cannot be wrong...
...But you spent years promoting him for canonization...
...I was so self-centered...
...TAS: Wasn't he a gold trader before becoming a priest...
...He started by raising taxes and trying to nationalize medicine...
...The two are similar because Bill Wilson, the founder of A.A., had been part of the Oxford Group, and a Catholic priest from St...
...Economy declining and surplus rising...
...Nor that William Nordhaus of Yale attacked me...
...TAS: The NASDAQ at 10,000 will please my wife...
...After Monica, Clinton moved left to secure his base...
...So Ford never went with it...
...I believe it will be 35,000...
...This is why he can believe the economy gets "overheated" and inflation looms, even when every price indicator indicates the dollar is sound...
...They're getting a taste of freedom in China...
...KUDLOW: No, I don't...
...KUDLOW: No...
...He lost his business and was ashamed for years about that...
...He believes in bubbles: Too much wealth creation will spur too much spending and economic activity, and that will spur inflation...
...It was about his message...
...It's not my goal and if it does happen, it will not be by my design...
...The president can't fire board members, sadly If he could, I would recommend he fire Lawrence Meyer, the principal Phillips Curve theorist on the Fed...
...If it's growth, watch your incentives...
...With five percent you're going to see a massive recovery of the NASDAQ...
...I'm not a Catholic intellectual...
...They have no clue how the people who actually drive the economy behave...
...I'd never seen him like that before...
...TAS: Do you know why he stumbled...
...He would also make an excellent Treasury official as perhaps a transition to the Fed...
...I would not have reappointed Greenspan to a third, sorry, to a fourth term...
...KUDLOW: The center is moving toward free enterprise, ownership, investment.The primacy of markets over governments as organizing and growth tools is accepted...
...They punish countries by withdrawing capital immediately...
...I'd just do whatever I felt like...
...He gave us an antiquated monetary policy...
...The fashionable world is against him but he hangs tough...
...It taught the twelve-step program...
...I went to a retreat and I didn't like it because I didn't understand it, mostly...
...Greenspan rehabilitated a flawed theory...
...He goes to Washington after the election and he has a series of tension-filled photo-ops...
...He is a total pessimist— he thinks in ten years the Dow will be 6,000...
...Paul Krugman, Larry Summers, the New York Times editorial page: all on cue...
...Marty Anderson [assistant for domestic affairs in the Reagan Administration] told me there was a bit of Reagan in George W. I was still in my anti-Papa Bush mode, thinking one Bush was enough for any country...
...KUDLOW: He was a guy with an ego, but not a real policy vision...
...I remember that in this little prep school that I went to, the Dwight Englewood School in New Jersey, we had to say the Lord's Prayer in homeroom...
...TAS: Why this pessimism of the intelligentsia...
...Suddenly the 2 percent and 3 percent quarters become four, five, six percent...
...One of the things I like about Mass is that you go on your knees for part of the time...
...If you read the eucharistic part of the Mass, there's a whole story there and it's a fabulous story...
...We should target four percent annual growth minimum because that's what we have done except when we have depressed incentive with high taxes and inflation...
...I believe that...
...Why still gold...
...KUDLOW: Although he was on the board of Lucent...
...TAS: Who does that remind us of...
...You learn a lot when you fail...
...TAS: We're all down on Greenspan these days...
...And he was a very engaging man...
...The Contract with America didn't have lower tax rates...
...Two tax hikes in 1990 and '93 kept growth down to barely three percent...
...But that investment boom only made sense with a high rate of return, after taxes...
...That's when the first big wave of high-tech investment came, and the power of that is still with us...
...He had his finger in the wind...
...That's really the message of this election...
...TAS: Gingrich was the single most disappointing politician of recent times...
...He turned out to be a bad White House chief of staff, and Baker was a bad Treasury secretary TAS: What did Baker do at Treasury...
...Their big battle cry now is "Let the Fed take care of recovery...
...It wasn't until Greenspan and [Treasury Secretary] Robert Rubin resurrected the strong dollar in 1995 that the Reagan model was resumed...
...I needed regulation...
...More growth and more goods will absorb more money...
...We talk so much about reducing the welfare rolls we almost forget we are increasing the work rolls...
...KUDLOW: Right...
...I grant you that in the public forums he shied away from it...
...KUDLOW: If done right it has a certain mystical quality, and it appealed to me...
...In Reagan's second term, that started to break down...
...Plus decades of global evidence that GDP rises in the wake of tax cuts and falls after tax increases...
...Periods of relatively sluggish growth move investors "Between the night Newt Gingrich took the House of Representatives and the night Lewinsky surfaced, Clinton governed as a supply-side Republican/' KUDLOW: No, because they weakened the dollar and inflation came back...
...A tax cut of these dimensions will boost GDP growth about half a point a year, to about four percent rather than three or three and a half...
...The mix of companies will change, but the bandwidth revolution will come and lead the NASDAQ to 10,000../' TAS: Why...
...O'Neill thought I was nuts...
...TAS: So the real story of the 20-year boom is Reagan's giving us what Bob Bartley called the "seven fat years," followed by seven years of Bush-Clinton drift, then a resurgence of incentives and growth in Clinton's second term...
...He deserves a Nobel Prize," I said on the air...
...KUDLOW: You know, in his own clumsy way Paul Volcker may be the best Fed chairman in history...
...Who on the board should he re-appoint...
...I was the rule...
...How could supply-siders be so right and yet surrender the war of ideas...
...So you have two separate levers...
...Fascism, communism, socialism: it's all unraveling...
...If you want less inflation, take liquidity out of the economy through open market operations...
...I'm interested in how I live my life each day...
...TAS: Can we talk about some personal things...
...We've done a computer simulation of your projected performance in five years.You're fired...
...We also expanded IRA Super Saver accounts, which has capital formation effects.Those are major items...
...We have wonderful barometers...
...That is a fine achievement, but not quite the same...
...They know there are really only two or three important things...
...If you don't, the second term will be worse than the first...
...I needed to be taught rules of the road...
...It was literally destroyed...
...Some people want me to carry the sword of Catholicism the way I carry the sword of free-market economics...
...That's the only time I have ever heard Bartley raise his voice...
...I am not for Clinton, but I am not for your dad...
...He's fascinating, because he's real smart, and yet he doesn't have to prove it to you...
...In our interview, Kudlow talks about his experiences, economic prospects for the new administration, the economic indicators that get his attention, his forecasts for 2010, and his faith...
...That's a huge increase in the incentives on investment...
...I understand now that all that had to happen...
...32 THE AMERICAN SPECTATOR ¦ March 2001 Because supply-siders' biggest problem is that people see that the economy boomed under Clinton, who they know raised taxes...
...Domenici never was a friend of the supply-side...
...The Phillips Curvers think of tax cuts as increasing the supply of money and thus consider them inflationary But tax cuts that boost incentives and productivity increase the demand for money and actually restrain inflation...
...Confound it, Quigly, you know how I feel about that damn fish-eye look of yours...
...KUDLOW: He probably wore his WIN button...
...Reagan would have supported them...
...I don't believe he has lost his compass...
...Laffer was a paid consultant...
...Reviving the dollar was in my opinion the unheralded achievement of the Clinton Administration...
...You may be the only Wall Street economist who ends his commentaries with a call to faith...
...It's an incredible story...
...Jesus is my Father...
...It was like a tax cut for welfare recipients...
...He should grasp incentives...
...He was not a supply-sider and was never reliable on economic policy...
...You can't live that way...
...KUDLOW: No...
...They put in June O'Neill, a perfectly mist who always sides with the establishment...
...He enters my body and mind as long as I'm open to him and prevents me from doing something really stupid or from misbehaving...
...TAS: Do you have a replacement in mind...
...When I was going into this dark abyss with alcohol and cocaine, after some terrible binge, I can remember lying in bed desperate and I started saying the Lord's Prayer...
...It's very personal...
...He resigned from his $1 million a year job at Bear Stearns after missing a speaking engagement with some of the firm's best clients...
...I liked the robes, the smoke...
...KUDLOW: Yeah, but it was a Ford Administration cocktail napkin...
...But this guy didn't want any money...
...But genuflection isn't good either...
...The force is with him...
...KUDLOW: You're talking about a fifteen or twenty trillion dollar daily trading day in the world financial markets...
...Just—I was desperate, I was trying to ask for help...
...KUDLOW: The stock market broke down in 1987...
...It's no accident that your favorite dead economist, Joseph Schumpeter, focused on creativity...
...Particularly long-term rates...
...KUDLOW: I told them there was this phenomenal wave of entrepreneurship and technological innovation...
...time on the cross, painfully...
...KUDLOW: That's where I came in...
...Still, he was taking on an establishment that said that 2.5 percent is the most we can grow without inflation...
...One of them is gold...
...Since God granted us our liberty, for which we are eternally grateful, we must reflect that by abiding by his rules...
...Since all the other manifestations of socialism have failed they are left with fine-tuning growth, as if they could...
...And I think I know why...
...And there are few market indicators that will tell you whether you're winning or losing on inflation...
...That was a major economy-wide tax cut...
...When gold is low, inflation is low...
...KUDLOW: That's exactly right...
...KUDLOW: Now, that wasn't exactly what I wanted to hear, because I don't believe "speed limits" are appropriate at all...
...Larry Lindsey, Bush's chief economic adviser— what happened to him...
...Maybe he gave us one rate increase too many...
...And that's good because for me to destroy my life is a rejection of Jesus...
...And he has...
...In 1995 he entered a drug and alcohol treatment program in Minnesota, and two years later converted to Catholicism...
...And I said I didn't know...
...We call it supply-side economics, but what we're really fighting for is more freedom...
...TAS: So you believe a Ford OMB guy is going to lead a supply-side crusade...
...KUDLOW: But to his credit, he brought in the strong dollar...
...KUDLOW: Absolutely...
...And we started getting all this fine-tuning nonsense: unemployment is this, wages are that, retail sales are this...
...He believes that the U.S...
...How did you become a Catholic...
...KUDLOW: Well, Marty Feldstein and Mike Boskin...
...So two important pillars of supply-side thinking were re-instituted under Clinton...
...TAS: Right...
...I'm giving you advice...
...Now I knew that somewhere along the line he had converted to Catholicism...
...Laura said, you know, "It's either me or the bottle...
...You've changed," he said...
...Growth solves a lot of problems, including inflation...
...I said no...
...Even more important was the productivity revolution that was coming from technology investment.Yet the CBO was still predicting 2.5 percent yearly growth, subnormal productivity, and excessively high deficits...
...Arthur Laffer was in Rumsfeld's office with Cheney in 1975...
...KUDLOW: I don't know if it's fair to call O'Neill a Ford guy, but most of them are more free-market oriented today than they were 25 years ago...
...Growth companies balanced the budget...
...But you didn't know where Newt was...
...Al Gore should have run as a Clinton Republican...
...Positioning it as a payday for the rich dissolved the moral argument, left the growth issue untouched...
...TAS: Like I said, old economy...
...KUDLOW: He will tell you that he believes in a short-run Phillips Curve...
...KUDLOW: Yes, but he always had a conservative Keynesian streak, so he accepts the limits to growth idea...
...So that's progress...
...He made this case from time to time during the campaign, including a valuable interview he gave to CNBC when he absolutely defended supply-side economics and growth...
...In fact, growth is the solution to inflation, not the cause of it...
...Then they just kick ass for the next five years...
...And that does take us back to economics and politics...
...KUDLOW: It's a very strange story...
...You'll see market dislocation for a few days, but it will settle quite quickly...
...I'd go missing in action for days...
...TAS: Wasn't Greenspan an Ayn Rand fan...
...THE AMERICAN SPECTATOR ¦ March 2001 31 The basic tenet of supply-side thinking is that working and taking risks has to pay...
...Clinton was the most pro-growth Democrat since John F. Kennedy...
...Clinton beat Bob Dole from the right, and he boosted the Dow about 6,000 points...
...KUDLOW: You become so self-centered and self-willed that you decide you can do anything, without regard for others...
...Under Bush and Clinton I, those numbers reversed...
...Gore should have won by eight points...
...They lack humility...
...I'm not interested in that...
...Greenspan started playing down the role of money in inflation, which is the key...
...And growth is principally a function of incentives, the after-tax return on investment, work, and especially entrepreneurship...
...Born in 1947, Kudlow grew up in New Jersey and studied politics and economics at the Woodrow Wilson School at Princeton, but cheerfully points out that he is burdened with no advanced degrees...
...He is showing Reagan-esque discipline...
...He was furious at me, because I was criticizing his father on the air...
...I am not a bosom buddy, but you do get acquainted that way...
...THE AMERICAN SPECTATOR ¦ March 2001 35 TAS: You are still largely a gold guy...
...A warning here...
...But the last time we had spoken before the campaign was in 1992...
...I will never be one...
...Inflation is caused by too many dollars chasing too few goods...
...And given the poor way those indexes are constructed, that means zero...
...Then bad tax and regulatory policy brought on the savings and loan crisis...
...But after 1986 the market, which I believe is the best economic barometer, meanders...
...TAS: Still, the leading salesman of the tax cut is going to be a major old-economy Fortune 500 CEO...
...Another has to be interest rates...
...KUDLOW: I've been on the record for 35,000 for awhile...
...TAS: But is gold really relevant, with all of these currencies trading against each other...
...Because the gold price will go up $100, or the bond rate will go up 100 basis points...
...THE AMERICAN SPECTATOR ¦ March 2001 39...
...I was not surprised that Bob Gordon of Northwestern didn't support me...
...He has worked at the New York Federal Reserve Bank, and at the Office of Management and Budget under Reagan...
...I've made amends to people directly, but still, I'm ashamed about that period...
...TAS: And it looks like Bush will get his tax cut...
...In 1999 and 2000 when Greenspan was wrongly obsessing over inflation, I just kept saying wake me when gold hits $300...
...KUDLOW: No...
...TAS: Given the size of world financial markets, how much impact can the U.S...
...But the church offered me a regulated regime for life, as did my twelve-step program...
...January— TAS] Far enough...
...Louis was his mentor...
...Newt said, "I hear you have a problem with our tax plan...
...He's an odd character— by no means a supply-sider...
...TAS: So what really happened...
...They killed the dollar...
...My basic political rule is tax cuts and pro-life...
...And tax-free institutions making mostly conservative investments...
...But Greenspan obscured all that...
...I started searching for God...
...The economy is going to grow at 4 or 5 percent for the next several years...
...Then he introduced me to a friend who went to St...
...And it will actually suppress inflation...
...KUDLOW: Right...
...TAS: Staying on message...
...TAS: What about Paul O'Neill at Treasury...
...But if the Fed gets its interest rate cuts finished, say by March, and in April tax rates are cut and made retroactive to January 1, Bush could be looking like a genius...
...I'd love to see him as Paul O'Neill's deputy...
...All of a sudden you see the animal spirits of the economy revive...
...So when they see a president who hammers away at two or three things, they like him...
...I believe it can grow by five...
...I said it because he acknowledged the impact of the new technology—that there was no need for the Fed to tighten automatically with four percent growth...
...From about '88 to '95, the U.S...
...TAS: But can you support this incredibly important claim that the reduction of inflation actually "neutralized" the Clinton income tax rate increase...
...The reason we have the best economic and stock market record in the world is we are the freest country in the world...
...I just nod my head and kid them...
...That's all it is...
...It was a golf outing at Pebble Beach, organized by Steve Dart, Justin Dart's son...
...A hundred million Americans are invested in the stock market...
...The financial markets act as cops and flag bad policies...
...I was there grade seven through twelve, so it's something you remember...
...I don't think his father ever suffered...
...Some supply-siders are not thrilled because he has never been part of our group...
...KUDLOW: You're darned right it has...
...Reagan...
...He basically lost his shirt as oil prices collapsed in the 1980s...
...It's absolutely predictable that the one thing liberal economists are never for is tax cuts...
...If there is too much money out there, you'll know it...
...If it's inflation you're worried about, use the monetary lever...
...Alan is 74 now...
...He gave me a book or two to read and then said: "Why don't you try going to Mass...
...Is that enough for excommunication...
...Alan took the inflation rate from four or five to two...
...Where do you expect the Dow to be at the end of the decade...
...It effectively reduced the capital gains tax rate and restored the incentives to invest...
...That was in Bob Woodward's book...
...THE AMERICAN SPECTATOR ¦ March 2001 37 You know, who was going to get me out of this...
...The growth is cumulative, of course, you know, compound interest, man's best friend...
...Every morning at your desk you put your head down and say the Lord's Prayer...
...KUDLOW: He became an inadvertent sup-ply-sider...
...The real point is that if you strengthen incentives to work and invest, the economy will grow, and growth trumps everything...
...I didn't ask for an outcome, just help...
...He may be the guy with the best analytic handle on this...
...They never favor moving money out of the government and back to individuals...
...So I was ready to pull out my checkbook and write a thousand dollars to whatever...
...Excess money will drive interest rates up, however big the budget surplus...
...She basically was out of there...
...All of those academics on the CBO board assume the horrible 1970s are the baseline...
...KUDLOW: What you had in Reagan's first term was lower tax rates and a strong dollar...
...You can only believe that if you believe the 1980s never happened, tax cuts have no effect on the economy, and that even if you pay people more after tax to work, save, and invest they won't do it because they don't care about the money...
...KUDLOW: The basic thought in the book is that even we optimistic Americans mustn't ever forget that Jesus spent that TAS: Sometimes people forget how tough addictions can be...
...He has written and spoken for years about the need for tax reform...
...Bush's argument was always: "We are giving you back the money you deserve...
...He has been the president of the Dallas Fed for almost ten years...
...But not in an intellectual way I don't possess those tools...
...But Kudlow—today the chief investment strategist and senior managing director of ING Barings—was right, just as he had been right in predicting the Dow at 10,000 five years before it happened, and in calling the timing of the 1990-1991 recession and its subsequent recovery...
...What happened to the rising tide that lifts all boats...
...And we recite the Nicene Creed, the church's statement of beliefs...
...He made a deal with Dan Rostenkowski to use static analysis on the bill...
...TAS: Even that drift up was driven by buy-backs, companies repurchasing their own shares...
...Most people in this "You're going to see a massive recovery of the NASDAQ...
...KUDLOW: Right...
...economists, the vast majority of them from universities in the northeast, especially the Ivy League, doesn't help...
...So you had to stand up and say I believe some very specific things...
...Another measure of this meandering period is that value stocks out-performed growth stocks...
...We had a capital gains rate reduction in 1997, from 28 percent back to 20...
...Nobody can...
...In their view, we had all this crazy tax cutting, Reagan almost destroyed the economy, but somehow the country managed to come through it thanks finally to Clinton and Papa Bush raising taxes...
...Hoover beats him...
...They bitterly hated his book The Growth Experiment, a masterly defense of Reaganomics...
...TAS: How are drugs part of that...
...People who aren't in the day-to-day commercial, entrepreneurial battle have no confidence in the people of this country...
...They couldn't convince Alan Greenspan, who was chairman of the Council, or Bill Simon, who was treasury secretary...
...KUDLOW: It was Jeff Bell, an old supply-side ally, who actually got me started with the Church...
...The polit36 THE AMERICAN SPECTATOR ¦ March 2001 ical culture is with him...
...Global electronic financial markets were the first to embody the information age...
...My view of Lord Jesus is very basic in that sense, though I have read some books that are interesting to me, including Fr...
...KUDLOW: Some are going to be better than we think...
...But a handful of Ph.D.s with their computer models can be wrong...
...That's a major change...
...Bob looked at me and said, "Go ahead, shoot down this thing...
...TAS: But he appointed a Fed board that eventually undermined Greenspan...
...I do believe the Fed should cut rates...
...TAS: So they missed the growth story...
...KUDLOW: Sure...
...Maybe four...
...Then Baker got into a spider web of negotiations with Germany and Japan over the trade deficit...
...Recently, he has been on the Bush-Cheney transition advisory committee...
...TAS: In 1986 it seemed the rise in the capital gains rate would be a small price to pay for that big income-tax rate cut...
...In this group of 20 academic economists, I got no support...
...You knew where Jack was...
...The human expense was staggering...
...TAS: Who was behind the supply-side revival in Clinton's second term...
...The options revolution in compensation was a largely successful attempt to avoid the statutory tax increase...
...No one in the Clinton Administration talked in supply-side terms, but they did two very important things...
...But a handful of Ph.D.s with their computer models can be wrong...
...TAS: Saying Rubin and Greenspan "neutralized" the Clinton tax hike is a huge claim...
...He had to sit there with Clinton, sit there with Gore...
...At a 12 percent inflation rate, a 45 percent capital gains rate, which is where we were before 1978, is effectively a tax rate of over 200 percent...
...But he took the inflation rate from fifteen and brought it down to two, roughly between 1980 and 1986...
...TAS: That's why they oppose tax cuts...
...Remember, he was around when the dollar was linked to gold...
...I began to realize that for the past eight or ten years I had been living without them...
...And I loved it...
...KUDLOW: That's why "supply side" doesn't really capture it...
...I came to it late in life, but that's exactly the way it was supposed to be...
...That is going to give you a budget surplus next year, and bigger surpluses after that...
...You could see the numbers literally jumping off the page after 1996...
...Worst of all, he kept alive this notion that growth and prosperity cause inflation...
...TAS: Gold bugs bring bears...
...Remember the Reagan stock market advanced more rapidly in percentage terms than the Clinton stock market, especially during Clinton I. Under Reagan, from a base of about 800, the Dow went toward a more defensive position...
...The expansion of these growth companies was phenomenal.These guys were building sales revenues, you know, 35, 40, 50 percent a year, and their capital gains were just unbelievable...
...As far as I can determine Ferguson has just been a garden-variety Phillips Curve guy...
...I say, well, you don't understand how wonderful those rules are...
...I expected to get no support from Rudy Penner, an allegedly Republican econocode," I said...
...And lacking faith in others, they oppose freedom for others...
...Clinton in many ways acknowledged it...
...But we learned and history will keep pushing us in the right direction...
...Once you get a taste you want more...
...TAS: Do you think you will write more about this...
...He's not inherently high-tax...
...The Japanese for years were obsessed with saving...
...KUDLOW: .. .And turn out to be an excellent president...
...So Bush has three slots...
...In order to "pay for" cutting the top rate from 50 to 28 percent they raised the capital gains tax from 20 to 30...
...He was in the Treasury Department in the '50s...
...up to around 2600, 2700...
...TAS: The Pope would say that the original reason God gave us liberty was to complete his creation...
...economy slowed to less than three percent growth, having been almost five percent during the fat years...
...In my twelve-step program there's all these young kids who went to Catholic school and rebelled...
...TAS: But you yourself are an inflation hawk...
...When I saw him seven years later, it was clear that he was going to stay tough...
...He's also my Supreme Court because the court has rules and if you break them you get into trouble...
...Bush can get these tax cuts through because free enterprise is the center in American politics today...
...KUDLOW: He sure has...
...Suddenly he was governing as a Reaganite...
...It wasn't about his personality...
...Rubin and Greenspan worked for a stronger dollar, which neutralized the 1993 income tax hike by bringing inflation down...
...Richard John Neuhaus's recent book, Death on a Friday Afternoon...
...Others I am less sure about...
...KUDLOW: First, the tax reform of 1986...
...He has been unrelenting in his mistakes...
...Through much pain in the twentieth century, we have learned what works...
...I hauled out one of my charts, showing $500 billion budget surpluses by the late 1990s...
...The system pushes people up the slope of a progressive tax "The economy didn't grow worth a shake in the early '90s...
...Raising capital gains was a big mistake, because the stock market was valued on the lower rate...
...LAWRENCE KUDLOW THE AMERICAN SPECTATOR: What do you think of George W. Bush...
...It's still lower than the post-World War II historical rates, but it's better than they had...
...Not unlimited freedom, and that's where faith comes in...
...I was very willing to surrender...
...KUDLOW: I had this wonderful experience at the Council on Foreign Relations a few months ago, debating Robert Schiller from Yale, the guy who wrote Irrational Exuberance...
...KUDLOW: And it is not going back.That's not the way history works.Voters in free countries will keep driving their politicians toward a prosperity model...
...LAWRENCE KUDLOW: You know, to meet him is reassuring...
...Coming out of a recession, that is nothing...
...When Reagan won there were times numbers—three straight declines of industrial production...
...He said, well, lots of people do it...
...Do you have any opposition to it...
...John Kasich and Pete Domenici blew it...
...Then Bartley raised hell...
...That same winter I was in the treatment center I bumped into Jeff on the street...
...But at least there's something...
...But it never had a growth component...
...But that day he said he had been watching me on TV on the financial shows...
...KUDLOW: Craig Roberts says the Phillips Curve survives because it affords planners a role in the political economy...
...I ask help for stuff that I believe I need...
...Of course these models going out a decade tend to be nonsense anyway, another reason their $1.6 trillion number is ridiculous...
...And the economy sputtered...
...He took the gold price down from $800 to $300 an ounce...
...But it wasn't church...
...Take it from me...
...We are fast approaching a time when the information economy can produce as much as six percent growth a year...
...They believe that without the wisdom of the Ivy League, the markets will go haywire...
...I am impressed with W.'s fortitude...
...Growth stocks don't start beating value stocks until 1995, '96...
...You can see it in the body language...
...At Merrill...
...How I conduct my relationships with people...
...But I was surprised to get no support from Republicans like Martin Feldstein of Harvard and John Taylor of Stanford, people who had worked for Reagan and Papa Bush...
...It had tax credits and balanced budgets...
...Thomas More on 89th and Madison, near where I lived...
...And from his bittersweet experiences in the Texas oil patch, I think he developed more of an entrepreneurial outlook...
...KUDLOW: Right, except that after the tax hike, the administration and the CBO were still predicting $200 billion deficits as far as the eye could see...
...It was like somebody flipped a switch...
...KUDLOW: Of course not, that is absurd...
...They've changed because they've seen how it can work...
...It is a wonderful thing to learn some humility...
...Inflation is a monetary problem...
...TAS: There are two open chairs on the Fed Board, and Roger Ferguson's term expires soon...
...He called and just reamed me out...
...Sure, the gold bugs wrong...
...There came this one day when I stopped just mouthing it and read it in an intellectual, cognitive way, and realized there's a whole story here...
...The Federal Funds rate should go to four and a half percent...
...He agreed that the dollar was too high, and he ensnared Fed Chairman Paul Volcker, up for re-appointment in 1987, into pursuing a loose monetary policy...
...It's just that I didn't write it...
...McCloskey, Jeff Bell, my mentor Sim Johnston...
...My take on the success of the 1990s is that between the night Newt Gingrich took the House of Representatives and the night the Monica Lewinsky scandal surfaced, Clinton governed as a supply-side Republican, and the economic results show...
...The minute it is, I know the rest of the story is going to fall apart...
...But why are tax cuts still controversial...
...TAS: Was anyone else predicting surpluses...
...But as I hit bottom, I lost jobs, lost all income, lost friends, and very nearly lost my wife...
...As a general rule, I don't believe anybody should be appointed to more than two terms for anything...
...I'll grant you if the Treasury goes out and buys back 30-year bonds, the price will go up that afternoon...
...In a period of entrepreneurial creativity, the return on capital becomes more important than ordinary income...
...KUDLOW: It has not failed me...
...You point out that the collapse of inflation was the biggest tax cut in the 1990s...
...But, I would feel a little odd just walking into a Catholic Church...
...And the economy responded brilliantly...
...KUDLOW: Moving to 3.3 percent annual growth estimate is going to add another trillion or so to the surplus estimates for the next five years...
...He's more of a tax reformer than people think, and he's smart...
...A $50 billion buy-back of Treasury Bonds has virtually no meaning...
...He's a relic of the past...
...They need a rationale for control...
...He believes we're in tulip mania...
...Better to be lucky than smart, they say...
...TAS: So we "couldn't afford" tax cuts...
...KUDLOW: Still, Clinton's shift is the mark of a talented politician...
...His crown of thorns was sticking into his skull, he was nailed to the cross, and it was horrible...
...TAS: He's a priest in New York, edits First Things...
...You fire Nick Brady, Dick Darman, and Mike Boskin 26 THE AMERICAN SPECTATOR ¦ March 2001 and I will support you...
...There's a script here...
...So cutting taxes and reducing inflation are not contradictory as the Phillips Curvers think, but complementary...
...KUDLOW: Yes...
...I was in my master-of-the-universe period...
...Last Saturday, when I was at sixes and sevens in my own head, which is a risky real-estate section to be in, I believe Jesus came to me...
...He had a chance to provide breakthrough leadership that would have lasted beyond his time...
...KUDLOW: Right...
...model was resuscitated by happenstance...
...I don't mean to denigrate that, but it's a tough job, double-digit work hours every day, and Alan is a hard worker...
...I was willing to surrender and take it on faith that I had to change my life...
...TAS: What is that...
...KUDLOW: We were roommates for a few days in the mid-'80s...
...The statutory capital gains rate can be dwarfed by inflation...
...It's not a real loss like losing your job, or your wife, or your money...
...KUDLOW: One night, right before they announced the Contract, Steve Forbes, the Wall Street Journal's Bob Bartley, and I had a knock-down drag-out with Gingrich...
...KUDLOW: Robert McTeer...
...You have to say that was the most extraordinary achievement in the Fed's history...
...Jesus died for me, too...
...My secretary said, "This priest is here to see you...
...Two tax hikes in 1990 and '93 kept growth down to barely three percent...
...TAS: In this decade...
...In the early 1980s, he rode [Jack] Kemp's coattails when he saw how popular Kemp's ideas had become...
...And with Y2K there was an 18 percent jump in the money supply...
...If someone stays sound on those issues, as he has, you can trust the rest will more than likely fall into place...
...TAS: It has happened...
...KUDLOW: One of the things I learned from my own crash and burn is it's good to fail...
...Inflation declined—registering less than two percent...
...They had the highest savings rate in the world, and now they have the lowest growth rate in the world...
...We need to get beyond that...
...TAS: How much does half a point matter...
...No appointment, but a lot of the partners donated to various charities...
...Then in 1996 and '97, we had some supply-side legislation...
...That level should be the goal of fiscal policy...
...TAS: He probably wore his WIN button [Whip Inflation Now...
...This notion that increasingly central banks or governments are not going to be able to misbehave because of the efficiency of price signals on instantaneous global trading networks...
...So then he asked me, "Do you believe in the hereafter...
...I knew it wasn't good and the drugs and the booze were part of it...
...TAS: That's where the new revenues came from...
...The truth is—on a strictly back-of-the-envelope basis—tax revenues will probably rise by $300-$500 billion over ten years as a result of Bush's tax cut...
...It reminds them of their own life...
...It's obvious revenue will grow faster than personal income...
...And that is my redemption...
...I understand now that all that had to happen...
...As a young pup in the 1970s, it was precisely the fervor for gold that taught me how much trouble we were in...
...But W. wound up with the best of the Bush character and family values—which Papa Bush always had—without the squishy policy thinking...
...TAS: Could you expand on that...
...We also passed welfare reform.This was crucial because it reduced disincentives to work...
...In my worst moments—and I still get a few—the reason I don't go out and do something crazy is because I don't want to break my bond with God...
...KUDLOW: It's—we are partaking of the body and blood of Christ...
...TAS: Is the center of gravity of American politics shifting...
...TAS: Well, Kennedy did it willingly...
...Four is off the charts...
...What a way to run an economy...
...KUDLOW: I had a problem with alcohol and cocaine...
...TAS: What was the effect of all that...
...Although you know the Laffer Curve was launched in the Ford White House...
...THE AMERICAN SPECTATOR ¦ March 2001 39 has been born...
...TAS: Why...
...We can't have tax cuts, ever...
...It was different from anything I had been exposed to...
...TAS: So I take it you don't think Bush's tax cut is going to cost us $1.6 trillion over ten years, right...
...Anyhow, I knew this was something I should be doing, just from a selfish stand38 THE AMERICAN SPECTATOR ¦ March 2001 point...
...They also think we dodged a bullet in the 1980s...
...He became a big regulator for his last 18 months...
...They've learned nothing...
...And we are seeing recession-like "Greenspan rehabilitated a flawed theory, destroyed trillions in national wealth, and kept alive the myth that growth causes inflation...
...He was a friend of Jeff Bell's and he wanted to talk to me...
...And they always get up and say how they rebelled against the Church and its rules...
...During the heyday of the Reagan period, growth was almost five percent and inflation dropped to two percent...
...He was right...
...Maybe even deflation...
...People brought Jesus to me: Fr...
...And that's what was needed...
...I believe he somehow entered into my head for the next 48 hours and helped me get through this little patch...
...That is where I think this is going...
...Having the Fed engineer a recovery is exactly the policy mistake of the '70s...
...The companies that lead that change will lead the NASDAQ to 10,000...
...If I'm not mistaken, by election day in 1994, it was 3,800, a relatively tiny increase over eight years compared to Reagan...
...By getting the inflation rate down and cutting the capital gains tax rate, under Reagan we reduced the real effective capital gains tax rate to about 35 percent...
...KUDLOW: Totally...
...TAS: Like...
...KUDLOW: Right...
...Recently, CBO raised its baseline to 3.3 percent growth...
...So I gave him credit for that...
...He would make an excellent Fed chairman...
...What should he do...
...He had a tax rebate instead, an anti-recessionary "stimulus" like Jimmy Carter's...
...TAS: I thought it was launched on a cocktail napkin...
...I don't pray for stuff that I want...
...TAS: But is Greenspan still the best Fed chairman in history...
...If your currency is collapsing, you must be doing something wrong...
...That destroyed trillions in national wealth, at least temporarily, and will now give us a few tough quarters...
...And we leave unchallenged the absurd notion that Bush's tax cut is going to cost $1.6 trillion...
...But O'Neill was only a deputy OMB director...
...Once the bubble bursts, the stock market bubble comes down by 40 percent, then we're okay...
...The church part is what I liked, the actual Mass...
...At 3.3 percent they are just coming to grips with the historical reality that this country creates more growth than people say...
...KUDLOW: My first choice would have been Arthur Laffer, either for CEA [Council of Economic Advisers] chair or treasury secretary...
...I thought Wayne Angell would have been excellent because of his understanding of tax-rate incentives and hard money But O'Neill is an interesting guy even though a lot of people are writing him off as a Jerry Ford, root-canal budget-balancer...
...TAS: The question remains, how did supply-siders win such a great victory in the 1980s, both theoretically and empirically, and yet a Republican president now has to deny it to gain "credibility," and a Republican Congress remains committed to "static analysis"—the theory that tax cuts are a dead revenue loss with no behavior change or growth effect...
...Now we have Greenspan sitting there with a board and 500 Ph.D.s "If your stock market is plunging, you are doing something wrong...
...Kasich was on again, off again...
Vol. 34 • March 2001 • No. 2
