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Kudlow: Trump's common-sense growth policy has worked before, and will again

CNBC logo CNBC 25/02/2017 Larry Kudlow

© Provided by CNBC Virtually the whole world is beating up on the administration of President Donald Trump for daring to predict that low marginal tax rates, regulatory rollbacks, and the repeal of Obamacare will generate 3 percent to 3.5 percent economic growth in the years ahead.

In a CNBC interview last week, Treasury Secretary Steven Mnuchin held the line on this forecast. He also argued the need for dynamic budget scoring to capture the effects of faster growth. Good for him.

But what's so interesting about all the economic-growth naysaying today is that former President Barack Obama's first budget forecast roughly eight years ago was rosier than Trump's. And there was nary a peep of criticism from the mainstream-media outlets and the consensus of economists.

Strategas Research Partners policy analyst Dan Clifton printed up a chart of the Obama plan that predicted real economic growth of roughly 3 percent in 2010, near 4 percent in 2011, over 4 percent in 2012, and nearly 4 percent in 2013.

But it turned out that actual growth ran below 2 percent during this period. Was there any howling about this result among the economic consensus? Of course not. It seems they've saved all their grumbling for the Trump forecast.

And what's really interesting is that the Obama policy didn't include a single economic-growth incentive. Not one. Instead, there was a massive $850 billion so-called spending stimulus (Whatever became of those spending multipliers?), a bunch of public-works programs that never got off the ground, and finally Obamacare, which really was one giant tax increase.

Remember when Supreme Court Chief Justice John Roberts ruled that the health-care mandate was in fact a tax? But it wasn't just a tax. It was a tax hike. And added to that were an 3.8 percent investment tax hike, a proposed tax hike on so-called Cadillac insurance plans, and yet another tax increase on medical equipment.

So eight years ago tax-and-spend was perfectly okay. And the projection that it would produce a 4 percent growth rate perfectly satisfied the economic consensus.

Make sense? No, it does not.

So here's Trump reaching back through history for a common-sense growth policy that worked in the 1960s, when President John F. Kennedy slashed marginal tax rates on individuals and corporations, and again in the 1980s, when President Ronald Reagan slashed tax rates across-the-board and sparked a two-decade boom of roughly 4 percent real annual growth.

But the economic consensus won't buy Trump's plan.

One after another, Trump's critics argue that because we've had 2 percent growth over the past ten years or so, we are doomed to continue that forever. This is nonsense.

Most of the Trump critics point to the decline in productivity over the past 15 years. They say, unless productivity jumps to 2.5 percent or so, and unless labor-force participation rises, we can't possibly have 3 to 4 percent growth.

So I invite your attention to the below chart from Stanford University economics professor John Taylor, who's also a research fellow at the Hoover Institution. Taylor, one of the nation's top academic economists, shows that productivity declines can be followed by productivity increases, which unfortunately can be followed again by productivity declines.

In his widely read blog, Economics One, Taylor writes: "Take off the muzzle and the economy will roar."

He notes that bad economic policy leads to slumping productivity, living standards, real wages, and growth.

"Huge swings in productivity growth in recent years," Taylor writes, "are closely related to shifts in economic policy, and economic theory indicates that the relationship is causal."

He concludes, "To turn the economy around we need to take the muzzle off, and that means regulatory reform, tax reform, budget reform, and monetary reform."

Well, aren't those exactly the reforms that President Trump is promoting?

Get rid of the state-sponsored barriers to growth. Then watch how these common-sense incentive-minded policies turn rosy scenario into economic reality.

Commentary by Larry Kudlow, a senior contributor at CNBC and economics editor of the National Review. 

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