Kudlow Looks Less a Pinocchio, More a Prophet

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

When one of President Trump’s top economic advisers, Lawrence Kudlow, said recently that the federal budget deficit “is coming down,” the Democrats and the press — apologies for the redundancy — accused him of lying.

The Democratic leader in the House of Representatives, Nancy Pelosi, issued a press release about what she called “Kudlow’s outrageous claim.”

Politifact, a Pulitzer Prize-winning website operated by the nonprofit Poynter Institute, called the statement by Mr. Kudlow, who is chairman of the National Economic Council, “inaccurate and ridiculous.” It gave the comment by Mr. Kudlow its “pants on fire” rating, as in “liar, liar, pants on fire.”

The New York Times assigned a “fact-check reporter,” Linda Qiu, to the story. She declared Mr. Kudlow’s statement “false.”

After Friday’s news that second-quarter real GDP growth hit an estimated 4.1%, and that the real GDP growth rate for the first half of 2018 exceeded 3%, maybe it’s time for some fact-checking of the fact-checkers.

After all, one of the main ways that economists and government accountants have long measured the federal budget deficit is as a percentage of gross domestic product.

There’s some logic to that. If the government is spending $500 billion a year more than it takes in, that means something different in a $3 trillion economy than it does in a $20 trillion economy.

Projections about budget deficits as a percentage of GDP, then, are built not only on assumptions about the size of deficits, but on assumptions about the size of the economy.

A growing economy can help reduce the deficit in other ways, too. If the economy is strong, the government often has to spend less money on means-tested poverty-assistance programs such as food stamps or even on disability aid. Food stamp enrollment recently reached an eight-year low. A growing economy can mean some increased tax revenues even at lower tax rates, as supply-side economic thinkers and policy makers such as Presidents Kennedy and Reagan realized.

Even small differences in assumptions can translate into big differences in projections. The White House Office of Management and Budget, for example, assuming a 3% real GDP growth rate, estimates a federal budget deficit in 2024 of $749 billion. The Congressional Budget Office, assuming an annual average real GDP growth rate of 1.9% for 2018 to 2028, estimates a federal budget deficit in 2024 of $1.25 trillion.

These differing assumptions about growth have become the topic of congressional scrutiny. The Congressional Budget Office had projected 3% average annual real economic growth back in 2012, during the Obama administration, when Mr. Obama wanted to increase spending. Now that Mr. Trump and Congressional Republicans are cutting taxes, however, the CBO is using a decade-long average of 1.9% annual economic growth as its assumption.

The chairman of the House Budget Committee, Steve Womack, recently asked the CBO for an explanation. “Why did your growth assumption fall so rapidly in such a short period of time?” Mr. Womack asked. The CBO responded with some palaver about “business cycle conditions,” eventually conceding, “forecasting economic growth is difficult because it is impossible to accurately predict all of the factors.”

The White House Office of Management and Budget projects the federal budget deficit as a percentage of GDP gradually decreasing to 2.8% in 2024 from 3.4% in 2023, 3.9% in 2022, 4.3% in 2021, 4.8% in 2020, and 5.1% in 2019. If those numbers turn out to be anything close to real, Mr. Kudlow won’t have been a Pinocchio; he’ll have been a prophet.

OMB calls this growth driven by tax cuts and deregulation “MAGA-nomics,” using the acronym for Make America Great Again.

As context, the deficit was 9.8% of GDP in 2009, 8.7% in 2010, 8.5% in 2011, and 6.8% in 2012. It was 5.9% of GDP in 1983 and 5% of GDP in 1985 at the height of the Reagan military buildup and deficit panic. In that historical context, the Trump numbers in the OMB estimates sure do represent the deficit “coming down.”

One of the best guides to all this was the editor of the Wall Street Journal, Robert Bartley. In his 1992 book “The Seven Fat Years,” Bartley called the deficit a “grossly overrated” figure.”

“The deficit as we measure it is no sort of bottom line,” Bartley wrote. “Our politicians have conjured the deficit into a bogeyman with which to scare themselves.”

The Trump economic story isn’t over yet. A few more quarters of 4% growth, and perhaps Mrs. Pelosi and Politifact will offer Messrs. Kudlow, and Trump, an apology. More importantly, the rest of America will owe Messrs. Trump, Kudlow, Treasury Secretary Mnuchin, OMB Director Mulvaney, and Mr. Kudlow’s predecessor Gary Cohn a thank-you for seeing past the deficit panic to imagine an America with a rapidly growing economy.


Mr. Stoll was a founding partner in the New York Sun and its former managing editor.

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