Larry Kudlow on Improving Economic Opportunity for Low-Income Workers

The White House intends to replace outgoing National Economic Council director Gary Cohn with Larry Kudlow, the former Bear Stearns chief economist, Reagan budget advisor, and CNBC host. Kudlow is well known as a free-market evangelist in ways that contrast with the economic philosophy of President Trump.

The President appears to see Kudlow’s differing perspective as a plus. “We don’t agree on everything,” said Trump, “but in this case I think that’s good. I want to have different opinions.”

Among the many policy ideas that Kudlow has backed, two stand out at the moment. The first is his critique of steel and aluminum tariffs. As Kudlow noted in a recent op-ed for National Review, while steel tariffs may help protect jobs at American steel factories, they will destroy jobs in the much larger sector of manufacturers that use competitively-priced steel to build their products:

President ‎Donald Trump genuinely believes that his steel and aluminum tariffs will save thousands of blue-collar jobs. And we know from our interactions with him that he truly cares about these workers in Pennsylvania, Ohio, and other Rust Belt states. We do, too, and we don’t want factories to shut down.

But even if tariffs save every one of the 140,000 or so steel jobs in America, they put at risk 5 million jobs in industries that use steel. These producers now have to compete in hyper-competitive international markets using steel that is 20 percent above the world price and aluminum that is 7 to 10 percent higher than the price paid by our foreign rivals.

Steel and aluminum may win in the short term, but steel-and-aluminum users and consumers lose.

Tariffs are really tax hikes. Since so many of the things American consumers buy today are made of steel or aluminum, a 25 percent tariff on these commodities may get passed on to consumers at the cash register. This is a regressive tax on low-income families.

Meanwhile, up to 5 million jobs will be put in harm’s way.

As my Forbes colleague Ryan Ellis notes, Kudlow has also been a proponent of a creative tax reform idea that could substantially boost investment in new jobs: indexing the long-term capital gains tax to inflation.

Congressional statutes define a capital gain on an “adjusted basis” relative to the “cost” of obtaining the asset, such as house or an investment in a startup. But the tax code is silent on whether or not that “cost” should be real (i.e., adjusted for inflation) or nominal (i.e. not adjusted for inflation).

This may seem like a wonky point, but if the Treasury Department were to revise the definition of “cost” to include inflation—which is likely within its authority—the result would a huge shift in economic incentives away from short-term investing into long-term investing: the kind that does the most to expand job growth.

The majority of net worth in the typical American household lies in the value of their home. But much of the nominal increase in the value of one’s home is due to inflation, rather than a real increase in value of the home itself. The current capital gains regime effectively creates a tax liability for these individuals even if the value of their homes, adjusted for inflation, has never increased.

“More investing and risk-taking will increasing much-needed productivity, real worker wages, and overall economic growth,” as Kudlow notes in an August piece for CNBC.

If Kudlow advances this idea in his new role, it could have a significant effect on job and wage growth for those who are looking for work today.