When growth comes from productivity, inflation FALLS: Economist

Key Concepts

• Supply-Side Economics: The belief that economic growth can be most effectively fostered by lowering barriers for people to produce (supply) goods and services, as well as invest in capital.
• Productivity Growth: Increases in the efficiency with which inputs (labor, capital, etc.) are used to produce outputs.
• Non-Inflationary Growth: Economic expansion that does not lead to a sustained increase in the general price level (inflation).
• Phillips Curve: A historical economic model suggesting an inverse relationship between unemployment and inflation – lower unemployment leads to higher inflation, and vice versa. The discussion challenges this concept.
• Federal Reserve (The Fed): The central banking system of the United States, responsible for monetary policy.
• Unit Labor Costs: The cost of labor per unit of output. Falling unit labor costs can contribute to lower inflation.
• Accommodative Monetary Policy: A monetary policy that aims to stimulate economic activity, typically by lowering interest rates.

Economic Growth, Inflation, and the Future of the Federal Reserve

The discussion centers around former President Trump’s assertion that economic growth does not cause inflation, a point he emphasized during his speech at Davos. This perspective is presented as a key element of his economic strategy during his first term, which saw a combination of high growth, wage improvements, and low inflation. The core argument is that focusing on policies that increase supply – through tax reform, deregulation, and unleashing energy production – is the most effective way to combat affordability issues by lowering prices and boosting incomes, rather than relying on government stimulus.

Trump’s Economic Philosophy and its Connection to Fed Leadership

The conversation highlights the unusual nature of a president directly challenging the conventional economic wisdom regarding the relationship between growth and inflation. Larry Kudlow notes that while George W. Bush had some supply-side leanings, Trump’s emphasis on this point is particularly strong and central to his thinking.

A significant portion of the discussion revolves around the implications of this philosophy for the selection of the next Federal Reserve Chairman. Trump, according to the panelists, doesn’t want a chairman who will automatically stifle growth out of fear of inflation. He believes that productivity growth can reduce inflation by lowering unit labor costs. As Marc Sumerlin stated, “When growth comes from productivity, inflation falls. Unit labor cost falls, and that’s what’s happening.” Trump reportedly aims for a growth rate of 20%, believing that increased capacity can absorb increased demand without triggering inflation.

Challenging Conventional Economic Models

The panelists challenge the traditional economic models, particularly the Phillips Curve, which posits an inverse relationship between unemployment and inflation. Kudlow explicitly states this is a “falsehood,” and Trump is prepared to “fight the entire economic establishment” by rejecting this model. The discussion suggests that the Fed has historically been inclined to “take away the punch bowl” – to curb economic activity when it gets too hot – and Trump wants to avoid this approach.

Potential Fed Chairman Candidates: Warsh vs. Hasset

The conversation focuses on two potential candidates for Fed Chairman: Kevin Warsh and Kevin Hasset.

• Kevin Warsh: Marc Sumerlin advocates for Warsh, emphasizing his proximity to innovation in Silicon Valley and his understanding of productivity gains. Warsh’s location allows him to be “where the excitement is happening” and understand the potential for rapid change.
• Kevin Hasset: Both panelists acknowledge Hasset as a strong candidate. The argument for Hasset centers on the need for “diversity of thought” at the Fed and someone with a background as an “economic scientist” who can challenge the prevailing neo-Keynesian models. There's a concern about repeating the experience with Jay Powell, whom Trump reportedly didn’t know well beforehand.

The Lisa Cook Controversy

A brief but pointed exchange addresses the situation surrounding Federal Reserve Governor Lisa Cook. Larry Kudlow expresses frustration that the debate is focused on the Fed Funds rate rather than allegations of mortgage fraud, stating, “The issue isn’t the Fed Funds rate. It’s did she commit mortgage fraud?” He views the focus on monetary policy as a “canard” and a “red herring,” emphasizing the importance of investigating the allegations of having multiple primary residences. The Supreme Court’s involvement is mentioned, with a suggestion that the court is attempting to shield Cook from scrutiny due to political considerations.

Data and Research Findings

• Productivity Acceleration: The panelists note that productivity is currently accelerating in the economy.
• Unemployment and Growth: In the past year, the unemployment rate actually increased despite rapid economic growth, suggesting that growth doesn’t necessarily lead to lower unemployment.
• First Term Success: The first term of the previous administration saw a combination of high growth, wage improvements, and low inflation.

Logical Connections

The discussion flows logically from Trump’s statement about growth and inflation to its implications for Fed policy. The panelists connect Trump’s economic philosophy to his desire for a Fed Chairman who will not automatically stifle growth, and then analyze potential candidates based on their understanding of productivity and their willingness to challenge conventional economic models. The brief detour into the Lisa Cook controversy, while seemingly separate, underscores the importance of integrity and accountability within the Federal Reserve.

Synthesis/Conclusion

The core takeaway is that former President Trump is advocating for a fundamental shift in economic thinking, prioritizing supply-side policies and challenging the traditional view that growth inevitably leads to inflation. This perspective is driving his approach to selecting the next Federal Reserve Chairman, with a preference for candidates who understand the dynamics of productivity growth and are willing to challenge the established economic consensus. The discussion highlights a potential clash between Trump’s vision and the conventional wisdom of the economic establishment, setting the stage for a potentially transformative period in monetary policy.