Larry Kudlow: Confident, Optimistic, & Apparently Ignorant of History

Sunday, March 19, 2006 at 12:01 PM

Larry Kudlow, CNBC's chief economic prognosticator and cheerleader for all things anti-regulatory, has this to say in his recent piece for National Review Online:

If the polls are telling us things are so bad, why is the stock market telling us things are so good?

Well, Larry, probably because the stock market is so bad at predicting long term prosperity.  Which I'd think you would know, since it seems like one of the few clear lessons from the debacle of the 1929 stock market crash.

A fuller quote from Kudlow's NRO piece, to demonstrate his thought process:
If the polls are telling us things are so bad, why is the stock market telling us things are so good?

Opinion poll after opinion poll reveals just how unhappy people are with President Bush, the economy, the war in Iraq, and the general direction of America. At the same time broad stock averages are hitting five-year highs. So who should you trust, forward-looking stock markets or backward-looking polls?

Here's my answer: I have long believed that stocks are the best barometer of this nation's economic health and wealth, as well as the status of our national defense that is so necessary to sustaining freedom.

There's good reason why the NYSE (about 2,500 stocks), the Transportation Index, and the small-cap Russell 2000 are at their all-time peaks. New inflation reports show diminished price pressures, lower tax rates have boosted business, the Fed is nearly done tightening, job-creating profits are surging, consumers are spending, and former rust-belt manufacturing industries are enjoying their best run in twenty years as they participate in the growing global economy.

So if you follow Kudlow's thought process, the fact that stocks are booming now means that we can expect them, and the economy in general, to be booming considerably later.  For that to be true, we should see that, historically, bad times take a long time to develop; if things in the market are sky high in 2006, say, that should mean they will remain sky high for some time, say until 2008, or 2009, or even 2010.

Is this historically true?  I think we'd all agree that the stock crash of 1929 and the ensuing Great Depression were historic and crucial events in America.  Most people place the crash as October 24, 1929 (Black Thursday) or, at the latest, October 29, 1929 (Black Tuesday).

Yet on September 3, 1929, less than 60 days before the crash, the Dow Jones Industrial Average reached a record high of 381.  In fact, "From 1925 to the third quarter of 1929, common stocks increased in value by 120 percent in four years, a compound annual growth of 21.8%."  Again, the Dow Jones record high to that point came less than 60 days before the crash in '29, but Kudlow takes great comfort in the fact that "the NYSE (about 2,500 stocks), the Transportation Index, and the small-cap Russell 2000 are at their all-time peaks."  

Talk about learning a lesson.  So, did Mr. Kudlow's education at the University of Rochester and Princeton University manage to skip over the crash and the depression?  Or is there some other reason he now postulates a theory completely contrary to historical fact?

It isn't hard to come up with a theory on why Kudlow is so adament in defending the economy of our Mr. Bush--Bush's supply side-ism, his "growing" jobs and tax revenues on the back of tax cuts is the bedrock belief of Lawrence Kudlow.  In fact, Kudlow's web site has a bio which reveals that "he was a member of the Bush-Cheney Transition Advisory Committee. During President Reagan's first term, Mr. Kudlow was the associate director for economics and planning, Office of Management and Budget, Executive Office of the President, where he was engaged in the development of the administration's economic and budget policy."

Not explicit there is the fact that Kudlow is closely associated with Art Laffer, the originator of the "Laffer Curve" which has formed the foundation for all the supply-side nonsense that leaked through the many cracks in the Reagan administration.  According to  another Kudlow bio, Kudlow Served as economic counsel to A.B. Laffer & Associates, Laffer's firm.

Good stock market as a long term indicator of national health--reality or a real Laffer?