CNBC's full interview with White House Economic Advisor Larry Kudlow at Davos

[00:00:00] Speaker 1: Welcome back to Squawk Box, live from the World Economic Forum in Davos, Switzerland. We heard from President Trump earlier this morning. [00:00:07] Speaker 2: Years of economic stagnation have given way to a roaring geyser of opportunity. U.S. stock markets have soared by more than 50% since my election, adding more than $19 trillion to household wealth and boosting 401Ks, pensions, and college savings accounts for millions of hardworking families. [00:00:34] Speaker 1: Joining us now, National Economic Council Director Larry Cuddle. We have so much history, Larry. [00:00:40] Speaker 3: It's a pleasure. Thank you, Pat. [00:00:41] Speaker 1: Great to see you. 25 years, Squawk Box is 25 years old. Live in Davos together. Do you remember when we brought you back on Squawk? And look at you now. [00:00:49] Speaker 3: Well, it's, you know, I've always said this is a blessing. And it's been wonderful working for President Trump. It's been about two years for me. A lot of the projects that we work on came out in the speech today. I thought he gave a terrific speech. [00:01:04] Speaker 1: What was your old saying? Can we say it one more time that you told me 25 years ago that I believe? [00:01:09] Speaker 3: It's free. [00:01:09] Speaker 1: Can you remember? [00:01:10] Speaker 3: Free market capitalism is the best path to prosperity. That's held up pretty well, actually. People still use that. That was from our show. [00:01:17] Speaker 1: It's just what we're experiencing. It's just the type of prosperity that you alluded to. [00:01:21] Speaker 3: You know, the president talked a lot about a free and vibrant market economy where people are rewarded and they're able to grasp opportunities. And I think that, you know, you can say, sure, I got to say that because I work for him. But the reality is the facts are there. And I think, for me, one of the most interesting parts of this boom right now, with tax cuts and deregulation and energy independence and rolling back unfair trade practices, it's the middle class, all right? We call it a blue-collar boom. It's the middle and lower wage earners who are growing the fastest. They're growing much faster than their managers. And that's very rare. The last time I saw that was when I was with Reagan in the 1980s. And that's really gratifying because, as POTUS said today, we want an inclusive economy and we're getting an inclusive economy. And in relative terms, even with respect to the stock market, I mean, I know the middle and lower classes don't have as large holdings of stocks, but their rate of increase in household net worth has been running, I don't know, 12 to 15 times. [00:02:28] Speaker 1: The good news has made it into the pages of the New York Times and Andrew's column today. And we remember two years ago, when the president came here two years ago, there were some raised eyebrows. Who is this guy? What's he doing? He was a mega media star back then, the crowds that followed him here. But he's back here. And Andrew, because I want to... What did you say? Andrew said he's being embraced, embraced by this and called the new Davos man. [00:02:53] Speaker 4: Because the construct of what it used to be to be a Davos man of this idea. Sometimes, Larry. Of multilateral negotiations, of everything being... And he sort of turned the whole thing on its head. And I think there was an expectation two or three years ago here that it wasn't going to work. Right. And everybody, dare I say, has been thus far at least been proven wrong. Well, thank you for that. [00:03:14] Speaker 3: I thought Klaus gave a great introduction this morning, which was very important to set the stage. And he basically had, you know, two brief themes. Number one is optimism. President is an optimist. You know I'm an optimist, always have been an optimist. Number two is what a prominent role the president is playing in international affairs, not just foreign policy, but trade policy. Now, folks said he was an isolationist and so forth and so on. The reality is we've cut huge trade deals, one in China, one in North America, one in South Korea, one in Japan. We're still working on the EU. In fact, I will be in the bilateral with the new president of the EU and President Trump. So he has been very prominent in international affairs and he is an optimist. And I think the country's in a better place, to be honest with you. I just think people are happier. The president mentioned that today in his speech. I think we're in a better place. [00:04:12] Speaker 1: Larry, is the growth we're seeing for the middle class and even below middle class, why is it called crumbs by the left? Why do a lot of people in the media say that the income inequality is still the overriding concern and it's going to end badly in this country? Is this enough organically? What we're seeing is at the beginning of something real? [00:04:34] Speaker 3: Well, look, I think so. I think as long as these policies are in place, that's a very important story. And I think a lot of the stock market bet this year is going to be about that subject when the campaign heats up. But look, inequality is diminishing right now, OK? And there's a lot of cognitive dissonance about this. People don't want to look at the facts. And folks on the other side are painting a dreary picture of an economy in deep recession. You know, only 12 fat cats are making out well. That is simply not true factually. And one of the lines in here that I also wanted, I got in towards the back end, I know the millennials are supposed to be all socialists and so forth. But actually, be careful here. We looked at these numbers, age 25 to 34, which is the millennials, their labor participation rate is soaring. And their wage increases are better than 5% per year. And I think, you know, if we all think back to when we were in that age bracket, starting careers and so forth, when you're working and paying taxes and you have household needs, the job is important and being rewarded for the job is very important. And I think the president's going to do much better among the younger folk than people think. [00:05:52] Speaker 5: Because as millennials are aging, they're getting into all of those same sort of things? [00:05:57] Speaker 3: That's the way I see it. I don't think they're going to vote socialists, frankly. And, you know, what Reagan used to call take-home pay, you look at median household income after inflation and after taxes, that is soaring. It's up $5,000 per household in three years, OK? And the prior two administrations, Republican and Democrat, were basically flat to down. So it's a huge change. The whole trajectory has changed. [00:06:20] Speaker 4: What do you think of the whole sort of stakeholder theme here, that investors and that companies really, company leadership should not just be focused on shareholders, but should be focused on so many other constituents? There's also a huge focus, as you know, here on sustainability. I know the president talked about this Trillion Trees program. But his policies, in large part, have been somewhat empathetical, if I could be so bold, to the policies, for example, of Microsoft, which is now pursuing a carbon, not just neutral, but carbon negative program at their company. [00:06:51] Speaker 3: I'm OK with that. I don't see anything wrong with that. By the way, I work very closely with the Microsoft folks on 5G. They're so helpful, the president of Microsoft. Look, you know, it's interesting to me. Stakeholder theme is not a brand new theme. And I think any responsible company has to think about their so-called stakeholders. I mean, you're talking about labor management relations. You're talking about community relations. I think that's a good thing. I don't think that should get in the way of good profits and earnings, because that's what drives the system. And judging from the stock market, the outlook there is still very good. But I don't want to exaggerate it. I mean, look, we are opposed to a government-run socialist economy. The president was very clear about that in his speech this morning. We are opposed to that. Beyond that, stakeholders are a good thing. It's just acting responsibly. But you can't forget the profit motive. That's what makes the engine run. [00:07:49] Speaker 1: You know, it's a blessing and a curse. I've known you for so long. You used to be pretty hawkish on deficits and debt. Deficits and debt. I was never really a deficit mom. Well, you were about normal for where most people were, and none of us are there anymore. I'm a supply side. Okay, what happens if there's a second term? What happens? Does the president no longer accede to what the Democrats want? I mean, he had to do it for the defense bill, obviously. He had to agree to things that he didn't want to agree to. But how do you stop the runaway entitlement spending when he won't do anything with Medicare or won't do anything with Social Security? Would that be on the plate? [00:08:30] Speaker 3: One theme here is politics is the art of the possible. So you have split houses right now. I think if the GOP can recapture the House in the election, and I think there's a pretty good chance they will, something like 18 or 20 seats, something like that, we'll have more spending reforms. But I also want to emphasize the growth. I mean, look at revenues are rising. After the tax cuts, revenues are rising, corporate revenues are rising. By many estimates, we've already paid for the corporate tax cut. Not the whole tax cut, mind you. That's going to take several more years. I think economic growth is the ultimate solution to budget deficits, okay? We're running now, I guess, deficits as a share of GDP is something around 5%. Now, to me, that's a manageable number, given all the reforms that we've put in place. Spending's about 21% of GDP. I would like to see it lower. I think the president would like to see it lower. Look, as a businessman, he tackles waste, fraud, and abuse. Look at the regulatory changes we've made. He had a number that's about $3,100 per family just on the regulatory savings alone for small businesses and so forth. And yes, I think everyone's going to have to have a stronger look at spending, if that is possible. I think you're going to need a united Congress to do it, but I don't want to get too far ahead of that game. [00:09:56] Speaker 5: Can I just ask, we had Ray Dalio with us earlier, and he said that he thinks in the next five years, you will see a downturn, just playing the odds, looking at how long of a growth spurt that we've seen. He said if that happens, he's worried about what happens next. First of all, the Fed is not going to have the power to lower and stimulate the economy like it has in the past, and then he worries on the fiscal front because he thinks the nation is more divided, that Congress is more divided. You're less likely to have two sides working together to do things to offset a downturn. What would you say to that? [00:10:27] Speaker 3: Well, you know, look, Ray Dalio is a friend, he's a very smart guy, and I've heard his view. But first of all, I don't want to get too far ahead of the story. In five years, I don't know, we may all be doing something else. We'll see. This is a long cycle, and what you've got here in the Trump years is essentially a mini-up cycle. You've gone from 1.5% to 2% growth. We had it going at almost 4%, then the Fed tightened. We're now down to 2.5% to 3%. I'm looking for faster growth. I think we're going to get 3% this year. The trade deals will help. The Fed changed policy. That was very, very important. Unfortunately, some of our friends in Europe are not growing, so I'd like to see them take pro-growth measures. Fiscal policy is very important. I just want to make this point. All this negative interest rates and printing a lot of money, by itself, doesn't really work, does it? I mean, I use Europe here as an example. The ECB has negative interest rates, and their balance sheets are exploding. There's nothing wrong with a balance sheet rising. Negative interest rates struck me as ineffectual. But where are the tax cuts? Where are the incentives for people to work the extra hour and make the extra investment and take the extra risk? And in addition, the president made a point today. He departed from the text to make this point. You have to clear away the regulatory, bureaucratic cost debris, which clutters up and causes sclerosis in the arteries. And I don't think our friends in Europe have done near as much as they could to do that. I don't think it's wise to rely solely on monetary policy. The G7 is going to be in the U.S. I'm the Sherpa. It's an NEC run. We're going to explicitly have sessions and plenaries on growth and the role of all the different people. [00:12:32] Speaker 1: People want to stand there. They're rushing out. But maybe the Euros can learn from Davos Man, the new Davos Man, and adopt some of these pro-growth policies that they see are now working. [00:12:44] Speaker 3: This will turn out to be a pivotal speech, in my judgment. It was a pivotal deal, but they all heard it today very clearly. Right. I agree. You ought to read the speech, by the way. It's a lot of fun. We took it live. We took it live. My pleasure. Thank you very much. Thank you. Thank you. [00:13:02] Speaker ?: Thank you.