Larry Kudlow, who became President Trump’s chief economic adviser in March, sits in an office on the second floor of the West Wing. Kudlow is not a desk guy — he sits at a conference table with stacks of papers covered with comments and yellow sticky notes. I sat down at that table today to talk with him about the health of the American economy.

We covered a lot of ground in our 25-minute conversation, including today’s jobs numbers, wage stagnation and, of course, ongoing trade disputes. Kudlow affirmed that the administration is close to making a deal with Mexico on trade. And despite anxiety from CEOs as well as manufacturers and farmers across America, Kudlow insists that tariffs are not hurting economic growth: “There is very little impact, almost unmeasurable impact on real GDP. OK? That’s a fact. It may be out there. I don’t want to predict U.S.-China relations on trade but I’m just saying, thus far, in GDP terms, it’s been nothing, unmeasurable. Now, there are worries, I get that and I respect those worries.” The following is an edited transcript of our conversation.

Kai Ryssdal: I want to give you your due on this morning’s jobs report. Trend is great — 3.9 percent is a nice number. I want to ask you, though, about the thing that was sort of beneath the headlines: the wage number in this report. How long is it going to be — with a fully functioning job market, which we have — before workers start feeling a little bit of the benefit?

Larry Kudlow: Well, look, the wage numbers, you know, these are the best numbers in 10 years but—

Ryssdal: Which numbers are these, sir? Are they just straight-up unemployment numbers?

Kudlow: All these numbers. Look, the year-to-year wages; average hourly earnings, 2.8; average weekly earnings, 3.0 —

Ryssdal: Barely keeping up with inflation.

Kudlow: — employment cost index, 3.0. So I agree. I mean, I think they should be stronger. As we are now — this is my take: We’re getting into a capital goods boom.

Ryssdal: Explain that a little bit.

Kudlow: Very important point. This was the thrust of our whole economic program: taxes and regulations. So, businesses are investing in new plants, equipment, buildings, structures, technologies, campuses, everything that businesses invest in. You’re starting to see a real takeoff now.

Ryssdal: There are also, well we’re starting to see a takeoff? We’re we’re starting to see a real takeoff in the 10th year of an economic expansion? Is that what you’re saying?

Kudlow: Well, see that’s— I don’t really think we had a 10-year economic expansion. In fact, my view is before President Trump was elected, what we had was not only the weakest recovery, but in the old days we would call it a growth recession. That was the term when I started working on Wall Street and so forth. Meaning 2 percent or less is growth. It may be growing —

Ryssdal: — but it’s fundamentally recession.

Kudlow: Yeah, and any little thing could knock it down. And that’s basically what you had from the middle of ‘09 until ‘17. That’s, so what you’re saying is the 10th year, and I’m giving you, this is a contrary point of view.

Ryssdal: Fair enough.

Kudlow: It’s my view. I’m not sure everybody in this building agrees, but this is my view. Most recoveries of any depth or duration have a big rise in capital goods and business investment. This one did not. Virtually nothing. In fact — because I don’t like to be partisan about this stuff — we haven’t had any real capital business investment since the year 2000, under Democrats and Republicans in the White House or the Congress. We haven’t had one. And there’s a bunch of factors here that are very important to this question, to this issue. Number one: the business tax cut we designed during the campaign was expressly aimed at creating incentives for businesses to invest. The terminology, as you may know, is capital stock, we want them to invest in the capital stock, which really had barely grown in almost 20 years. The capital stock leads to productivity, output per hour, right?

Ryssdal: Which we should say has been stuck in this economy for a decade or more.

Kudlow: Yeah, call it 10 years it’s been about zero. That’s fair. And from the capital stock and the productivity comes the wage increases.

Ryssdal: So you’re betting on the come here. You’re betting that the companies are going to spend, workers are going to be more productive and then we’re going to get wages.

Kudlow: I like what I see. I mean, the numbers on capped goods are very impressive. Why you’re asking I’ll sift through my notes, but very good. And in fact this first and second quarters — here we are. I’ll give you some numbers

Ryssdal: We should say here you’re not a desk guy. You’re a spread-out-on-the- table guy with lots of papers.

Kudlow: Yeah, I like to roam around and have some fun. Because these are, like, really good numbers. So I want to find them for you. And here you go. So total business — it’s called business fixed investments. It’s the big one, 7.3 at an annual rate in the second quarter advanced report, the 4.1 percent quarter, and in the first quarter, 11.5. Year-on-year you’re at 6.7. Business equipment, 8 percent. Non-residential structures — this is really interesting. In other words it’s not housing, but factories, campus or whatever they’re called today. In my day they were called factories — 13 percent Q2, 14 percent Q1.

Ryssdal: Let me, let —

Kudlow: Those are big numbers.

Ryssdal: I get that you like this and that you’re a numbers guy —

Kudlow: And look, this is, no, but this goes directly to your point. If you say to me I’m betting on it. You’re right, I am betting on it, but I’m saying to you we now are seeing several quarters where it’s happening. That’s important.

Ryssdal: Gotcha. Let me pull you back out of the weeds then and ask you the follow-up question, which goes like this: We’ve had several quarters of this, we’ve also had a huge fiscal stimulus with the tax bill, right? We’ve had the president’s —

Kudlow: Lower. I don’t like that term, fiscal stimulus.

Ryssdal: How do you prefer to call it?

Kudlow: Lower marginal tax rates.

Ryssdal: Fair enough. Companies paying lower taxes, that’s fine.

Kudlow: No, it’s an incentive. The argument here is free market supply-side economics. You might want to look at my book on JFK and the Reagan revolution. It’s here someplace. What we’re saying is, this is not a demand-side fiscal stimulus quote-unquote. We are reducing marginal tax rates so that you keep more of what you earn working, investing and risk taking, and that creates incentives to keep doing what you’re doing. It pays to invest. For example, we’re talking about capital business, which is really, if it pays more to invest after tax, people will invest. That’s what you got here.

Ryssdal: So here’s what we have, looking at it —

Kudlow: It is not-traditional demand stimulus.

Ryssdal: And you’re a supply-side guy from way back, and you believe this and history has its own judgment on this. But let me ask you the sort-of-related question where we started. You’ve got companies in this economy doing really, rethank ally well, right? Profits are good. They’re buying back their own stock. The stock market is up. Everything appears to be great. But when do workers start to see this?

Kudlow: Well, I was trying to answer that. I’m not sure— You want to go back through this?

Ryssdal: Well, let me ask it in a different way.

Kudlow: Yeah, try me again because you asked, that was your lead question, which is fine, and my answer was wages are rising now about 3 percent.

Ryssdal: Barely keeping up with inflation. That was my counterpoint.

Kudlow: So inflation is running about 2 percent. So that’s OK. But I think it will get better. And the reason I think it will get better is we’re in a capital goods boom. And a capital goods boom, in my way of thinking, will generate the kind of productivity, which will in turn lead to higher wages. Now the cap-goods boom also is a big job creator, which is important, but we’ll get those numbers, those wage numbers up, at least that’s my outlook.

Ryssdal: Fair enough.

Kudlow: And I don’t, by the way, see anything particularly in the way of inflation pressures. I just don’t see it.

Ryssdal: And neither does the Fed or pretty much anybody, right? So that’s fine. Let me change gears then and talk about something else that I’m sure is on the mind of many economists in this building and elsewhere. This 4.1 percent quarter GDP growth that we had. As you nod. A whole lot of factors led to that, some of which were related to the tax law, some of which were related to the president’s stand on trade now. The question is: 4.1 percent this quarter, or the most recent quarter. What’s it going to be next quarter?

Kudlow: Before I venture into that treacherous —

Ryssdal: Oh no, go ahead.

Kudlow: I know people have tried to belittle that 4 percent.

Ryssdal: No, let’s be clear here: The president deserves a victory lap on the 4.1 percent.

Kudlow: But the idea that it was trade-related, where people are buying soybeans ahead of the tariffs. We’ll know more about that when we get the subsequent revisions when they show you the sectors. That’s a hypothetical of a hypothetical. I just want to say that that’s unknown. That’s one person I think came up with that on a certain business… channel. And then people start running with that ball.

Ryssdal: (laughs) A certain business channel.

Kudlow: I’m completely non-partisan. And if it, if the soybean factor is in fact the case, it will be very small.

Ryssdal: Let’s be clear here. It’s more than soybeans, right? It’s Americans moving to export more ahead of the tariffs. It’s getting stuff in the country ahead of the tariffs.

Kudlow: The biggest, of the swing factors, which are trade and inventory, the biggest one was a $27 billion drop in inventories, which took over a percentage point out of real GDP. And that’s cool for a number reasons. One of them is we still got 4.1 percent, even with it, OK, because the C and I went up a lot, consumption and investment. But it’s that swing factor, much more important than soybeans. The second point is it positions us — this is the great point. If you have rock-bottom, truly rock-bottom inventories and you’re in a capital goods boom—

Ryssdal: Let’s just let’s just be clear. Rock-bottom inventories means companies don’t have much on the shelves and they need to stock up.

Kudlow: Inventory sales ratios, rock bottom. I mean, just as a business cycle thing, which I used to do, it’s very rare. And then you got to cap goods boom, which affects manufacturing and hard goods and whatnot. That sets you up for some really big GDP numbers, really kind of fun GDP numbers.

Ryssdal: Here comes the put-up-or-shut-up question that you talked about a minute ago: What’s your number?

Kudlow: The administration is predicting, officially, 3 percent and change.

Ryssdal: For next quarter.

Kudlow: For the next bunch of quarters, actually for the next bunch of years, OK? We don’t segment the way I would if I was back being a Wall Street economist. That’s great number. I’ll buy into that. I will say to you the Atlanta Fed GDPNow model, which moves, but they’re showing 5 percent in Q3, and they had 4.3 in Q2. They’re on a hot streak. But it changes, and nothing’s perfect. So they’re showing 5 right now — that’s their number, not mine. I’m not allowed to do this.

Ryssdal: You’ve got to own one of these numbers. Pick one that you like.

Kudlow: It’s going to be big. We’re going to see big numbers.

Ryssdal: All right, we’re going to come back and see in 90 days.

Kudlow: And you know what, it’s not just going to be Q3 ending in September. It’s going to be the next several quarters. Big numbers.

Ryssdal: I don’t want to get too political —

Kudlow: They’ll accuse me of leaking numbers. I’m not, I have no information —

Ryssdal: Understood.

Kudlow: — that no one else has. I’m just giving you a sense of where I think things are going. (laugh)

Ryssdal: Understood. Let me let me ask you this though. What if in the next couple of quarters you’re wrong? As you know, we’re heading into the midterms. Spitball that for me.

Kudlow: We’re going to get one more GDP number before the midterms. It’s going to be a great number. You’re going to have two great GDP numbers before the midterms. It’s going to be a very positive development for the election.

Ryssdal: I want to go to the other news of the day, which is trade related and the Chinese coming back with their new suggested tariffs in response to our new suggested tariffs. There’s been much this week of well maybe the Treasury Department talking to the Chinese and then yesterday or two days ago the president ordered trade representative Lighthizer to actually look into raising tariffs. What is the tariff policy at the moment to you. Could you give some clarity on that?

Kudlow: Be specific, which tariff policy?

Ryssdal: Sure, specifically the tariff policy with the Chinese.

Kudlow: OK. Happy to talk about it.

Ryssdal: Doesn’t it say something that you have to ask me which tariff policy we’re talking about?

Kudlow: Well, because we’re dealing with several different countries and each one has its own story or several different blocs. For example last week against all odds and expectations we entered into a deal with the European Union.

Ryssdal: Well to be clear the way it came across was we agreed to negotiate to talk about a deal with the Europeans.

Kudlow: No, we actually agreed. I wrote that. I helped negotiate that.

And then the two presidents signed. It actually was quite specific in certain areas regarding Liquid Natural Gas, soybeans, beef and taking a look at defense purchases. And the presidents agreed, my president, that as we move forward towards this zero tariff regime which is what President Trump wants and Juncker does too. Zero tariffs, zero non-tariff —

Ryssdal: The head of the European Commission.

Kudlow: We will have a whole panoply, whole group, of what I’m going to call large scale transactions and this came in the 24 hours leading up to that meeting. Much to my surprise and delight. And so we will have an EU deal. In other words, there’s much more, if you read carefully, my suggestion to the skeptics, read the final statement because there’s a lot in that statement that answers a lot of questions and you’ll see a lot of specific topics and issues. You follow me?

Ryssdal: Yes, sir.

Kudlow: And that’s important. So that’s a big deal. And the EU, China wanted a deal with the EU. EU said “no we want to deal with the United States. They are going to get it.” And that puts China on the defensive. Also, also we’re very close to a deal with Mexico.

Ryssdal: Don’t we already have a deal with Mexico, isn’t it called NAFTA?

Kudlow: No. No. Well, that’s the existing deal which is being renegotiated and we will have an agreement in principle very soon with Mexico. I personally think Canada will come on board but that’s not, I mean none of this is done. But the Mexico thing is very close.

Ryssdal: Let me be clear. Are you prepared to make a deal with Mexico without Canada on the NAFTA renegotiation?

Kudlow: All I’ll say is the president has indicated from time to time that he is perfectly happy with bilateral deals. So if a deal with Mexico is a deal with Mexico and Canada doesn’t come on board, at least immediately, the president is OK with that. That’s a bilat. And we would make by the way a bilat with Canada now to be very clear we will not leave NAFTA. We’re not leaving NAFTA. But in terms of the renegotiations, president prefers bilaterals by the way.Well that’s the answer.

Ryssdal: Fair enough.

Kudlow: Now come back to the other side of the world with China.

Ryssdal: I want to go back to China for a minute. You said this morning I think it was on Bloomberg, you said you know this Chinese response is they’re weak. It looks like they are negotiating from a position of weakness.

Kudlow: It looked weak to me. I may be wrong about this and we haven’t yet gotten all the information but here’s the first point of weakness. We’re, our last tariff tranche proposal is $200 billion and —

Ryssdal: Anywhere from 10 to 25 percent, we should be clear.

Kudlow: Well now I’m coming to that. And president has asked our trade team, Bob Lighthizer, to explore the possibility of moving the proposed tariff from 10 to 25 percent.

Ryssdal: Right.

Kudlow: Now the China response, the tit-for-tat was 60, as far as I know, just from sketchy news reports.

Ryssdal: $60 billion worth of stuff.

Kudlow: Yeah so that’s a change from their prior strategy. Usually if we named a number they’d match the number.

Ryssdal: But the point being —

Kudlow: I don’t want to go, I don’t want to make that point too important. It just interested me.

Ryssdal: Here’s the larger point. Nobody seems to be backing down. Nobody seems to be saying “Hey let’s talk about it.” Right?

Kudlow: That’s correct.

Ryssdal: You know the Treasury Department let it be known the other day that Secretary Mnuchin was talking to the Chinese and then you have said today and yesterday “nobody’s talking to anybody.” So, what’s going on?

Kudlow: I won’t say nobody’s talking to anybody. If Mr. Mnuchin told you he’s had a conversation, he’s had a conversation. Leave that up to him. All I’ll say is virtually nothing has happened in a trade dialogue with China in a month or six weeks. We haven’t heard from them. So here’s the thing, a couple of points, I’m going to make some generic points for you.

Ryssdal: Sure.

Kudlow: We’re going into this. No.1: Do not underestimate the intensity and strength of President Trump on this issue. Unfair trading practices, illegal trading practices, IP theft, forced transfer of technologies, increasing commodity and goods tariffs and non-tariff barriers, all on the table. We’ve told them this many times that these are our asks. I was there in Beijing when we told them the first time. Do not underestimate the tenacity and stick-to-itiveness and intensity of President Trump’s effort on this. You know, other U.S. presidents have complained to China but never followed through. President Trump is the first president in several decades to follow through and he will continue to follow through. And if the Chinese think that we’re going to somehow back off, they better think again because we’re not.

Ryssdal: We had a Republican congresswoman from Indiana on the program yesterday whose name is, her name is Jackie Walorski, she’s from the Indiana second and I said to her —

Kudlow: From the what?

Ryssdal: Indiana’s 2nd congressional district right. She’s a Republican, went heavily for the president in the election. She supports the idea of a new trade regime under this president. But I said to her tell me what your constituents are saying and this is Elkhart, Indiana right. They made RVs, they make all those things that depend on steel and she said people are coming to her saying “we want to know when it’s going to stop. When’s it gonna stop?”

Kudlow: It being?

Ryssdal: It the tariffs and the pain that is happening to American companies and consumers from these tariffs.

Kudlow: I think that, look I appreciate, I don’t happen to know this house member but you know I appreciate the concern, absolutely. But I will say so far the pain has been de minimis, really very little.

Ryssdal: Look, sir, really with all respect that’s easy for you to say sitting here on the second floor of the West Wing of the White House.

Kudlow: Now, don’t class warfare me or anything like that. I’m telling you quantitatively we follow this very closely because we are concerned about it. There is very little impact, almost unmeasurable impact on real GDP. OK? That’s a fact. It may be out there. I don’t want to predict U.S.-China relations on trade but I’m just saying, thus far, in GDP terms, it’s been nothing, unmeasurable. Now, there are worries, I get that and I respect those worries. Some farmers have been hurt probably the soybean area has been the clearest and hardest hit. Soybean prices are off about 20 percent and there may be other things besides trade but I think it has a big, big to do with China’s tariffs. So I’m going to, I’m going to even that out. I’m going to sell so many bushels of soybeans to Europe that I’m going to take the price back to $10 and take China out of the calculus. That’s one of the things that came out of the EU deal and that’s by the way literally written in the, in the, in the final statement. We are prepared to help the farmers if we need to. As the president has indicated we could come to their rescue for a considerable sum of money. Thus far it’s not necessary. I personally don’t think it’s ever going to be necessary. But my crystal ball is not perfect here. Other than that, I can’t, I just don’t see anything yet.

Ryssdal: Last thing on the way out and it’s a bit it’s a bit 30,000 feet. I want you to step back for a minute. Do you, do you think people understand President Trump’s vision for the American economy because he says a lot of things that don’t always follow logically. And it’s —

Kudlow: I don’t know, I think he’s been pretty logical as an informal adviser during the campaign and now his assistance for economic policy, I think he is quite logical. I mean look, President Trump is a growth candidate. Healthy economy is his No. 1 priority domestically, growth solves a lot of problems. So what’s he done? He’s slashed tax rates, he’s slashed onerous business regulations, he’s reopened the energy sector. Reforming health care, albeit slowly. The theme of deregulation is paramount in everything he does. And the theme of tax reduction is paramount. I mean right now, we are talking about indexing, inflation indexing for the capital gains tax, which contrary to some class warriors actually affects middle America and is a very important thing for both homes and stocks. So we’re looking at another deregulation move. So he’s been totally consistent on that, totally consistent. It’s every, everything he’s done is pro growth. I wouldn’t be here if that weren’t the case because that’s been my career for four decades or so. The trade thing is in some ways maybe the toughest nut to crack. Maybe. I mean he’s only really been on the trade path really for six months, the first half of this year and it’s tricky business. I agree. But you know I say to you what I’ve said to others. Don’t blame President Trump. He inherited a broken world trading system where tariffs and particularly non-tariff barriers have been rising for years. The WTO which is supposed to be the adjudicator has been broken. And China is really at the center of the broken trading rules system. They’re not the only ones. But they’re at the worst culprits. And you know what everybody agrees with us on that. Even those who don’t like our tactics agree that China has been the single biggest culprit and must be fixed. So the president is trying to fix it. He is a free trader. He is, you know, he and I worked out again: zero tariffs, zero barriers, zero subsidies. I can’t be any clearer.

Ryssdal: Is that what winning the trade war looks like?

Kudlow: Well I think so, ultimately if we can get to that point, of zero tariffs or close to it and barriers, yes, that would be a tremendous win, and look, to me that would be incredibly pro growth. It is consistent with all of his other actions on taxes and regulations. And so it’s, it’s all there. I mean people may not, a) they may not agree with me, I understand that, I have my critics, they may not agree with the president but that’s what we’re trying to do. You know that’s the best I can give is. We see it as consistent.