Trade Policy Uncertainty

My guess [1] is it’s gonna rise again (not that it’s particularly low right now)

Figure 1: Categorical Economic Policy Uncertainty — (blue), Trade Policy Uncertainty (red), 2005-2010=100. Source: PolicyUncertainty, accessed 9/3/2018.

38 thoughts on “Trade Policy Uncertainty

  1. PeakTrader

    I guess, the certainty of being ripped-off is better than the uncertainty of not being ripped-off.

    1. pgl

      Is that how the Republicans sold the 2017 tax “cut”? They made certain the little guy was ripped off so the “certainty” made them better off even though they are now much poorer!

      1. Bruce Hall

        Please explain. Everything I’ve read shows tax cuts for those who pay the least taxes. Granted, the tax cuts were designed as business stimulation. But everyone I’ve talked to has indicated their taxes have gone down. These include people on Social Security and small pensions.

        1. 2slugbaits

          Bruce Hall You need to talk to different people. Or better yet, read some of the better analyses of the Trump tax bill. For starters, state income taxes will increase for many as a result of losing the deductibility of state and local taxes. But even at the federal level, the small reduction for some at the lower end of the income scale is only temporary and will actually increase because those tax cuts are designed to phase out. That’s a feature, not a bug. The Trump tax bill was deliberately designed such that the tax cuts for the wealthy and for corporations would be permanent, but the tax cuts for those further down the ladder would only last for a couple of years and then jump above their initial level. So if you’re on Social Security and a small pension and plan on dying within the next 2-3 years, then you should do just fine. But if you plan on living longer, then you were screwed by the Trump tax plan.

          1. pgl

            “Everything I’ve read shows tax cuts for those who pay the least taxes.”

            Theory? Excuse me Bruce but you need to stop watching Fox and Friends.

          2. CoRev

            2slugs your comment does not refute Bruce Hall’s observation, “…But everyone I’ve talked to has indicated their taxes have gone down.” Specifically, “… the small reduction for some at the lower end of the income scale is only temporary…”
            and “…the tax cuts for the wealthy and corporations would be permanent,” actually support or reinforce his observation.

            The remainder is either speculation or opinion.

          3. Bruce Hall

            2slug, the “couple of years” appears to be 8 years:

            The vast majority of all earners will see a federal tax cut; however, there are the minority that will see some increases, as explained in The Washington Post article. I suspect that when the rate cuts are about to expire, the party in power will come under significant pressure to either extend the tax rates or face a backlash from people who would see their taxes skyrocket… again.

          4. 2slugbaits

            Bruce Hall and CoRev You need to look at the entire bill, not just the change in the tax rates to understand how it will affect lower income folks. The rates themselves don’t move up until 2026, but the rates are calculated at the back end of your tax preparation process. Before you get to the tax rate itself you have to first calculate your taxable income, and that’s where the Trump tax changes will start to bite in only a couple of years. For example, the Trump tax plan eliminates the head of household status, so that’s going to hurt some taxpayers. The Trump tax plan also caps the deductibility of state and local taxes, which will really hurt taxpayers in blue states. The Trump plan also eliminates the personal deductions, which hurts families with a lot of kids but too much income to be eligible for the EITC. Finally, the Trump tax plan indexes the standard deduction to a chained price index rather than the CPI.
            And that’s the one that’s going to bite a lot of low income families because the value of the deduction will fall faster than the rate of CPI inflation. (This change alone raises about $500B over ten years thanks to the power of compound interest). According to the Tax Policy Center the bottom quintile will see an average tax saving of only $110:
            However, it only takes a very small difference of 0.12 percentage points between the CPI and the chained price index over three years to completely wipe out the tax savings due to the rate reduction for a typical family in the bottom quintile. And that’s before we even consider the indirect taxes due to higher interest rates and a stronger dollar due to the humongous structural deficits created by the Trump tax plan. And don’t kid yourself, a stronger dollar really hurts low income folks. A strong dollar is great if you’re rich and like to take trips to Europe, but it’s a killer if you have to shop at Walmart. If you’re just a working stiff who believes you’ll see lower taxes through 2025, then I suggest you do some reading and learn some math.

        2. noneconomist

          How long ago was it (20011?) when Paul Ryan was lamenting the damages caused by continuing deficits and rising debt? How his three children–and millions of other unfortunate youngsters– would be burdened by such fiscal insanity, being forced to pay for the sins of older generations? he was joined by Mitch McConnell, who insisted rising debt was the road to doom and destruction.
          I’m assuming that near apoplectic hysteria has been replaced by “look at what these tax cuts are accomplishing..everybody’s taxes are going down!” (and, don’t worry, soon, deficits and the debt will be history…. because we said so)
          Important to note, the Tax Policy Center broke down average benefits from the tax bill. Average benefit received by those in the $50K-$75K range is $870, a 1.6% change in after-tax income. Average benefit for those in the $75K-$100K level is $1310, a 1.8% change in after-tax income.
          Contrast those middle class figures with those with incomes of $500K-$1Million who will receive an average benefit of $21,240 with a percentage change in after=tax income of 4.3%.
          Yes, I’ve noticed our personal tax cuts and the amounts added to our monthly incomes. Being older, however, we’re not spending any more than we previously did. We’re contributing little to economic stimulation. (BTW, those with only SS income have no tax liability; nor in California is there any tax on SS benefits. For these people, the tax cut has little or no effect.)
          What’s needed now? For those who who’ve rattled the deficit/ debt cup for years to either come clean about their duplicity or never open their mouths again.
          Of course, I do realize the impossibility of that. We already can’t afford pay raises for federal workers and we’ll likely soon have to cut SS, Medicare, Medicaid, and any other programs that might endanger further tax cuts.
          Trillion dollar deficits as far as the eye can see. Problem?

        3. 2slugbaits

          Oops. Correction. Should have said stronger dollar helps Walmart shoppers, but higher interest rates hurt Walmart shoppers. Stronger dollar hurts those who work in the tradeable goods sector (e.g., manufacturing).

        4. dilbert dogbert

          I guess you talk to folks who file quarterly.
          This family will only find out in April next year.
          If we have one property vacant for a couple of weeks we will not notice a reduction in our taxes.

        5. ottnott

          Our family will see higher taxes this year, due to the tax bill. That’s a single-income household, salary from a public university, multiple children.

          That’s just the effect of the tax bill. The import taxes (tariffs) will pull some more money out of our household.

        1. noneconomist

          From “The Motley Fool” 4/30/2018
          “…if Social Security is your only source of retirement income, or your other income is small, you probably won’t have to pay taxes on your benefits.”
          “Married couples with a combined income of less than $32,000 don’t pay taxes on their Social Security benefits.”
          Effect of the tax cuts on those with low incomes (who would be most likely to spend more): little to none.
          “Among elderly SS beneficiaries, 48% of married couples and 69% of nonmarried persons receive 50% or more of their income from Social Security.” (Social Security Administration Fact Sheet)
          Average benefit of those with incomes in the $30K-$40K (SS and small pension?) $360. Percent change in after-tax income: 1.1%: Tax Policy Center

          1. Bruce Hall

            noneconomist, basically what you’ve referenced says that if you have low income, you will probably pay no taxes, so tax cuts will not affect you. Okay, zero is still zero and I’d love to pay that much, but the tax cuts do benefit most (not all) of the taxpayers… and those who pay vastly more than their “fair share” do get sizable tax relief.

            I know you’re disappointed that the money redistribution impact is less than you want, but that’s not really the purpose of taxes.

          2. noneconomist

            Oh, the details!
            That extra average $360/year (mentioned above) from the tax cut has big implications. You could, for example, go to a movie once a month.
            Real world numbers: Two admissions (matinee, of course) $16. The new D’Souza epic has the wingnuttery buzzing.
            Two sodas $8. Large popcorn to share $5.50 with the senior discount (you can’t afford two separately and stay within your budget).
            50 cents left over. What’s not to like? Economic stimulation at its finest.

          3. noneconomist

            Bruce: who said anything about redistribution? I simply noted you were incorrect about lower taxes for those on SS with small pensions.
            As I referenced elsewhere, Romney got lots of support while complaining about that 47% who pay no federal income tax. If they weren’t paying FIT in 2012, how has the tax cut benefitted them in 2018?
            If, as others have noted, the tax cuts where intended to be stimulative, it would seem larger tax cuts (or credits or increasing the EITC) for those with lower incomes would have been better than giving larger percentage cuts to higher earners/incomes.
            When the first Bush tax cut was passed in 2002, VP Cheney made no bones about the cuts rewarding supporters, no matter potential effects on deficits and the debt. That’s seems to be your position now. Or were you only concerned with deficits and debt until Jan. 20, 2017? (I know. “Reagan proved deficits don’t matter.” )

  2. Not Trampis

    My guess is your guess is pretty much on the money.
    It is exacerbated by a President who does not have a clue of how Trade occurs

      1. pgl

        Art Laffer? Excuse me while I fall on the floor laughing. Hey – I have an idea of how to get really rich really fast. Why don’t you, Trump, and Mr. Laffer drop by my place this weekend for a friendly game of poker. Yep – time to add to my retirement!

      2. 2slugbaits

        PeakTrader A good poker plays understands what cards remain in the deck. If Trump thought tariffs were the only leverage he had with China, then clearly Trump didn’t have a clue as to what other cards remained in the deck. But I’ll grant you that Trump is a poker player…just not a very good one. How else do you explain his being a serial bankruptcy abuser?

        And just why does Trump believe he needs “leverage” when dealing with China? That’s the mindset of a mobster, not someone who understands international trade.

      3. Not Trampis

        poker playing and trade policy has no similarities except if you attempt to use poker tactics you increase uncertainty!

        1. PeakTrader

          Trump is creating uncertainty and raising the cost.

          He’ll keep the other side guessing.

          He’s already gained some concessions.

          1. JBH

            PeakTrader: And there will be many more concessions from surplus countries to come. The stock market is telling us this! If you have the presence of mind and ability to read the market. (Not speaking to you Peak, i believe you do.) The stock market always was and always will be a most potent litmus. Trump’s initial tariff announcement was the fundamental that took all the indices down off their all-time highs of January 26th. The period of greatest uncertainty ran from then until March 23rd. The market simply had to discount how the world would react. Hence it had to go down.

            Budding economists with open minds, listen up. This is how to do economics if you want to accurately forecast the future. The market observed the trade goings on from the day of the top until the 23rd of March. On that date the Dow fell to its correction low. Already over this period the market had been digesting the news and with that information building a base. That weekend the news came out that China — the force of greatest mass and thus the one to be most reckoned with — had relented on one of Trump’s major objectives. On the following Monday, the Dow surged some 600 points and has never looked back. But there is still more. And this is the real story. </p.

            Whereas globalist laced indices like the Dow had been leading the way to the January top, domestic indices like the Russell 800 now fell the least during the correction (Whoa!), and then surged on ahead to new all-time highs while the globalist indices recovered the slowest. The Dow still hasn’t made a new all-time high.

            This sharp wrenching at the major pivot point of January 26th was an historic moment. It marked the end of the era of raw globalism and the beginning of the new era of America First. All this was set in motion by the well thought-out strategy of Donald Trump and the close circle that you don’t know about that surrounds him. This circle was in existence before Trump even announced he was running back in April 2015. Here this year, the market looked at both the short-run and the medium and to longer-runs. As it always does. Now the market has tipped its hand that Trump was right from the very beginning, though it may take you some time to see this. The market has been and is still saying with even greater conviction that America will come out victor on net in these so-called trade wars. It makes little difference that global trade and global economies outside the US will slow. The US markets are all about US-domiciled firms with their operations including demand on these shores. Also firms like those that make up the Russell mid-Cap 800, and like firms whose stock is privately held. The NFIB optimism index is telling the same story for the even smaller firms.

            I have made a prediction here. Prediction is at the heart of science. Given some time, and it make take a year or possibly more, the confirmation will come in (amongst other places) the percentage contributions of net exports to real GDP. The last 4Qs were what you might call a Trump transition year. Prior to that the contributions were -0.33 pts. This is now in the process of flipping to +0.33 pts or thereabouts. In other words, a 2/3rds percentage point swing in real GDP growth. In one of the economy’s tinniest sectors at that!

            Two takeaways. This methodology can be used time and time again. I have with great success done so ever since I developed it in 1993 for the purpose of understanding why the US 10yr was doing the odd thing it was doing. (Surely others had discovered it before me.) Secondly, you have now been made aware of the changing of an era! There will be arguments aplenty against this. But they will come from the place of abstract theory and not from the empirical data and evidence that I cite above. Even more, there are other predictions out of this. The Dow is soon going to a new all-time high. Going forward, real GDP growth will be more on the order of 3% than than the 2% of the Obama era. The next recession is far into the future. (I am quite well aware of the burgeoning deficit which will be dealt with in due time.) I state no recession until 2021 at the earliest. As the uncertainty about trade and the tariff trap wears off, the US 10yr yield will move back higher. This because the global flight into US Treasuries will die away along with tariff trap uncertainty. This uncertainty is being mowed down like an alfalfa field as we speak. Little of this is in your textbooks, by which I am not saying there is nothing of good in those books.

          2. ottnott

            JBH wrote:
            Going forward, real GDP growth will be more on the order of 3% than than the 2% of the Obama era. The next recession is far into the future. (I am quite well aware of the burgeoning deficit

            Congratulations. You discovered that massive deficits stimulate the economy.

            Go tell the farmers about it. They need some cheering up.

            #Farm business average net cash farm income by resource region, 2018F compared with 2017 @USDA_ERS— Farm Policy (@FarmPolicy) September 2, 2018

            If the commenting system can’t digest the above:

  3. Bernard Leikind

    Dear Prof. Chinn,

    Can you explain for your amateur economist readers why things that seem once removed from economic data, such as uncertainty or inflation expectations, are of greater interest to economists than, say, model results predicting inflation based upon measured prices and their rates of change.

    I take it that uncertainty or expectations are mental properties of economic actors rather than properties of the economy.

    Why, for example, does the Fed attend to what “everybody” thinks the inflation will be next year. Everybody includes people both knowledgeable and not, people paying attention and not, and so on. Why do their opinions matter?

    1. Menzie Chinn Post author

      Bernard Leikind: The relative emphasis on policy uncertainty derives in part from the fact we have, due to computing and data management enhancements, the ability to generate proxy measures, not feasible in the past.

      As for expected inflation, the one that matters is “the market’s” expectations. That’s unobservable, but we have used survey proxies for decades (e.g., the Livingstone series). Little was done in the 1980-90’s because the dominance of the rational expectations hypothesis, which implied the best measure of expected was the ex post realization.

  4. joseph

    So today we learn what people really think of President Trump:

    f***ing idiot
    f***ing liar
    the understanding of a fifth or sixth grader
    professional liar
    goddamn dumbbell
    f***ing moron

    And that’s just his closest friends in the White House.

    Of course, Trump knows how to dish it back:

    Jeff Sessions is “mentally retarded, a dumb southerner”
    Reince Preibus is “like a little rat”
    Rudy Giuliania is “like a little baby that needed to be changed. When are you going to be a man?”
    H.R. McMaster “dressed like a beer salesman”
    Wilbur Ross “you are past your prime”
    And in the spirit of bipartisanship, Obama is “a weak d**k”

    Making American great again by bringing dignity and civility to the White House.

  5. sammy

    The “Overall Uncertainty” (which presumably includes the high “Trade Uncertainty”) is below the norm, which means businesses are a lot less uncertain about many other things now.

    1. Menzie Chinn Post author

      sammy: The current level of economic policy uncertaint is about 1/2 standard deviation below mean 1985-2018M07. That is hardly a lot less uncertain.

      1. noneconomist

        Addendum (question) to those in the lower income brackets who are supposedly benefitting from tax cuts; In 2012, Republicans were all in with Romney’s lament that 47% of Americans DON’T pay any federal income tax.
        That being the case, how are those at those same income levels who weren’t paying income taxes in 2012, now benefitting from the tax cut? Especially Social Security recipients with small pensions or outside income?

  6. JBH

    Let’s examine trade policy uncertainty. It is a category of economic uncertainty. By design of the words searched for, the various categories are exhaustive and mutually exclusive by construction. (FinReg is a subcategory.) Taking the mutually exclusive exhaustive categories and summing them should yield a strong proxy for overall economic uncertainty. But it does not. What is going on here? At the category level, what trust can there be?

    Taking this a step further, what regression analyses of trade uncertainty on a dependent variable, if but just one, tell us something we don’t already know? Has anyone found anything?

    Further still. This calendar year is a great experiment period regarding trade. Trade talk has been moving markets. There are 8 monthly observations. Does trade uncertainty as quantified here have any value in explaining important economic variables like the monthly level or percent change in the S&P? No, not statistically significant. Yet at an events level, uncertainty about trade wars has definitely driven stocks and long yields if not other variables. So of what informational content is the graphic here? It tells us it is going to rise in Sep, Oct, or Nov? Un-uh.

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