The Trumpian World as Natural Experiment

The Trump economic policy regime (if it can be called that) has provided several “natural experiments”. Do corporate tax rate reductions “pay for themselves”? Does expansionary fiscal policy at full employment lead to large increases in output? Does increasing trade protection necessarily lead to an increase in the trade balance? Does a bellicose and confused trade negotiating stance accelerate fixed investment? I think the answers are No, No, No, and No. On this last point, see Altig et al. on Macroblog:

Amid reports of softening manufacturing conditions in the U.S., slowing growth in payroll employment, and a drop-off in business investment, it’s natural to wonder whether trade policy is at least partly to blame. Professional forecasters seem to think so. For instance, the International Monetary Fund (IMF) forecasts that the U.S.-China trade dispute will shave roughly three-fourths of a percent from global output by 2020, which, as the IMF’s managing director noted, is “equivalent to the whole economy of Switzerland.”

Over the past year and a half, we have been keenly interested in how trade policy worries affect business decision making. In August 2018, we reported that trade concerns prompted about 1 in 5 firms to re-evaluate their capital investment decisions. At the same time, only 6 percent of the firms in our sample had then decided to cut or defer previously planned capital expenditures in response to trade policy developments. Early this year, we noted that the hit to aggregate investment from trade tensions and tariff worries was modest in 2018, but firms believed the impact would increase in 2019.

Twelve percent of surveyed firms reported cutting or postponing capital expenditures in the first six months of 2019 because of trade tensions and tariff worries (see exhibit 1). That’s twice the share when we asked the same question a year earlier. Given the capital-intensive nature of manufacturing, it is perhaps more concerning that one in five manufacturing firms now report cutting or postponing capital expenditures because of trade policy tensions.

Exhibit 1: Share of Firms that Cut or Postponed Capital Expenditures in the First Half of 2019 Because of Tariff Worries

We also find that tariff hikes and trade policy tensions now exert a larger negative impact on gross U.S. business investment. Exhibit 2 uses SBU data on whether firms changed their capital expenditures due to trade policy tensions and, if so, by how much and in which direction. Column (1) reports the average percentage impact in the sample, where we weight each firm’s response by its capital stock value. To estimate the dollar impact of trade policy developments in column (2), we multiply the weighted-average percent change by actual U.S. business investment in the first half of 2019, which yields an estimated effect on U.S. business investment of about minus $40 billion.

Here is an interesting correlation which is supportive of Altig et al.’s views.

Figure 1: Log nonresidential fixed investment detrended using Hamilton’s procedure (blue, left scale), and Trade Policy Uncertainty (red, right log scale). Light orange shading denotes period during which China has retaliated against US Section 301 tariffs. Source: BEA,

Note that trade policy uncertainty as measured by Baker, Bloom and Davis rose substantially above the 1985-2016 average in the first quarter of 2018, when Mr. Trump declared his intent to impose sanctions under Section 232 and Section 301.

The increase in trade policy uncertainty is associated with an increase in global economic policy uncertainty. The correlation is much less marked for economic policy uncertainty and the global index.

Figure 2: Log US trade policy uncertainty categorical index (red, left scale), and log global economic policy uncertainty (green, right scale). NBER defined recession dates shaded gray. Orange shading denotes period in which China retaliates against US Section 301 tariffs. Source:, NBER, and author’s calculations.

If you want to scare yourself, plot the trade policy uncertainty index unlogged…

21 thoughts on “The Trumpian World as Natural Experiment

  1. pgl

    ” Average tariffs on Chinese imports now stand at 21 percent, up from 3 percent in March 2018.”

    The 2nd sentence of David’s post made me gulp. That is a yuuuge change in policy.

    Of course, the Trumpsters will likely argue that David (an excellent center right economist) is one of those “never Trumpers”.

  2. Moses Herzog

    I was kinda hoping Gita Gopinath would get that job of Managing Director for IMF. She’s certainly a hell of a lot more qualified for the job than Lagarde EVER was. Maybe it’s a figurehead job mostly tied into public relations that she doesn’t want to get into anyway. It’s probably all for the best as far as Gopinath’s concerned. Keep it honest and tied to the work instead of all the lying the managing director is apt to get into. Just like “our patron saint” Jerome Powell.

  3. Moses Herzog

    This is broadcasting on PBS tonight I think:

    America hasn’t always done good or benevolent things in our wars overseas. Sometimes we have done more harm than good. Both in a policy sense and in a humanitarian sense of wasted lives. Turning our backs on and backstabbing the heroic, lionhearted, indomitable, and ballsy Kurdish soldiers and populace is the most recent example of America’s legacy of sometimes horrific and shameful military decisions. donald trump’s decision to tuck tail and run like a coward caused hundreds of unnecessary deaths of women and children, that Republicans would be harping on right now if we had a Democrat President. But now they just act like nothing happened and belittle the risks Kurdish soldiers took to save Americans risking their lives and also giving us useful military intelligence when circumstances allowed. But here is the deal: If your country requests (orders??) you to go overseas and risk your life for your nation (be it the Chinese government, Korean government, Vietnamese government, Canadian government, Israeli government, Ukrainian government etc) then you are entitled to a large degree of respect, and a “thank you” in terms of good quality health care, pension, a lifetime of kudos etc.

    I’ve watched this near 10 times now, and every time I watch this story about the Vietnamese father jumping out of his chopper I get a lump in my throat, I am not ashamed to say it:

    Here’s the longer version, you’ll have to “sign in” because it’s war footage I guess. Was all broadcast before on regular antenna TV but whatever:

  4. joseph

    Sorry, but “natural experiments are irrelevant. As Kellyanne Conway stated, Republicans have “alternative facts”.

    We knew this from day one of the Trump administration when Trump and his press office insisted that his inauguration crowd was the biggest ever. And true believers like Rick Stryker leaped up to deny what everyone could see with their own two eyes.

    More recently true believers are instructed to “Read the transcript! It’s perfect!” and deny what they see with their own two eyes.

    1. pgl

      Speaking of KellyAnne Conway:

      Conway then oddly compared the impeachment inquiry process to how high school cheerleaders are asked to prom. “That’s how the cheerleaders find out which one of them is going to be asked to the prom by the quarterback — he said, she said, he said, he thinks, I interpreted,” Conway said. “CIA does not stand for conjecture interpretation and assumptions. What are we doing?”

      I bet KellyAnne never got to go to the prom as all the boys in her high school thought she was too disgusting to date!

      1. Moses Herzog

        I’m guessing she was actually pretty attractive in her high school days, but rather the “mean girls” type and a little catty. But then I was the guy that didn’t attend his school’s prom so maybe I’m talking out of turn here. It is fascinating that the woman frames important issues in terms of “the cool kids” in high school. I think she is one of those who is still fighting these battles in much the same fashion (as high school age people), as she views her position on the outside regions of trump’s solar system as dating the QB. I think the accusation of “projection” of one’s own faults on others is often overused in recent years in verbal or text sparring. But I do view Conway’s statement regarding cheerleaders as kind of the textbook example of projection of her own psychology onto others.

  5. tom

    The second natural experiment assumes (i) an expansionary policy (but tax cuts for the rich largely fail to stimulate much C or I) and (ii) we are now at full employment (but evidence of that in wage or price inflation, or in the profit share, is scant). Seems to me we have yet to experience a test of the hysteresis running in reverse?

    1. Menzie Chinn Post author

      tom: Agree that this particular point subject to observational equivalence. Could be the nature of the stimulus (although there is a lot of pure spending increase relative to baseline in the Bipartisan Budget Act) instead of being at full employment.

  6. pgl

    Bolton needs to testify under oath:

    “Former national security adviser John Bolton derided President Donald Trump’s daughter and son-in-law during a private speech last week and suggested his former boss’ approach to U.S. policy on Turkey is motivated by personal or financial interests, several people who were present for the remarks told NBC News.”

    So it is more than selling out Ukraine to get dirt on the Bidens! Turkey? Is this why Trump sold out our Kurdish allies?

  7. Moses Herzog

    You can’t say that Mike Pompeo isn’t running a very efficient and well-oiled machine with his State Department.

    Obviously Pompeo is not going to be fooled by what’s going on with Giuliani and donald trump’s Ukraine policy. Although Mike Pence may wish he had personally made the hiring of this lady so it would have bolstered his bozo clown claims of not reading his own staff memos on the Zelensky phone call more believable.

  8. Moses Herzog

    Interesting news on Jim Jordan who will lead the trump bribery hearings for the Republicans on TV this week. His sole objective will be muddying the waters with conspiracy tropes. (Warning: there is a reference to vulgar/deviant behavior in a public setting (a college campus I assume) mentioned in the MSNBC video, if that could emotionally upset or offend you, then do NOT click on the link)

    1. pgl

      Brucie is about to get fired by his master. Yes Brucie does not get that the FED is signaling no interest rate cuts anytime soon which will send Brucie’s master into a twitter rage. Hey Brucie – given that the court jesters surrounding Trump are all incredibly incompetent and rather dumb, we have to congratulate you for being the head court jester. It is a shame Trump will fire you for this one!

    2. pgl

      Evan is more concerned about rising inflation which means he is opposed to Trump’s call for lower interest rates. It is right there in the title of the latest from Brucie boy. Just wow – Brucie boy cannot even phathom the meaning of the damn TITLE of what he linked to. And we thought CoRev was dumb!

    3. pgl

      What did Charles Evans really say?

      ‘The Federal Reserve voted 8-2 to cut interest rates by a quarter percentage point at its October meeting to a target range of between 1.50% and 1.75% but signaled it would only lower rates again if there is a material deterioration in the U.S. economic outlook. Evans did, however, point out that the current level of interest rates, in his view, would not be appropriate should there be a future negative shock to the U.S. economy.’

      This is quite contrary to the cherry picked quote Brucie boy fed us. Yes – every time Brucie pulls this stunt, read the whole link. Brucie is even less honest than Donald J. Trump this way.

      1. Bruce Hall

        but signaled it would only lower rates again if there is a material deterioration in the U.S. economic outlook. . Uh-huh. So, if the Fed raises rates, that’s fine tuning, but if the Fed lowers rates a depression is at hand (if Trump is president)? Yeah, got it.

        1. pgl

          Come on Bruce – even you are not THAT stupid. Or maybe you are THAT incredibly dumb!

          Powell is doing the right thing. But I was referring to Trump politicizing the FED to do his bidding even if it is the wrong macroeconomic policy at the same. I would think even the dumbest dog on the planet would get this simple point but you do not get it? I can see why all the dogs in your neighborhood at laughing at you!

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