If there’s a recession, would it be Trump’s fault?

The short answer is “probably not”. But this requires making some careful distinctions:

1. It’s possible that Trump’s policies might become so reckless as to create a “real shock” that is large enough to cause a recession. Say a massive all-out global trade war. That seems very unlikely.

2. More likely, Trump’s policies might create a real shock large enough to complicate the implementation of effective monetary policy. Think of the way that the housing bust complicated things for the Fed in 2006-08. In this scenario, it would still be the Fed’s fault, but it would be bad trade polices combined with a flawed monetary regime that led to recession.

In this second case, I still think it would be very important not to blame Trump for the recession. We are never going to fix the problem of bad monetary policy until we stop misdiagnosing the problem. Today, 99% of economists continue to misdiagnose what went wrong in 2008, absolving the Fed of blame for an excessively tight monetary policy. To fix that, we need to start talking honestly about what causes most recessions—falling NGDP, not real shocks. And we also need to implement a regime that prevents real shocks from spilling over and causing bad monetary policy—which means NGDPLT.

3. It might be argued that Trump is to blame because he appointed the top officials at the Fed, and they made serious policy errors. To be honest, I would not blame the Dems for blaming Trump for any recession. After all, he’ll take undeserved credit for anything good that happens, so it’s only fair. Nonetheless, impartial observers who want to get at the truth should be careful before blaming Trump for any Fed screw-ups. If a demand-side recession did occur, would it be because Powell, Clarida, Quarles and the others were poor choices, or because the Fed’s entire operating system is flawed, and has been for decades? Obviously, the latter is much more likely.

Some people blame Bernanke for the Great Recession, but Greenspan’s public comments during this period suggest that the Fed would have done even worse if he had still been chair. As long as we focus on personalities we won’t solve the underlying problem, which is a flawed monetary regime.

Hopefully, the Fed has learned from the mistakes of 2008.  But we won’t know for sure until the next real shock comes along—the next crisis that requires the Fed to take aggressive steps to stabilize expected NGDP growth.

Those suffering from TDS may find this post to be dispiriting.  It would feel good to blame Trump for any recession.  Don’t worry, the voters will always blame the government for recessions, no matter what I say.

Some people who like Trump may be surprised that I take this view.  If so, it’s probably because your thinking is corrupted by politics and you assume that everyone is similarly corrupt.  Just as habitual thieves assume that everyone else would steal if they could get away with it.

I’ve been very clear all along that presidents have very little impact on the business cycle. Trump has done some useful tax changes, and lots of bad policies in areas such as trade, immigration, deficit spending, global warming, promoting an unstable financial system, etc.  But none of that has much impact on the business cycle—those are things that impact long run trend growth.  That’s how the President’s impact on the economy should be judged.

PS.  I’m not currently predicting a recession, as I don’t believe recessions can be forecasted.


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16 Responses to “If there’s a recession, would it be Trump’s fault?”

  1. Gravatar of TravisV TravisV
    24. October 2018 at 12:36

    Prof. Sumner wrote:

    “Some people blame Bernanke for the Great Recession, but Greenspan’s public comments during this period suggest that the Fed would have done even worse if he had still been chair. As long as we focus on personalities we won’t solve the underlying problem, which is a flawed monetary regime.”

    That reminds me of a deeply misguided analysis Volcker just published in Bloomberg:

    https://www.zerohedge.com/news/2018-10-24/former-fed-chair-slams-feds-false-precision-over-2-inflation-target

    “Former Fed Chair Slams Fed’s “Dangerous, False Precision” Over 2% Inflation Target”

  2. Gravatar of TravisV TravisV
    24. October 2018 at 14:44

    Yglesias:

    “Regarding both Trump’s statements on Powell and Volcker’s new revelations about Reagan, Fed “independence” seems highly overrated to me.

    America would be much better off if Obama had pressured the Fed into a more pro-growth stance in 2015-2016.”

    https://twitter.com/mattyglesias/status/1055056228244697088

  3. Gravatar of Benjamin Cole Benjamin Cole
    24. October 2018 at 15:59

    Great post.

    If you look at the numbers, Trump’s Trade War is really something on the order of Trump’s Trade Tiffs. In relation to GDP, the tariffs are rather minuscule.

    It is surprising that Trump did not select a Fed chair who would do his bidding. Maybe nobody with any credibility wanted to be appointed by Trump. Jerome Powell was already at the Fed, so he could just slide over without really being selected by Trump, so to speak.

    The irony is that Trump may be right in his perception that the Fed is becoming too tight.

    Perhaps millions will become unemployed and business profits will suffer because a Paul Krugman could not bear to call up Trump and say, “I will print lots of money. Let me be the next Fed chair.”

  4. Gravatar of Marcus Nunes Marcus Nunes
    24. October 2018 at 16:10

    Creating a recession is mostly the Fed´s prerogative
    http://ngdp-advisers.com/2018/10/11/the-feds-monetary-policy-has-become-dysfunctional/

  5. Gravatar of ssumner ssumner
    24. October 2018 at 21:47

    Thanks Travis, I have a post at Econlog.

  6. Gravatar of dtoh dtoh
    25. October 2018 at 03:49

    Scott,
    If there is a recession, it will be your fault for failing to convince enough people of the merits of NGDPLT.
    :-)

  7. Gravatar of ssumner ssumner
    25. October 2018 at 05:39

    dtoh, I agree. I’m more important than Trump. :)

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. October 2018 at 09:00

    Didn’t someone once say that recession ‘is, always and everywhere, a monetary phenomenon.’?

  9. Gravatar of Brian Donohue Brian Donohue
    25. October 2018 at 09:40

    I know you think the Fed’s primary problem was being slow in 2008, but it seems to to the drive to push the FFR up to 5.25% in 2006 (“normalization”) was part of the problem. The economy was not overheating, the jobs recovery was weak, and inflation was running a bit hot, but a lot of that was really an oil price shock.

    What the Fed failed to realize in 2005 was that the “new normal” for interest rates was a lot lower than historical levels. They were targeting a world of “old normal” interest rates, and trying to “build up ammo” ahead of the next recession (a flawed notion once you understand that monetary policy can be effective at the ZLB anyway).

    In retrospect, if the Fed had been content to leave the FFR at 4%, where it was in late 2005, it would have reduced the risk of moving too slowly in the opposite direction when the economy faltered.

    I don’t see a 5.25% FFR returning for the next couple decades, yet the “build up ammo” argument continues to get play. New normal, people!

  10. Gravatar of Philo Philo
    25. October 2018 at 10:34

    Here you are writing as if the Fed’s policy goal should be to stabilize the growth of NGDP. That’s fine with me, and I wish you always expressed that view. But elsewhere you have written as if the Fed should aim at their prescribed and acknowledged goal–low and stable inflation together with full employment. These are not far apart from each other, but they are not identical.

  11. Gravatar of Ralph Musgrave Ralph Musgrave
    25. October 2018 at 12:11

    Scott says “…we need to start talking honestly about what causes most recessions—falling NGDP…” Falling NGDP (as long as it falls far enough) is the DEFINITION of a recession, surely, not the cause.

    As to whether Trump’s policies “complicate the implementation of effective monetary policy..”, they look like having the OPPOSITE effect in that his big deficits will lead to interest rate rises, which in turn means interest rate cuts will be easier come a recession. But therein lies the central absurdity of monetary policy: to be able to cut interest rates, they first have to raised to an artificially high level, with mortgagors and other borrowers paying more interest than they need for years on end.

  12. Gravatar of Don Geddis Don Geddis
    25. October 2018 at 18:33

    @Ralph: “Falling NGDP … is the DEFINITION of a recession, surely, not the cause.”

    Wrong. It is falling RGDP — not NGDP — that is (part of) the definition of recession.

    Nobody would call falling NGDP together with robust RGDP growth, a “recession”.

    Also: cutting interest rates is not necessary for monetary stimulus.

  13. Gravatar of Ralph Musgrave Ralph Musgrave
    25. October 2018 at 19:47

    Don,

    The only circumstance where NGDP can fall while RGDP rises is where prices are falling. But that’s pretty unlikely given your “robust RGDP growth”. Thus for all practical purposes, stable or falling NGDP tells you there’s a recession.

    Re your point that cutting interest rates is not needed in order to implement monetary stimulus, I realize that. E.g. helicopter drops are an alternative: certainly heli drops contain a big monetary element (though it can be claimed they contain a significant fiscal element). But that does not detract from my point that monetary policy is easier given high interest rates: reason being that interest rates can be cut!

  14. Gravatar of ssumner ssumner
    26. October 2018 at 20:32

    Brian, I don’t think money was too tight until the end of 2007.

    Philo. There is no conflict. The Fed’s goal should be NGDP. But given they’ve chosen inflation, they should try to hit their target.

  15. Gravatar of Steve F Steve F
    27. October 2018 at 13:52

    Rational expectations says that Trump certainly deserves some credit and blame for the state that the economy may be in.

  16. Gravatar of bill bill
    29. October 2018 at 03:57

    Presidents deserve little to no credit for a good economy. Certain fiscal measures that gradually balance the budget do make the central bank’s job easier, so some credit is possible. But Presidents can certainly do things that make the job much more difficult and increase the chances of a recession. So most recessions will not be caused by the President, but it is imaginable that a President could make one more likely.

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