Don’t be biased (It won’t be Trump’s fault)
How many pundits believe the following three things:
1. Trump is despicable, by far America’s worst President ever.
2. Trump’s trade war is stupid and hurts the economy.
3. If there is a recession in the next few years, it most likely will not be Trump’s fault.
I sometimes wonder if I am the only one who believes all three things, but perhaps there are a few others.
Most people engage in motivated reasoning, believing what they want to believe. I’d certainly like to believe that any recession is Trump’s fault, but I try my best to stick to the logic of my analysis, which says:
1. Most recessions are caused by tight money.
2. Presidents have little impact on the behavior of the Fed, even via appointments.
That’s not to say Presidents have zero impact. The trade war obviously makes the Fed’s job slightly harder. But if we make the mistake of blaming anyone other than the Fed for a demand-side recession, then we’ll never solve the problem. Now if we had a recession despite stable NGDP growth (a real shock) that would be another story. But I don’t expect that to occur.
Ironically, some of Trump’s defenders insist that appointments to the Fed are very important, and even that Ben Bernanke is personally responsible for the 2008 recession. Those Trumpistas will be forced by their logic to blame Trump for any Fed screw-ups. After all, he picked Powell.
Will they follow their logic?
In contrast, I believe the Fed has a lot of institutional inertia, that it follows the zeitgeist, and that no single appointment is all that consequential.
PS. Here’s Yahoo:
The fallout from recent escalations in trade tensions could drag global economies into a recession within a year, according to at least one major Wall Street firm.
If the U.S. were to move forward with imposing a 25% rate of tariffs on about $300 billion worth of Chinese imports, and China were to retaliate, “the global cycle will be at risk,” Morgan Stanley chief economist Chetan Ahya wrote in a note Sunday.
“We could end up in a recession in three quarters,” he said.
A recession may or may not occur (I doubt it), but either way it won’t be Trump’s fault.
PPS. I’m not claiming to always avoid motivated reasoning, just that I try to avoid that sort of bias. You should too.
PPPS. I have a new post at Econlog discussing the optimal NGDP growth rate.
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16. June 2019 at 14:20
1. Despicable? I think that’s relative. Worst President ever? Definitely not. I’m inclined to think people who say this are fanatics.
2. Trump’s trade war is stupid and hurts the economy? Definitely disagree. The Chinese government is a huge threat too humanity. (BTW – I’m riding in Uber right now so I decided to do a quick poll on this subject. My driver, a Tibetan it turns out, heartily agrees with my assessment.) I don’t think the U.S. should trade with China period. As to trade wars in general, I don’t think you can know definitively. If it’s free trade and investment (not the case with China), restrictions/tariffs, would almost certainly reduce output. If you’re talking about utility, it’s much harder to know whether a trade war is good or bad. In general, I don’t favor a policy which allows some people to buy cheaper trinkets at Walmart when it destroys the lives and livelihoods of other people.
3. Would a recession be Trump’s fault? If he causes a supply shock and the Fed doesn’t fix it, whose fault is it? Not sure. Seems like the blame should be shared. I mostly blame economists though. A President generally doesn’t have the qualifications to know who would make a good Fed member. Economists should know but mostly they don’t really understand monetary policy so there’s no consensus for a President to rely on. The economists who do understand monetary policy give the Fed a free pass even when they’re doing a terrible job.
So I guess I disagree on all your points.
As to motivated reasoning, I’m a rationalist so it’s quite easy for me. I just believe in what is true. 🙂
16. June 2019 at 15:17
How many Herman Cains or Stephen Moores would it take for your opinion on 3 to change?
I agree on 1 and 2.
16. June 2019 at 15:28
Excellent blogging.
The math for the Trump tariffs causing a global recession is not convincing. We are talking about tariffs on a portion of trade between just two nations. Let us also propose that a rodent can tackle a buffalo and bring it down to earth.
By the way, Foxconn already said it is prepared to produce iPhones entirely outside of mainland China. Samsung makes smartphones as well.
The world’s steel and aluminum industries are glutted with capacity, as are most manufacturing industries.
The idea that there are irreplaceable supply chains chiseled into granite, that extend only into mainland China, is a red herring.
The world’s multinationals have formed an alliance with the Communist Party of China to create a huge manufacturing base in China, one that they want to protect.
Multinationals can pour unlimited funds into academia, media, think tanks, lobby groups, trade groups, and even political campaigns. It appears they have been effective at fear-mongering.
In Europe, Japan and the United States, central banks are missing their (already too low) inflation targets on the low side.
It is unwarranted tightness by the globe’s major central banks that is causing a global economic slowdown. As Sumner says, central banks thrive in inertia. It is unwise to leave central banking to central bankers.
16. June 2019 at 16:10
The numbers all seem to indicate you’re correct, as you’ve framed the issues, but I think Trump will be somewhat more responsible for a recession that occurs during or shortly after his term. This is because I think the Fed’s job right now is harder than you indicate, given some other potential global sources of real and nominal shocks. One big potential source for such shocks is the EU.
I think a competent central bank could deal with these issues rather easily, but that’s not the kind of central bank we have. I think these stupid trade shocks, with Trump’s stupid, irratic foreign policy, combined with Trump’s very public pressure on the Fed are increasing the likelihood of a Fed mistake. I think this Fed would be stressed enough with potential shocks out of Europe, without the Trump trade wars making things worse.
Given the Jared latest Fed language, I’d drop the risk of recession down to about 36% over the next two years, down from 50%. On averwge, the blind probability of recession in any given year is about 18% since the Fed was founded.
16. June 2019 at 16:41
I basically agree with dtoh on all three points.
1. Despicable? Maybe. Worst ever? Surely not (so far).
2. Trump’s actually a softie. He should listen to the democratic dissidents more. They favor his trade war as well.
3. The blame should be shared. And picking Powell (instead of you) is his mistake as well.
One could even argue that the Fed has been like this for years. Trump is the recent factor that has changed, so his share of the blame might be even more than 50%, because he should have known what the Fed is up to.
He also calls himself a “low interest rates”-guy but then favored people like Cain and Moore. That’s extremely lazy or mad, or both.
16. June 2019 at 18:03
If there is a recession it will be the Fed’s fault, but Trump’s actions are making a Fed error more likely. I guess that’s essentially the same thing as what you said. We need a monetary policy regime change so that this is no longer true.
17. June 2019 at 00:19
1. No. If Trump is the worst, certainly not “by far.”
2. The tariffs are dumb but the impact on the economy has been very small. I highly doubt a trade economist would disagree.
3. Correct.
17. June 2019 at 03:32
OT but interesting from IHS Markit:
“Declining bond yields
According to Tradeweb data, at end-May 48% of the Eurozone government bond market traded at negative yields, the highest proportion since late 2016. During May, the stock of negative-yielding Eurozone debt rose from EUR3.44 trillion to EUR3.71 trillion. On 31 May, the Netherlands’ 10-year bond entered the negative-yielding group. On the same day, Germany’s 10-year Bund closed at -0.20% yield, an all-time low, breaching the -0.19% established in July 2016. On 5 June it traded as low as -0.23.
The rally also extends to Europe’s periphery, with Greece performing particularly strongly ahead of its anticipated general election. Greece’s 10-year yield fell to 2.88% on 3 June, having been at 3.43% on 23 May.”
—30—
Certainly negative yields belong in the a central-bank tool-kits, and does QE. The ECB also does something called TLTROs.
There is a squeamish hysteria in central-banker circles against both fiscal deficits and money-financed fiscal programs. The ECB now wants to beat up on Rome for missing fiscal targets. Athens complied with ECB myrmidons, and their GDP shrank 25% and never recovered.
Really, how long can we watch the Bank of Japan and the ECB flounder before wondering if more needs to be done?
17. June 2019 at 04:37
dtoh, you’re using an emotionally charged hypothetical about trade, but when weighing benefits to consumers versus loss to producers, we should try to quantify things. Every study of particular tariffs enacted in recent years I’ve seen comes out to a consumer bill of at least high-six-figures per job saved. High six figures, especially when spread out among many consumers, almost certainly increases utility far more than one, probably poorly-paid, job.
17. June 2019 at 05:20
“1. Trump is despicable, by far America’s worst President ever.”
I believe Woodrow Wilson would like a word…
17. June 2019 at 07:43
I agree on points 2 and 3 (the first point is irrelevant). I am surprised to notice that less than 10% of our exports go to China—while 20 percent of our imports come from China.
Two things bother me about Trump critiques
1) Re China “Trade War”.I continue to wonder why few people, including you, fail to declare how damaging China’s “Autarky light” policy is for itself and the world—-it is as if only our policies matter—all in accordance with WTO rules. Still, we should always buy things that are cheaper, as it frees up money and capital to invest and/or consume other things. If Trump (who has said his ideal trading world is no tariffs anywhere—FWIW) believes he can force them to open markets—the end would be a plus–I think that is possible on the margin—but I still prefer to get cheaper things now.
2) Re: Point 1–( tried to not comment but impossible). From your comments one could infer that you would prefer a Sanders or a Warren (if that happens then Senate likely goes to Dems as well) over the worst President ever. I really do not believe you would prefer that.
Re:Fed policy. It is hard to describe how difficult it is to believe that Fed Policy is essentially the most important thing with regard to steady growth—but I choose to believe you. For a “central planner” Powell has shown pretty good instincts regarding taking advice from markets–we will see. I dislike those views that insist “we need an adult in the room” to ignore markets.
17. June 2019 at 08:50
Agree on 2 and 3, but not on 1. Woodrow Wilson was the worst President ever. Trump is uncouth and often incoherent. But Wilson was consequential in a way that Trump will not be. WWI and the federal income tax are much bigger deals than anything Trump is likely to do. Also on Wilson’s watch was the 17th Amendment, which really altered the character of our system. But that probably would have happened even if Wilson never existed, so he can’t really be blamed for it.
17. June 2019 at 09:15
Mark,
To me, it’s more of an ethical thing on trade. If someone offered me cheaper goods but it meant someone was going to lose their job and have their life totally disrupted, I wouldn’t take the savings even if I knew it increased aggregate utility.
If the changes take place at a reasonable pace and give people time to adjust, it’s a great thing. When politicians make sudden major changes to the rules (e.g. letting China into the WTO, letting Japan dump steel in the 70’s etc.) which totally wreck some people lives and wipe out communities, I don’t think it’s so great.
17. June 2019 at 09:15
dtoh, You said:
“A President generally doesn’t have the qualifications to know who would make a good Fed member.”
You’ve told us that monetary policy is “simple”. That it’s obvious they are making a mistake. Why can’t Trump see that? Why can’t he pick the doves he wants?
Trump told us he’d pick the best people. But the people Trump picks to work in his administration tell the press that Trump’s an idiot. So is Trump too stupid to pick the best people? Or is he picking smart people and they are correctly telling the press that Trump’s an idiot?
I happen to think that Trump’s picked some good people like Powell and Cohn, and some incompetent people like Navarro.
Right now the US is a far bigger threat to the world than China, which is not an imperialist power.
In any case, you are confused about Trump’s trade policies, which are not primarily motivated by worry about Chinese power, rather by the mistaken view that trade deficits hurt the US economy, a view that was discredited 200 years ago. That’s why he puts tariffs on our friends. He’s an economic illiterate who is opposed to free market capitalism, and indeed doesn’t even understand it.
As far as being “despicable”, it’s hard to see how anyone could not characterize a president who is very stupid, very cruel, and very dishonest in that way. What positive personal characteristics does he have? I don’t see any.
Jonathan, You mean how many people who failed to get approved by Congress? An infinite number.
Ben, You said:
“By the way, Foxconn already said it is prepared to produce iPhones entirely outside of mainland China.”
Very funny. Is that the same “Foxconn” that conned Wisconsin officials with a promise to build a big manufacturing plant in Wisconsin?
Michael, There is no doubt that Trump would be blamed. My point is that it’s more USEFUL to blame the Fed, as that’s the institution that needs to do better.
Christian, You said:
“And picking Powell (instead of you) is his mistake as well.”
You really are an idiot. I would be a horrible choice, and wouldn’t even accept the job.
cpayton, He’s the second worst.
Michael Rulle, You said:
“I continue to wonder why few people, including you, fail to declare how damaging China’s “Autarky light” policy is for itself and the world”
Maybe because it’s kind of silly to call the world’s biggest trading nation anything close to an “autarky”light”. Would you call the world’s heaviest drinker a “teetotaler light”. More seriously, I frequently criticize China’s statist policies. They should copy Hong Kong’s policy regime, except housing.
You said:
“If Trump (who has said his ideal trading world is no tariffs anywhere—FWIW)”
FWIW?!?!?!?!?
If Trump says it, it’s worth nothing.
You said:
“I really do not believe you would prefer that.”
Try paying attention to what I write. I do believe that.
17. June 2019 at 10:26
Worst ever? Worse than Wilson? Worse than Buchanan?
Come on be serious. How can Trump possibly be worse than Buchanan?
Grant says
“Floyd, the Secretary of War, scattered the army so that much of it could be captured when hostilities should commence, and distributed the cannon and small arms from Northern arsenals throughout the South so as to be on hand when treason wanted them”
Buchanan was literally a traitor. He conspired with rebels to overthrow the united states government.
17. June 2019 at 10:58
How would you go about quantifying your three bullet points above?
17. June 2019 at 17:49
https://www.jsonline.com/story/money/business/2019/06/17/foxconn-wisconsin-factory-plan-shows-trees-concrete-and-metal-walls/1482896001/
Scott Sumner:
The Milwaukee Journal Sentinel reported June 17 Foxconn has submitted plans for a 993,000-square-foot factory, for “village” approval in Mount Pleasant.
A million square feet is a big place. I ran a small furniture-making factory in about 3,000 square feet (plus outside yard). That is one honking big place, and they want to build it 48 feet high.
If you read the story above, Foxconn is asking for variances to get the building built, such as a height variance, while Mount Pleasant wants Foxconn to beautify the project, despite the fact it already has various functionally unnecessary visuals, such as hundreds of tree-plantings and a Japanese-style garden.
You will pull your hair out at the persnicketiness of your fellow cheeseheads!
For example,
“The (Mount Pleasant) staff also recommended that Foxconn be required to provide additional architectural detail along the east, west and northeast facades “to avoid large blank walls.” The detail could take such form as windows, building articulation or changes in materials or color, the staff said.”
—30—
So Foxconn is running into local obstacles, in getting a factory built in Wisconsin. Property zoning and deregulation issues.
What has that to do with Foxconn’s ability to produce iPhones outside mainland China?
Far from chastising Foxconn, should publish a rant against your former neighbors in cheesehead-land!
18. June 2019 at 02:31
Scott,
1. Monetary policy is simple except that monetary economists obfuscate it. Job security?
2. I honestly have no idea whether Trump picks good people or not. I suspect it’s probably the same level of mediocre talent that is always attracted to government jobs.
3. What makes you think Powell is any good? Have you ever looked at his resume?
4. Trump has a long history of commenting on China. I don’t think your characterization of his views is accurate.
5. Why do you think the U.S. is a threat to the world? In what way is it a threat?
6. I’m pretty good at distinguishing smart people from dumb stupid people. I’ve a had a lot of practice. I don’t think Trump is stupid by any means.
7. Why do you think Trump is cruel? Inconsiderate yes, but cruel?
8. People are so tired of politicians and the media parsing their words to deceive and obfuscate the truth and who expect their audience to be so dumb as to actually be deceived, that I think they regard Trump as an straightforward prevaricator much to be preferred to normal politicians. Complaining that a politician is dishonest is like complaining that the rain is wet.
9. Good qualities – Tenacious, self-confident, unflappable, practical, results oriented.
18. June 2019 at 02:44
Scott,
Regarding your post on Econlog
1. Don’t you think if you took away the inflation tax, government would just get the revenue through higher tax rates?
2. If you are not sure of trend RGDP, wouldn’t you want to err on the high side. You mention the issues with too low inflation. Wouldn’t it be worse to be a point low on inflation rather than a point high? Also wouldn’t a too high target allow you to better determine trend RGDP than a too low target.
3. Agree with you on zero bound.
18. June 2019 at 07:28
Monetary theory is fun, and apportioning credit/blame for the economy is fun, but at ground level, there is a current Fed meeting in progress, and “data-dependence” notices a 2.04% yield on the 10-year Treasury, so it would have been great if you had taken an actual interest and POV on actual monetary policy guidance recently, but hey it’s your blog.
18. June 2019 at 09:29
Dave, I would not even try. Life’s too short to waste vast amounts of time proving the obvious.
Ben, Check out what they originally promised, when $4 billion in subsidies were granted.
dtoh, You said:
“Don’t you think if you took away the inflation tax, government would just get the revenue through higher tax rates?”
Yes, but taxes on capital are less efficient that other taxes. I thought that was also your view?
You said:
“I don’t think Trump is stupid by any means.”
Then why does he put out stupid tweets almost every single day? Today he accused the ECB of adopting a policy of monetary stimulus. That policy will help the US. So why is Trump opposed? Why do his closest advisors say he’s like a kindergardener who has to be babysat all the time?
You said:
“Tenacious, self-confident, unflappable”
Being stubborn and delusional is not a good set of qualities to have for a bad man pursuing bad goals.
If people can’t see Trump for what he is, then I can’t help them. My God, the guy lies almost every time he opens his mouth! He’s utterly shameless. Sorry, but people like Obama and Bush were not like that. They lied at the normal rate for politicians. This has all been carefully documented by watchdogs, but I’m sure Trump defenders will claim it’s “fake news”, which is what they say about almost any criticism of Trump.
Brian, You said:
“it would have been great if you had taken an actual interest and POV on actual monetary policy guidance recently, but hey it’s your blog.”
It would be nice if you paid attention to my recent calls for monetary stimulus, but heh, it’s your life:
https://www.themoneyillusion.com/monetary-policy-is-becoming-too-tight/
18. June 2019 at 09:57
OK, this was May 23rd. Since then, Treasury yields have fallen another 30 basis points. For a guy who posts multiple times a week and thinks the Fed should monitor the situation daily, I assumed this development would merit a follow-up, maybe even taking a position on what the Fed should do right now, given there’s a meeting taking place as we speak and all.
18. June 2019 at 10:06
“But taxes on capital are less efficient” – Well yes I had thought about that, but…
1. The inflation tax is more like a wealth tax or a transaction tax. I haven’t thought this through, but that may not be such a bad thing (since it discourages inefficient use of capital) as opposed to a tax on returns on capital which is definitely a bad thing.
2. We don’t know what kind of tax we would get instead of an inflation tax. If it were a progressive consumption tax it would be a good thing.
3. I actually don’t ever read Twitter so I don’t know what he tweets, but maybe he does it just for fun to irritate Democrats and the MSM.
4. “They lied at the normal rate for politicians.” Seriously… that’s exactly the point I was trying to make. There’s a famous Japanese expressions 五十歩百歩 which was popularized after the battle of Sekigahara、and which means “When running away from a battle, 50 paces is the same as 100 paces.”
18. June 2019 at 16:30
You wrote:
“I frequently criticize China’s statist policies. They should copy Hong Kong’s policy regime, except housing.”
Copying Hong Kong’s policy regime doesn’t appear to be a top priority for the Chinese government at the moment…
You seem generally optimistic about China’s arc. Do you believe that the Chinese Communist party will loosen its grip on power and, if they don’t, do you think that China can continue to grow?
19. June 2019 at 10:29
Just here to document the Fed’s mistake today. Dipshit Krugman was wondering the other day about how low long term rates would even go, blissfully unaware that a rate cut would actually increase long-term rates.
We saw this in reverse today. Rates crept a couple BPs higher this morning, then plunged to new lows upon the announcement. 10-year is now at 2.04%- lowest since November 2016, when the FFR was at 0.5%.
This was the Fed blatantly ignoring clear signals from the bond market. Maybe Powell can scramble later this summer, but if we end up in a recession, here’s your smoking gun.
19. June 2019 at 13:13
Brian Donohue,
I wouldn’t necessarily conclude today’s fed meeting reduced NGDP expectations. The S&P 500 went up at least 0.2% after the meeting and fed fund futures seemed to signal rates will be lower than expected from the next meeting on. Immediately after the meeting VIX fell, gold rose, and the USD index fell. Can’t find any up to date data on the 5 year breakeven but I’m guessing it was basically flat.
The bond market has never made much sense with regard to long rates and NGDP expectations. Fed funds rate cuts really do lower long rates >50% of the time even if expected NGDP trend rises.
I don’t disagree the fed has been too tight the last 6 months though.
19. June 2019 at 22:13
“Those Trumpistas will be forced by their logic to blame Trump for any Fed screw-ups. After all, he picked Powell.”
I will partially blame Trump for the 2020 recession. Anyway, Sumner, this, from Stanley Fischer, seems like important evidence of economic sabotage by the Fed board (and much better sourced than many of these anti-Trump rumors you uncritically spout):
“Fischer also said there was a good chance the Fed wouldn’t have raised borrowing costs in December if Trump had been less vocal”
This is just plainly improper.
https://www.bloomberg.com/news/articles/2019-06-16/stanley-fischer-says-powell-out-if-trump-re-elected-in-2020
19. June 2019 at 22:15
China is not an imperialist power, but is well on the course to becoming one.
20. June 2019 at 10:52
Scott I thought a bit about what you wrote here:
“What positive personal characteristics does he have? I don’t see any.”
I despise Trump. I would nominate him for worst president ever. But I’ll try to say a few positive things, though I don’t know if they qualify as “personal characteristics.”
1. I believe the man wants to avoid war. And I don’t just mean personally by lying about bone spurs to duck Vietnam, I think he really wants to avoid getting us into another war. I don’t think he cares that people would die or about the suffering, he’s just an isolationist at heart. It’s simpler to just keep out of it. He sold himself to his base in part by claiming W lied about WMD to get us into Iraq. There’s a significant amount of his most loyal base that believes that too. Hell, I think there’s some truth to it too.
2. Also he hasn’t murdered any toddlers after raping them and played with their corpse afterwards. That we know of. Or rather he’s kept it to a minimum if he has, and he certainly hasn’t recommended the practice, so good on him for that.
20. June 2019 at 11:00
Qualifying what I wrote above. I think Trump wants to avoid war, but I also don’t think he’s bright enough to accomplish that necessarily. He may well box himself into a position that in order to save face (the most important thing to Trump is his ego) he’s forced to go to war.
I think he’s playing with fire with Pompeo and Bolton. I don’t think he likes their war talk, but he likes the “good cop, bad cop” situation. They’re the bad cops. They’re the dogs of war he could threaten to release, but he really doesn’t want to. They’re a bargaining chip. Only he’s too stupid to use them properly. He’s the one who’ll likely get used.