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

Summary:
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

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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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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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