Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Algorithm Finds No “Trump Effect” on the US Economy, at Least Not Yet
So imagine an alternate reality where Hillary Clinton campaigned a bit more vigorously in supposedly safe Big Ten blue states and eked out a narrow Electoral College victory. So, no President Donald Trump. And also no tax cuts, no deregulation, no trade war. How would the US economy — which Trump describes as “stronger than ever before!” — be performing right now? Or to put it another way: Is there an economic Trump Effect?
Well, not so much, according to “Stable genius: Estimating the ‘Trump effect’ on the US economy” by researchers Benjamin Born, Gernot Müller, Moritz Schularick, and Petr Sedlácek. Their conclusion: “The impact of President Trump on the macroeconomic performance of the US economy has been negligible so far. We measure neither an acceleration of growth nor increased job creation in the US economy relative to an appropriate benchmark.”
With no ready access to the multiverse of the Quantum Realm, BMSS tried a rather clever approach to this economic “what if” question. First they let an algorithm construct a “doppleganger” of the US economy by selecting a weighted combination of other advanced economies (with higher weights attached to Canada, the UK, Denmark, and Norway). This twin rhymed the US economy over the past twenty years, and served as a control for the experiment. They then compared the path of the US economy since the election of Trump to its doppelganger that did not get the “treatment” of electing Trump. And this was the result:
From the BMSS analysis:
The main result can be easily spotted visually – there is no acceleration of the US economy relative to the doppelganger. If anything, the doppelganger outperforms initially and by mid-2018 there is no discernible difference. It is important to stress that the doppelganger has been constructed exclusively on the basis of observations prior to the vote. And yet, the doppelganger tracks the behaviour of the US economy very closely after the vote as well. This means that the US economy behaves just as it did before the election. Trump, in other words, was immaterial for US growth. The doppelganger grew just as fast. This result stands in contrast to the substantial effects that the synthetic control method helps uncover in other situations. For instance, in our analysis of the Brexit vote we find a large and significant effect on UK GDP. In the seven quarters after the referendum, UK GDP declined relative to its doppelganger by close to 2%.
Now to be fair, what this experiment is trying to test is the impact of Trump on the economy vs. a sort of status quo — not the possible economic policies of Clinton. But that said, the result really isn’t that surprising. The tax cuts passed only late last year, deregulation takes a while to move from press release to implementation, and the US vs. the World trade war is only now really gearing up. It’s notable that in testimony yesterday Federal Reserve Chairman Jay Powell seemed reluctant to give fiscal policy much credit for what’s been happening in the economy. (And let’s not forget this is perhaps more accurately the Bernanke-Yellen-Powell economy.) Overall, this has stayed a Two Percent Economy under Trump, and good luck finding a big difference in job growth pre- and post-Trump’s election:
Now all that may change as the stimulus from the tax cuts and federal spending increases causes a growth surge, as both Washington and Wall Street are predicting. But even then, we won’t really know if Trumponomics is working. The goal isn’t supposed to be a sugary surge but rather a long-term, structural supply-side change in the economy’s growth potential. The tax cuts, for instance, aren’t meant to merely give consumers more spending money today but accelerate growth and raise wages by boosting investment and productivity. That will take time, though maybe we are starting to see signs of that investment upturn. For now, though, both proponents and skeptics should probably hold their fire and avoid making any big, sweeping conclusions.
Published in Economics
I beg to differ. I’m not talking about using growth rates and employment rates as trailing indicators of the economy. I’m talking about measuring confidence and investment, which can be and are measured in near real time. If you wait five years, measure the growth rate, and then go back in time to explain what caused it, you can make the data fit any explanation you want to give. That’s why after 80 years, macro-economists still can’t come close to agreeing on what caused the Great Depression or what got us out of it.
BTW, nobody should get too excited about the upward curve at the end of my trend line. The data is still inconclusive. This kind of data is best fit (smoothed may be a better description) by a polynomial. With data of this nature, odd ordered polynomials will end with a positive slope and even ordered polynomials will end with a negative slope. Which you select makes all the difference in what this data “says” about 2018.
One should also ask how accurate is the measure. From 2015 to 2018 the oscillation has been between 62 to 63. When we measure this do we have the accuracy to feel confident 62.6 is actually different from 62.8?
Edit: Curse you phone auto correct!!
Right, so the actual economy hasn’t been measurably goosed. Yet. There are a lot of things that could hamper or nullify the confidence and investment over the few years: a trade war, poor fiscal policy, the housing market bubble bursting again.
To clarify, this is Labour Force Participation Rate?
Yes.
Right. As they say, past performance is no guarantee of future results. But I think you’re mistaken about calling certain measures the “real” economy. If there is one thing that drives the macro-economy more than anything else, it is confidence (or lack thereof). That’s why econometric models do not work and cannot work. There is no model that can predict human greed or fear on a mass scale. Nothing can accurately predict what is going to happen tomorrow. But we can get an idea of what is happening right now.
Just to clarify by real I mean it in the econometric fashion of adjusted for inflation.
That’s why we look at trends. The assumption, upon which I won’t pass judgement here other than to say econometrics is akin to voodoo, is that measurement error averages out over time.
… reductions in red tape boosting new business creation, reductions in corporate taxes boosting corporate investment, low unemployment boosting take-home pay …
That is the hope. But it makes analysis of the present tricky because you don’t have much of a trend to look at. From a science and data perspective I find this all very fascinating and frustrating. If you do see some change in trend how do you know what to attribute it too? You could say it is Trump, but how do you falsify that hypothesis? To know it was him and not something else?
Believe it or not, this just came up in another thread.
I’d say that great minds think alike, but the CoC prohibits me from casting aspersions upon @arahant.
… outside of The PIT.
Yes, and here’s another one, courtesy of @cm (Altar Girl):
A mathematician, a theoretical economist, and an econometrician are asked to find a black cat (who doesn’t really exist) in a closed room with the lights off. The mathematician gets crazy trying to find a black cat that doesn’t exist inside the darkened room and ends up in a psychiatric hospital. The theoretical economist is unable to catch the black cat that doesn’t exist inside the darkened room, but exits the room proudly proclaiming that he can construct a model to describe all his movements with extreme accuracy. The econometrician walks securely into the darkened room, spends one hour looking for the black cat that doesn’t exits and shouts from inside the room that he has caught it by the neck.”
So going back to what I was saying earlier, a) You can’t place faith in economists’ models in the best of circumstances, but b) when the authors of those models have demonstrated clear bias against one of the subjects of that model which can be made to say anything they want it to say, it’s hardly an ad hominem attack to mention it.
Indeed, the model here itself could be seen as a thinly disguised ad hominem attack, designed only to add to the anti-Trump fears and prejudices. So thinly disguised that I, not only not an economist but a Blonde Person to boot, saw through it instantly.
The whole thing stinks to high heaven. And personally I couldn’t care less what this guy thinks:
I’ve heard the black cat in a dark room joke before but when I heard it it went like this.
Science is like looking for a balck cat in a dark room, philosophy is like looking for a black cat in a dark room but there is no cat, and Marxist philosophy is like looking for a balck cat in a dark room, but there is no cat, but you shout that you have cought it.