Trump’s Economy Is Plagued by Even More Uncertainty Than Obama’s

(Bloomberg Opinion) -- Economic growth in the U.S. is slowing. There are lots of possible reasons for this, but one that probably deserves more attention than it has gotten is that uncertainty emanating from Washington, and in particular from the White House, is becoming an economic drag. From his saber-rattling on trade to his threats of a government shutdown over the border wall to his browbeating of the Federal Reserve to his unending stream of obstreperousness on Twitter, President Donald Trump certainly has been the source of lots of headlines that might cause one to wonder what's next for the economy.

Back in 2010, you may remember, business groups and conservative (and centrist) pundits argued that “policy uncertainty” under President Barack Obama was holding back the U.S. economy. A lot of this seemed to be just a new way of getting in partisan digs and complaining about regulations that one didn't happen to like: “Such a broad, sweeping bill epitomizes a law with unintended consequences that creates more uncertainty for American businesses,” U.S. Chamber of Commerce Chief Executive Officer Thomas J. Donohue said upon passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One could just as easily argue that the law reduced uncertainty by restricting certain financial behaviors.

Still, economists Scott R. Baker, Nicholas Bloom, and Steven J. Davis opted to take the uncertainty talk seriously, assembling an “economic policy uncertainty index” based on searches of newspaper archives for certain terms, as well as measures of tax code changes and disagreement among economic forecasters. In a 2011 paper they reported that, measured this way, policy uncertainty had indeed been pretty high in 2010. They also reported finding evidence of correlation between their uncertainty index and economic activity, “with some suggestive evidence on causation.” In a 2015 revision they emphasized the difficulty of teasing out that causality, concluding that:

Our findings are broadly consistent with theories that highlight negative economic effects of uncertainty shocks. The magnitudes of our estimated effects suggest that elevated policy uncertainty in the United States and Europe in recent years had material harmful effects on macroeconomic performance.

So yes, economic policy uncertainty may hurt the economy, but a weak economy also seems to create economic policy uncertainty. In any case, the issue lost a lot of its political salience in the years after 2010, when the biggest source of economic policy uncertainty in Washington became the new Republican majority in the House of Representatives. The debt-ceiling standoff of summer 2011 drove the uncertainty index to new heights, and it stayed elevated through the standoff of 2013. After that, things quieted down until the 2016 election campaign. Lately, they've been getting really interesting.

Policy uncertainty in the U.S. hit a new all-time high in January, surpassing the record set immediately after the debt-ceiling standoff of 2011. It's declined since then, but is still at levels similar to those of 2010. President Donald Trump's trade brinkmanship has driven a lot of the increase. Baker, Bloom, Davis, and Kyle J. Kost reported in a 2019 paper on equity market volatility that 26% of newspaper articles on the stock market's December 2018 fluctuations referenced trade policy.

But while policy uncertainty is high in the U.S., it's even higher around the world, with the Baker-Bloom-Davis global economic policy uncertainty index climbing to previously unscaled heights.

The fact that the global uncertainty index is 70% higher now than it was during the worst global financial crisis in generations does make one question its relevance a little. I asked Davis, a professor at the University of Chicago's Booth School of Business, if this disparity was because the financial crisis emanated from the U.S., while the current sources of uncertainty were more widespread, and he replied via email with a “yes” and a list of seven culprits:

U.S.: Trade policy, tensions with China, tensions with allies

China: Drift toward one-man rule, aggressive sovereignty claims, tensions with the U.S.

Japan: Trade-war crosswinds, deteriorating relations with South Korea

Europe: Immigration, Brexit, populism

Russia: Ukraine conflict, what's after Putin?

Turkey: Failed coup attempt, crackdown

Middle East: Syrian catastrophe, geopolitical conflicts involving Iran, Iraq, Israel, Saudi Arabia, Yemen,…

That's a lot to be uncertain about! One can see why the experts keep talking about a global economic slowdown. Then again, uncertainty was quite low both in the U.S. and globally in 2000 and 2007, only to give way each time to rising economic policy uncertainty levels and economic trouble the following year. The only thing worse than uncertainty might be misplaced certainty.

To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”