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A public policy blog from AEI
The Economic Policy Uncertainty Index — devised by Scott Baker, Nick Bloom, and Steven Davis — tries to measure policy uncertainty by looking at media coverage, the number of tax code provisions set to expire, and forecaster disagreement. The researchers have found a “significant dynamic relationship exists” between the index and the real economy, and that “foreshadows a decline in economic growth and employment in the following months.”
And, yes, the 2016 presidential election seems to have created a smidgen of policy uncertainty. CNBC’s Steve Liesman:
From the standpoint of creating economic uncertainty, the election of Donald Trump has been more tumultuous than the 1987 stock market crash and the 2008 financial crisis. Judged by the Economic Policy Uncertainty Index — devised by economists from Stanford, the University of Chicago, and Northwestern — the election of President Trump stands as the third-biggest source of uncertainty in the index’s 30-plus-year history. It is eclipsed only by the 9/11 terrorist attack and the battle over the fiscal cliff in 2011 in terms of generating doubt about future economic policy.
For further context, here is my AEI colleague Stan Veuger’s congressional testimony from earlier this year, which includes a brief roundup of the broader economic literature about uncertainty and the economy. (He also quotes James Madison’s words from Federalist No. 62: “Great injury results from an unstable government.”)
Anyway, all this is the other side of the Trump trade. Supposedly his promises of big fiscal stimulus stirred up pro-growth animal spirits, as reflected in a higher stock market.
But the shock election result also seemingly stirred up plenty of uncertainty — and the accompanying risks that Baker, Bloom, and Davis have identified. (And one might recall Republicans complaining about Obamanomics and uncertainty, such in this 2010 press release from then House Speaker John Boehner: “GOP Leaders Urge President Obama to Stop Creating Economic Uncertainty & Work With Business Community.”)
Certainly there is plenty of uncertainty about, say, the Trump tax plan. Or to put it another way, there is growing certainty that Republicans will not pass sweeping tax reform, and even a simpler tax cut is getting dicier. This from a new Goldman Sachs note (bold is mine):
The political outlook has changed considerably over the last couple of weeks. Two weeks ago, the House looked unlikely to pass its health legislation and the investigations involving the White House were largely background noise. Now, ongoing consideration of health legislation looks likely to postpone consideration of tax cuts for several months and the investigation into the Trump campaign’s conduct (and related matters) has clearly escalated. In light of the scant progress made on tax reform to date, the probability of a meaningful fiscal boost ahead of the 2018 midterm election had already appeared to be declining before the latest events, and has declined slightly further since. … In light of these developments, we are changing our fiscal policy assumptions. We already assigned a very low probability to comprehensive tax reform by 2018 but recent events make it even less likely in our view. Our base case has been that Congress would enact a reasonably simple corporate and individual tax cut, with incremental reform—limited base broadening and international corporate reform—that would reduce revenues by $1.75 trillion over ten years. … However, with little evidence so far that Congress is moving in the direction of a substantial net tax cut and the continued focus on revenue-neutrality we have seen from congressional leaders, we have reduced our assumption to $1 trillion over ten years, which reflects an expectation of a tax cut that could be considered close to revenue-neutral under the loose definition that congressional Republicans have been using. This could allow for a modest personal tax cut and, with a few budgetary offsets, a reduction in the corporate rate to 28%. We continue to believe that some type of tax legislation is more likely than not to be enacted in early 2018, but this is also now a much closer call than it used to be, in our view.
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