The Federal Reserve recently decided to lower the federal funds rate 25 basis points, setting its target range to between 1.75 to 2%. Those supporting this move hope to bolster domestic investment and exports that have weakened due to slowing global growth and increasing uncertainty over U.S. trade policy. What was not mentioned as a factor in the Fed’s news release, however, was the partisan bickering that quantifiably contributes to policy uncertainty and also discourages domestic investment.
To sustain economic expansion, Washington politicians need to dial down the words and deeds that contribute to policy uncertainty. In light of impending impeachment inquiries, this will — of course — be difficult for both sides of the aisle to do. That’s especially true as we the approach to the 2020 presidential election.
Trade policy uncertainty and partisanship have increased substantially during the Trump administration. We no longer need to speculate or rely on anecdotal conversations with business leaders to determine the level of this uncertainty, because economists have developed indices that measure both over time. And they have used these indices to measure the impact trade of policy uncertainty and partisanship on economic activity in the United States and abroad.
Federal Reserve economists, for example, have developed a trade policy uncertainty index that dates back to 1960. Searching seven major newspapers for articles that discuss trade policy uncertainty, they isolated articles that used certain combinations of words associated with trade policy uncertainty. For example, articles that include uncertainty, tariff or anti-dumping would be included. The resulting article count is used to construct an index. The higher the index, the greater the trade policy uncertainty.
The average value of the monthly index, prior to the Trump administration, was a little more than 33. Since President Donald Trump has taken office, the monthly index has averaged almost 173, a nearly five and a quarter fold increase. The index variability is more than four times greater during the Trump years in office. This provides an objective measure of the dramatic increase in trade policy uncertainty under the Trump administration.
When the index is used to examine the impact on global economic growth, the researchers estimate that the dramatic rise in trade policy uncertainty during the first months of the Trump administration (the first half of 2018) led to a decline of .8% in global economic growth during the first half of 2019. Continued trade policy actions by the administration and the actual retaliation from China can be expected to depress global economic activity into 2020.
Businesses that engage in international trade are reasonably less likely to expand investment when future trade policies are unclear, slowing economic activity. Projects that look profitable under current trade policies may not be if retaliatory tariffs are put in place by our trading partners.
Not all the blame for weakening investment in the United States falls on the president’s shoulders, however. Partisan squabbles in the Congress also harm the economy. Economist Marina Azzimonti has constructed an index that measures partisan conflict, similar to the trade policy uncertainty index. Articles are identified by a keyword search of word combinations associated with partisanship, which are then counted and used to construct the index. A higher index implies greater partisanship in Washington.
How has it performed? From 1981-2016, the index averaged almost 106.5. During the Trump years in office, it averaged 153, a 44% increase, but it is actually less variable, suggesting a consistently high level of partisanship. Clearly partisanship has been greater than average during the Trump years.
As one might expect, this partisanship hurts the economy. Azzimonte finds, for example, the index increased 67% during the 2007-9 recession and estimates that this explains almost a third of the decline in corporate investment during the period. Using a more specific “trade partisan conflict index,” Azzimonte analyzes foreign direct investment models over the 1985 to 2016 period and finds a 10% increase in the index reduced foreign direct investment into the United States by 7 to 13%.
Declines in domestic and international investments harm the U.S. economy. If the president and Congress truly want to put Americans first, it’s time to end the trade wars and find bipartisan policy solutions.
As the current news cycle moves forward, you may not want to hold your breath.