Tuesday, October 24, 2017

The best and worst of Trump matter little to the economy!

I have two long-held views on public policy making. One, even assuming the inevitable cognitive biases like hyperbolic discounting, we live in a world where the immediate takes disproportionate precedence over the long-term. This obsession with the immediate and present may be amplified by modern media and social networks. Whatever the reasons, we end up with ahistorical glorification or demonisation of people, incidents, ideas, and trends that are concurrent with us. Irrational exuberance or pessimism are the result. Such excessive attribution of credit and apportionment of blame blinds us to long-term underlying trends and factors that contribute to such shocks.   

Two, we attribute excessive importance to particular public policy levers in being able to influence long-term economic growth prospects. Governments, be it the Treasury or institutions like the Central Banks, are perceived to hold the keys to the economy. This sentiment becomes egregious during downturns, when governments are blamed for not only contributing to the downturn but also for not doing enough to restore growth. This leaves governments with a need to be seen to be doing something, even when important decision-makers realise the futility of such attempts. 

The best example of both these trends come from US politics and economy in the aftermath of the election of Donald Trump as President. Trump has occupied the centerstage in the cognitive universe of the liberals, demonised as being responsible for the demise of American growth and influence. Important historical trends like rapid convergence of developing countries like China, globalisation, technological disruptions, changing demographics, excessive financialisation, concentration of business activity, corporate rent-seeking, widening inequality, capture of democratic institutions, and so on are swept under the carpet. Trump becomes the punching bag for everything bad about America.  

Much the same applies to both the optimism and pessimism with Trump's economic policies. Matthew Klein points to the graphic below from a presentation by Jason Furman at the recent Peterson Institute Conference on Rethinking Macroeconomic Policy which should explain the need for more balanced assessments.  
In simple terms, the best effects of Trump's "positive" policies (tax cuts, regulatory easing, and public investments) and the worst effects of "negative" policies (protectionism, immigration restrictions, and deficit rise) are equally tiny as to be insignificant over the medium-term. 

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