Economic Policies Under Trump Risk Undermining Economic Growth
In the initial stretch of President Donald Trump's second term, economic policy uncertainty has skyrocketed due to unpredictable tariffs and fluctuating policies - a pattern noticeable in the unprecedented 140.2% increase in economic policy uncertainty from October 2024 to February 2025. Notably, a hike in economic policy uncertainty usually signifies a slower economic growth pace.
Scholars from Chicago, Northwestern, and Stanford University have meticulously probed economic policy uncertainty, using data from news reports, disagreements among economic forecasts, and future tax code expirations to construct an index that reaches back to 1985. By comparing this index to other monthly economic indicators, they've unearthed fascinating insights.
A few essential elements are crucial when dissecting this index and its implications for the economy:
- Volatility: The index frequently experiences significant fluctuations, so it's essential to study long-term averages to draw valid conclusions.
- Historical Trends: Over the past 20 years, economic policy uncertainty has incessantly risen, necessitating the use of 12-month changes rather than the absolute index levels to avoid skewed comparisons.
- Timing: The consequences of heightened uncertainty generally manifest with a delay; businesses might postpone investments, while consumers could defer purchases, but such changes don't occur overnight.
- Baseline: To gain an accurate understanding, it's crucial to compare changes in economic policy uncertainty to pre-pandemic levels, specifically from January 1985 to February 2020. During this period, the typical 12-month growth rate of the Economic Policy Uncertainty index was 0.4%.
After analyzing key economic indicators such as payroll employment growth, industrial production, and consumer spending, researchers found slower growth during the subsequent 12 months following periods of above-average economic policy uncertainty. For example, payroll employment growth was 0.8% lower in the year after heightened economic policy uncertainty, potentially causing close to 480,000 lost jobs.
Moreover, industrial production and consumer spending also exhibited slower growth rates after episodes of heightened economic policy uncertainty. In summary, muddled economic policy, as experienced during the discussed period, might unintentionally impede economic growth, potentially leading to fewer jobs and other negative consequences.
- Scholars from Chicago, Northwestern, and Stanford University have analyzed economic policy uncertainty, using an index constructed from news reports, disagreements among economic forecasts, and future tax code expirations, which reaches back to 1985.
- A study comparing this index to other monthly economic indicators revealed that industrial production, consumer spending, and hiring showed slower growth rates after episodes of heightened economic policy uncertainty.
- For instance, payroll employment growth was 0.8% lower in the year after heightened economic policy uncertainty, potentially causing close to 480,000 lost jobs, demonstrating the potential negative impact of muddled economic policy on economic growth.
