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The economic policies of the Trump administration risk triggering recession simply by the uncertainty they have injected into economic decision making. Let me explain.
I came to Rochester in 1991 to serve as chief economist at the Center for Governmental Research. The Chamber of Commerce engaged CGR to develop an annual economic forecast, a task that now fell to me. Having been a teacher of economics, not a practitioner, this was a new role. My predecessor’s sophisticated statistical model had a remarkable track record, predicting its targets—regional employment and other indicators—with remarkable accuracy. Humbled by the task, I dug into the whole business of forecasting and what drove the success of his model.
It turned out that predicting 1992 employment in late 1991 was not particularly challenging. Stripped of the apparent complexity of his statistical model, my predecessor’s forecast routinely reported that next year was going to look like this year. The stability of the Rochester economy was reinforced by its core economic engine, the Eastman Kodak Co. With a dominant market share of a popular product, Kodak’s annual sales were relatively stable and, due to its charmed market position, its profits were also quite robust. Kodak Park’s massive manufacturing facility could have been printing greenbacks.
Kodak’s stability (and that of Rochester’s other major employers) reinforced the habitual nature of human behavior. Creatures of habit, most of us make economic decisions based on an unspoken assumption that the future will look like the past. Thus, when asked by the Democrat and Chronicle or the Rochester Business Journal or the Chamber of Commerce itself what the future held, my stock response became, “barring any surprises, we can expect next year to look much this one.”
Steady expectations make for a stable economy
While Kodak made Rochester a bit of an outlier, the entire economy is propelled by virtuous inertia. We expect continuity. I’m confident that a dollar I receive this week will be worth roughly the same when I spend it next week.
Over two-thirds of gross domestic product is driven by consumer spending. This is both the glory and the curse of a free market economy. Markets consolidate and reflect the individual decisions of millions of American consumers. If consumers expect that this year will look much like last year, then that prophesy will be fulfilled. Stability is the default, not the exception.
How recessions begin
Sound economic policy relies on maintaining the stability of expectations. Just a few days ago I was speaking with neighbors about their plans to make a modest renovation to their house. “Have you gone to bid?” I asked. Their reply: “We thought we were ready. But now we’re going to wait.” Both employed in the health care sector, they knew how vulnerable the sector’s income was to decisions made in Washington. Their employers were waving a caution flag, preserving cash and changing strategy to protect against a loss in business.
Caution is contagious. While unaware of our friends’ decision, there are a couple of construction firms in Rochester that won’t be asked for a bid on the now-deferred renovation. With fewer projects in the pipeline, they’ll be wary of adding to their summer workforce. Unaware of our friends’ decision, there are a few laborers or members of the trades who won’t be seeing ads for seasonal employment. They may cancel vacation plans or buying a new washing machine. And so on. The virtuous inertia of the market will go into reverse.
Markets deplore uncertainty
A slim plurality of voters have endorsed bold change. None voted for recession. The Trump administration shows too little regard for the complexity of markets and, in my view, makes two major mistakes.
First, propelled by a campaign of recrimination, the many of the actions of the Trump administration focus more on reversing the policies of the past than on articulating a vision for the future. The resulting uncertainty is reflected in the dramatic decline in the stock market. The S&P 500 is down nearly 8 percent since Inauguration Day.
Second, the administration is employing powerful economic tools—most prominently dramatic changes to tariffs—to achieve political or reputational ends, confounding the steady-as-she-goes expectations of consumers and producers. The risks to the economy are too great for these instruments to be used largely for political gain.
Just as Kodak’s size and predictability once kept the Rochester economy on an even keel, so the American economy and, by extension, the U.S. dollar, has historically supported global economic stability. While this may not look like an “America First” policy, American consumers, producers and taxpayers reap rich rewards from a world filled with reliable trading partners and propelled by stable expectations.
Kent Gardner, Ph.D., Rochester Beacon opinion editor, is former chief economist at the Center for Governmental Research.
The Beacon welcomes comments and letters from readers who adhere to our comment policy including use of their full, real name. See “Leave a Reply” below to discuss on this post. Comments of a general nature may be submitted to the Letters page by emailing [email protected].
While what is happening in Washington will, no doubt, line the pockets of the few at the expense of the many, I seem to hear you suggest that, unless one is among “the many” and directly impacted by Trump’s so called program, one should not shy away from spending that dollar they had planned to spend. Your example of “holding back” appears to have negative consequences. Though certainly not a student of economic theory, I hear you suggesting that, if one can, one should continue life as we knew it yesterday and not be overly concerned to the point of holding back. Thank you for those encouraging thoughts. We, the people, need to remain positive , if possible.
“NECESSITY IS THE MOTHER OF INVENTION” (Aesop, Plato and others)
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Thanks for your ideas, Kent, but it could be that Trump’s crazy cuts may encourage the nation to seek new innovative solutions. Out of the depression came new governmental regulations. Out of the Second World War came new technologies, etc. Now, AI may help US…
Perhaps, perhaps, out of TRUMP 2.0, will come a new VIGILANCE on SANITY and HONESTY.
May we assume (or should I say hope) that your comment was posted as an April Fool’s joke? The substitution of AI for reality, combined with the scores of millions of gullible sheep supporters who have been corralled by Presidents Musk and Trump, more likely means that the future will see the fulfillment of Churchill’s 1940 warning at the time of another attack on civilization that, “the whole world, including the United States, and all that we have known and cared for, will sink into the abyss of a new dark age made more sinister, and perhaps more prolonged, by the lights of a perverted science.”
I heartily concur. The risk with Tariffs is that economic partners who in the past sought to do business with us are now in the process of discovering other markets and vendors not associated with us. While the tariffs may or may not be temporary – the lasting effect of pushing our customers and our manufacturing and resource providers to other markets may not be. You mention uncertainty and that’s a key factor here – if our allies are uncertain we will be a constant provider of products, or a constant consumer of products, that makes them reconsider if we are a reasonable economic parnter and if maybe they can get a better deal elsewhere. And if they do – now that they’re looking – find that better deal the customer or vendor may be lost forever – further deepening any temporary loss from tariffs.
I ran a business for 30 years. It depended heavily on doing such a great job and being so reliable that customers had no reason to look elsewhere. We retained some customers for all of that 30 years doing so. But when I folded my business and referred my clients out to new vendors, even with my loyal and reliable employees moving to those new providers, they now had a reason to reconsider. Not all of them went – not necessarily suprising though because we gave them a reason to reconsider. And that is what every vendor and customer of a US company is now doing, because somehow the current administration is managing to piss off even the most long time reliable partners and allies we have like Canada.
Trump and his policies claim they are “bringing jobs back” to the US. But many of those jobs rely on foreign trade INTO our country (witness the recession already hitting the tourism industry). If the trade isn’t there to begin with – neither will the jobs. And manufacturing? Well let’s take chip-fab, a target of the tariffs, you can’t just “ramp up” a chip fab company overnight. It takes 2-3 years and hundreds of millions of dollars of investment to do so. Trump claims credit for a number of existing chip-fab builds – but those builds were all initiated under Biden – not Trump – with his economic policies. Without those new fabrication factories the demand for chips will only go up – and the companies making them will just sell to other countries without tariffs, or we will pay more getting stagflation – unemployment PLUS inflation – a death knell for any economy and painful for all involved.
Finally if we weaken the dollar worldwide as this policy seems to be intent on doing, everything we eventually want or need to buy from overseas will be permanently more expensive – again increasing and deepening inflation. Ironic as the perceived reason to elect Trump in the first place was people didn’t like the inflation caused by COVID under Biden.
Thanks, Lee. Re-reading this column after the president’s “liberation” announcement makes my comments read as mild and naive. I’m sure that many of you are rding national sources on this–the always-pithy and wise Tyler Cowen, for example. Or see Nick Catoggio: https://thedispatch.com/newsletter/boilingfrogs/trump-tariffs-liberation-day-taxation-representation/?utm_source=ActiveCampaign&utm_medium=email&utm_content=Taxation%20Without%20Representation&utm_campaign=Boiling%20Frogs_Paid%20Subscribers%20Only_Taxation%20Without%20Representation
Thanks for the comment, Suzanne. As you note, the ripple effects of pulling money out of the economy could be significant. Yet even if you agree with every decision being made by the Trump Administration, the process by which funding decisions are being made has introduced significant uncertainty which can trigger secondary economic effects unrelated to the core policy decisions.
Thank you for this cler explanation. I see a tsunami of unemployment coming towards us as the reality of the “tarrifs earthquake” coupled with the withdrawal of Federal funds from our economy. The at-risk dollars for funds already spent and the confusion about what will be reimbursed only causes lack of clarity and fear for farmers, towns, cities and non-profits. How well we go forward will take focused, committed local leadership to hold firm on priorities and great communication.