Economist Writing Every Day

I was on a panel of economists last night at an event titled “The Economic Consequences of President Trump”. We each gave a 5-minute summary from our area of expertise and then opened up the floor for questions.  This is a truncated summary of my talk. Since the panel included an investor, two industry economists, and another macro economist, I wanted to discuss something that was distinct from their topics. I’ve published a paper and refereed many articles concerning economic policy uncertainty (EPU) and asset volatility. I wanted to look at the data concerning President Trump – especially in contrast to Presidents Obama and Biden.

EPU matters because uncertainty can cause firms and individuals to delay investment and hiring decisions. Greater uncertainty can also cause divergent views concerning forecasted firm profitability. The result is that asset prices tend to become more volatile when EPU rises. One difficulty is that uncertainty occurs in our heads and concerns our beliefs, making it hard to measure. We try to get at it by measuring how often news media articles include the terms related to uncertainty, policy, and the economy. Since news content tends to report what is interesting, relevant, or salient to customers, there’s good reason to think that the EPU index is a decent proxy.

Using the Obama years as a baseline, the figure below simply charts out EPU. It was relatively low during Trump’s first term and then it was higher during Biden’s term – even after accounting for the Covid spike. The sharp increase toward the end is after Trump won the 2024 election. The EPU series conflicts with my perception of social media and media generally. My experience was that the media was far more attentive to the uncertainty that Trump caused. But, it may just be that the media outlets had plenty to report on rather than it being particularly indicative of EPU. After all, if the president exercises his power, then there is a certain swift decisiveness to it.

But if we look at a couple of particular policy areas, Trump’s administration faired worse. Specifically, Trump caused a ruckus concerning trade policy and immigration. Remember when Biden continued the aggressive trade policy that Trump had adopted? That’s consistent with lower EPU. Similarly, Biden made the immigration process much easier and faster while Trump’s deportation haranguing results in a somewhat stochastic means by which people are deported.  Again, that spike at the end is after Trump won the 2024 election.

We can see the differences in the EPU index. But is it relevant? As I mentioned above, asset price and return volatility increases in the presence of uncertainty. Using a simple GARCH model, the below figure plots the conditional variance of the SCHG ETF, an index of 750 growth stocks. It’s more encompassing that the S&P500 and the emphasis on growth reflects future economic conditions better than would an index that included some stable cash cows. Obviously, covid wasn’t Trump’s fault, so we can’t hold that against him. But even if you do, the total volatility of SCHG was greater under Biden.  

Of course, it would be terribly misleading if I left it there. The Fed was engaging in some big monetary policy changes and those are tightly linked to volatility. So, in terms of asset volatility as well as other issues, Biden gets a lot of underserved blame.

So instead, I estimated a GARCH with EPU as an explanatory variable in the variance equation. I split EPU into time periods corresponding to the elections so that Trump’s EPU includes the days after the 2024 election. Then we can see who contributed more to asset volatility by way of the policy uncertainty that they caused. To make the numbers interpretable, I used Obama’s as a baseline portion of volatility attributable to EPU.

What do the results mean? The contribution to asset volatility that Trump’s EPU caused was about 50% of that caused by Obama. Biden’s was almost 2.5 times that of Trump. How does this make sense given the media frenzy over Trump’s administration? In fact, the question provides its own answer. Trump gathers so much attention and performs in such a bombastic way that the media can’t help but engage with him. But a lot of that engagement is distracted from policies that affect the economy. So, all of that coverage matters less for asset pricing. Investors can sift through the chaff in a way that excited journalists don’t/won’t/can’t.

I enjoyed preparing for this panel because I didn’t know what the results would be when I started. I let the data guide me. I have my own biases, but that data is what the data is. Trump gets a lot of attention. But, much of it is irrelevant or simply finding his actions and words remarkable. According to the data, Economic Policy Uncertainty is lower and less relevant under Trump. Having said that, none of this is predictive nor addresses whether either president’s policies were any good. We’ll see how the 2^nd administration goes.