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Stop Saying A Trump Win Would Cause A Recession

This is In Real Terms, a weekly column analyzing the latest economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.


Billionaire investor Mark Cuban says a Donald Trump victory would cause the stock market to “tank.” The forecasting firm Macroeconomic Advisers says stocks would fall 8 percent if he wins. Economists at Citigroup go even further: They say a Trump win could cause a “global recession.”

Enough already. There are plenty of reasons to think that many of Trump’s policy proposals would harm the economy. But confidently predicting how his mere election would affect markets or the economy is impossible — and risks further undermining economists’ already shaky reputation with the public.

Let’s start with the question of whether a Trump victory would cause stocks to drop. It’s certainly possible. Markets, as pundits endlessly remind us, hate uncertainty — and Trump, because he is such an unusual candidate, would bring a lot of uncertainty. A Trump win would also be a big surprise — FiveThirtyEight’s election models give him around a 15 percent chance of victory — which makes a dramatic market reaction more likely. (In investing jargon, markets haven’t “priced in” a Trump victory.) There is some evidence that markets view Trump warily: Economist Justin Wolfers recently found that the S&P 500 index appeared to rally in response to Trump’s weak performance in the first presidential debate (which made his chances of winning fall). Macroeconomic Advisers’ dire prediction was based on an analysis of the relationship between stock prices and FiveThirtyEight’s election forecast.

Another analysis from Moody’s Analytics, however, found no clear relationship between market prices and Trump’s chances. And it isn’t hard to come up with arguments for why a Trump presidency could be good for markets. He wants to cut corporate taxes and eliminate regulations, both of which should be good for corporate profits, at least in the short term.

So it’s possible that a Trump win could cause a crash. Or that it could cause a market rally. Or, perhaps most likely, that there could be little market response at all beyond a few days of volatility. (Historically, U.S. presidential elections haven’t had much impact on the markets.) Be skeptical of any economist who claims to know for sure.

What about the effect on the broader economy? Citigroup’s economists argued that a Trump win would create much more uncertainty about government policy, which would lead to tighter financial conditions — banks would become less willing to lend and investors less willing to take risks. That, in turn, would be enough to “trigger a significant slowdown” in this country and around the world.

All of that is plausible but far from certain. Economists have only recently begun to develop ways to estimate the effect of “policy uncertainty” on the economy; the field isn’t nearly advanced enough to make confident assertions about how a single event like an election surprise would affect the global economy. More generally, the dismal science’s record of forecasting recessions is, well, dismal. Few economists saw the global financial crisis coming (despite what were, in retrospect, numerous warning signs); on the other hand, economists are famous for predicting recessions that never occur. The same Citigroup team that’s forecasting doom from a Trump victory has for more than a year been predicting a global recession triggered by China.

The risk is that by making confident predictions about inherently unpredictable outcomes, experts will erode their credibility even in areas where their forecasts are on sounder footing. For a case study, look across the Atlantic, where economists made similarly dire predictions about what would happen if the U.K. voted to leave the European Union. Sure enough, markets tanked in the immediate aftermath of the “Brexit” vote. Since then, however, markets have rebounded, and the major British stock indexes are above their pre-Brexit levels. The British economy as a whole, meanwhile, has held up well since the vote; the unemployment rate actually fell in the first post-Brexit report, and other indicators have been similarly positive. Economists, predictably, have taken a beating in the press: “The real casualty of Brexit,” MarketWatch columnist Matthew Lynn wrote in August, is “the reputations of economists who predicted doom.”

Britain hasn’t yet left the European Union, so economists could still prove right about the long-term effects of the Brexit decision. But in the weeks leading up the vote, they didn’t talk about the damage as something that would happen gradually over a period of years. They gave the impression the impact would be swift and severe.

Economists don’t have to sit the election out. Trump has proposed sweeping — if often non-specific — changes to U.S. policy on taxes, trade and immigration. Those changes would have major economic effects, and unlike short-term market reactions, they are the kind of effects that economists are reasonably good at modeling. Some economists who have analyzed Trump’s proposals have concluded that his trade policies, in particular, could cause a recession. Those predictions aren’t a sure thing — economics never is — but they are on much firmer ground than claims about the immediate aftermath of November’s vote.

Tax cuts, tax hikes

Speaking of Trump’s economic policies, a new analysis from the Tax Policy Center last week found that his tax plan would reduce government revenue by $6.2 trillion over the next decade, and $15.1 trillion over the next two. (The bill is even higher if you count the interest on all that extra debt – although Trump says he would cut spending to avoid further borrowing.) The TPC, a joint project of the Urban Institute and the Brookings Institution, estimates the average taxpayer would owe nearly $3,000 less per year under Trump’s plan. But the cuts wouldn’t be evenly distributed. The richest 0.1 percent of earners would pay more than $1 million less per year on average, a 14 percent tax cut. The poorest fifth of households would save $110, a cut of less than 1 percent. Meanwhile, some households, particularly single parents and families with a large number of children, would see their taxes go up.

The TPC also analyzed Hillary Clinton’s plan, which looks very different. Her plan would raise taxes by $1.4 trillion over the next decade, with nearly all of that coming from the richest 1 percent. Most low- and middle-income households would see a small tax cut. Clinton’s plan would add various deductions, credits and other new provisions, however, making the overall tax code more complex. Most economists would prefer to go the other direction, making the tax code simpler in order to minimize the economic distortions taxes can cause.

As I’ve written before, analyzing tax policies is more art than science. And in this case, experts not only disagree about the effects of candidates’ tax policies, they aren’t even sure what the candidates are proposing. The TPC’s analysts note that Trump’s proposal “leaves many important details unspecified,” forcing them to make numerous assumptions. (Clinton’s plan has fewer question marks.) But there is little question about the big picture: Clinton wants to raise taxes on the rich. Trump wants to cut them massively.

The gig economy

One of the hottest topics in economics right now is how app-based platforms such as Uber and Airbnb are affecting the labor market. Fans of the so-called “gig economy” (a poorly defined term) see it as providing flexibility to both workers and customers. Critics worry it could undermine more traditional employer-employee relationships and the protections they provide. But the debate has been severely hampered by a lack of good data. Most gig workers aren’t employees, so they don’t show up in many of the usual sources of job statistics; but they aren’t exactly companies, either, so they aren’t necessarily captured by measures of entrepreneurship.

A new report from the Brookings Institution, however, argues that better data has been under our noses the whole time. A relatively obscure government dataset, the Census Bureau’s nonemployer statistics, has information on businesses that don’t have employees — including self-employed independent contractors such as Uber drivers. By looking at two industries that are most associated with the gig economy, for-hire rides (think Uber) and traveler accommodation (think Airbnb), economists Ian Hathaway and Mark Muro argue they can get a reasonable estimate for the scale and growth of this new type of work.

Hathaway and Muro find that Uber, Airbnb and their competitors are growing rapidly, especially in cities such as San Francisco, Los Angeles and Austin, Texas. But at least so far, the rise of these gig companies hasn’t led to a major drop in more traditional employment. That’s good news for Uber and its fans, but the authors stress that their work is preliminary and that the companies’ impact could grow over time.

The nonemployer data isn’t perfect. It won’t help measure gig work in categories that aren’t as easy to define by industry, such as the odd jobs performed by users of Taskrabbit. And it doesn’t have demographic or other information on gig workers. But it helps fill in at least some of the gaps in our understanding of this fast-growing and controversial sector.

The week ahead

On Wednesday night, the presidential candidates will meet in Las Vegas for their third and final debate. According to the topics released by the Commission on Presidential Debates last week, economic issues will play a starring role. Three of the six 15-minute segments will be related to the economy: one on debt and entitlements, one on immigration (a topic that was surprisingly absent from the first two debates) and one on the economy more generally. Later this week, we will be updating our “briefing book” on the major policy issues in the campaign.

Elsewhere

Writing for Politico, Dana Goldstein looks at the battle over affordable housing in the Clintons’ home town of Chappaqua, New York.

One group that’s solidly backing Trump over Clinton: people who still live near where they grew up. Andrew McGill delves into the data in The Atlantic.

Wal-Mart, known for its low pay, is raising wages in a bid to attract better employees. Neil Irwin of The New York Times says Wal-Mart’s bet represents a $2.7 billion test of the economic theory of “efficiency wages.”

Inequality isn’t just rising among individuals. It’s rising among companies, too. That complicates the debate over what’s causing the rise in income inequality, reports Josh Zumbrun in The Wall Street Journal.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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