The Psychological Economy and The Trump Effect

Is “the Trump Effect” a real factor in the economy?
October 26, 2019 Updated: October 27, 2019

If you’re wondering where the economy is headed, you’re not alone. There are enough data, indicators and economists’ opinions to argue either way. But behavioral economist Robert Shiller thinks Trump’s free-spending ways and motivational speaker style of leadership may be leading factors. He has even predicted that, due to the “Trump Effect,” the next recession may be “years away.”

Is Shiller right?

Psychology and Attitudes Matter

Perhaps; but not completely. Psychological factors are important. Circumstances can impact the economy, of course, but so can people’s attitude toward the circumstances. Like Ronald Reagan in the 1980s, Donald Trump understands that optimism is contagious. He also knows that belief in success usually precedes successful outcomes.

However, pessimism is also influential in how people think and in driving ultimate outcomes.  That’s why Trump has accused his critics in the media and government are trying to “talk” the country into a recession by repeatedly saying we’re very close to one. Jawboning the economy into contraction for political gain is itself a force that must be countered. That would help explain Trump’s constant cheerleading of the economy.

But there’s more to economic performance than just psychology and attitudes.

A Mix of Conflicting Economic Forces

There are tremendous forces at work in both the national and global level that usually determine the direction of economy. But the it’s difficult to recall when there were more conflicting economic data and trends as there are now. That said, there are, in fact, real reasons for the economy to be slowing down at this point in the cycle, but have yet to do so.

Consider, for example, the trade war with China. Conventional economic wisdom says that a trade war diminishes economic growth and often leads to less trade and therefore, less economic activity. That’s proven to be true in certain areas of the economy, such as manufacturing and agriculture.

But the trade war isn’t a fixed reality. Like many other economic conditions around the world, it’s fluid. What’s true today is not necessarily true tomorrow.

Disruptions in supply chains, for instance, have made it difficult for American manufacturing, which, by some measures, is the worst it’s been since 2009. But at the same time, companies are quickly adapting, finding new supply chains in other locales to make their products. Countries such as Vietnam and Malaysia are quickly replacing China as business-friendly places for American manufacturers. As a result, other reports say that U.S. manufacturing is rebounding. It’s not as high as it used to be, but it’s moving the right direction.

On the agricultural front, the situation hasn’t remained static, either. In fact, the dramatic fall in U.S. soybean sales, America’s most valuable export crop, may be short lived. A new partial trade agreement with China could mean a resumption in soybean exports of up to $50 billion per year. That would bring back U.S. farmers’ back to pre-trade war levels of their Chinese market share.

At the same time, the recurring negative bond yield curve, low inflation, a return to quantitative easing and interest rate cuts are also symptoms of an economy that’s in the final stage of a bull market. Quantitative easing is particularly worrisome because it’s an indication that there is too much debt in the financial system. But even these indicators aren’t pulling the economy down; at least not yet.

The United States remains at essentially full employment and, even with heavy student loan debt, Millennials’ spending habits are adding to the demand. But clearly, two of the biggest factors of economic growth or decline are taxes and regulation.

Cutting Taxes and Regulations in All Businesses

Whether one calls it psychology or simply rational expectations, business people knew that Trump would be a business-friendly president. This was a stark change in attitude from the statist mentality and economic fatalism of Barack Obama. Trump’s reduction of corporate and personal tax rates, as well as reducing business-strangling regulations, have been two factors that have been largely overlooked regarding the strength and vigor of the current economy. And even with some drop in the business outlook, both small and big businesses continue to increase capital spending and hiring.

Small business formation is crucial to the economy for not only that economic demand and employment that comes with it, but for the innovation that often comes from it as well. Without a positive, enabling economic environment, fewer small businesses open or remain open, fewer people are hired and innovations are less likely to become realities.

A positive economic climate is also a huge factor for big businesses as well. As demand grows and income grows, corporations expand factories and hire more people. These are basic concepts, but it seems as if half of the country needs to re-learn them, if they were learned at all.

Is Professor Shiller right about the Trump Effect? Is Trump a wizard at behavioral economics or psychological mastermind? Not at all. The real Trump Effect is, after several decades building business empire and then re-inventing himself as a huge media success, Trump knows business and he knows people.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.