Brunetti View June 2025
Published: June 10, 2025
Economic policy uncertainty in the USA at record levels
In the last two decades – as we have discussed here several times – the global economy has had to cope with two shocks of the century: the Great Financial Crisis and the Great Pandemic. In both cases, economic policy was challenged by extraordinary events and had to find suitable measures in the face of uncertainty. For some months now, we have again been in a crisis-ridden global environment, but this time it is not exogenous shocks to which economic policy would have to react, but economic policy itself has become a massive factor of uncertainty. Specifically, we are talking about the latest economic policy rollercoaster ride in one country, but because this country – the USA – is so eminently important for the global economy, we are once again dealing with a global event.
The Trump shock
Since Donald Trump became president, hardly a stone has been left unturned in US economic policy. Not a day goes by without a new far-reaching measure being announced or previously announced measures being adjusted or withdrawn. Irrespective of the material sense of the individual announcements, this first and foremost creates massive uncertainty. The first chart, which shows the often-cited “Economic Policy Uncertainty” indicator for the USA, shows just how unusual this is. This indicator is based on a very broad statistical analysis of media articles searched for specific terms; it is the most widely recognized measure of the degree of economic policy uncertainty. We see in this time series going back to 1985 that this uncertainty has reached unprecedented heights since the Trump administration came to power. The Great Financial Crisis of 2008 hardly brought any major swings because it was a relatively ordinary – albeit very pronounced – banking crisis and the economic policy responses to it were relatively well-known and clear. The Great Pandemic was completely different.
«Economic Policy Uncertainty Indicator» for the USA
This was a shock the likes of which had not been seen for more than a century and it was completely unclear what economic policy measures would be used to combat the massively negative economic impact. Accordingly, we can see in the graph that the indicator shot up at the outbreak of the pandemic and reached a level never seen before. However, this has been eclipsed by current developments. After Donald Trump took office, the indicator reached by far the highest level ever measured in a very short space of time and although it has fallen back somewhat at the current margin, it is still around twice as high as at the peak of the pandemic. In view of such data, it is hardly an exaggeration to speak of a pronounced Trump shock.
It is well known from economic literature that major uncertainties are poison for investment activity. With practically every investment, there is the option to wait and if many people take this option at the same time, this quickly has substantial macroeconomic costs. Uncertainty alone therefore poses a threat to the US economy. And because the greatest uncertainty probably concerns the erratic customs policy of the US and therefore global trade, this is affecting the global economy to a certain extent. This can be seen in the trend of the “Trade Policy Uncertainty Indicator” in the second chart, which is based on an analysis of US media. Since the Trump administration took office, uncertainty about trade policy has reached extremely high levels. The daily data collected for this indicator extends to the end of May and shows that uncertainty has decreased significantly since the peak values at the beginning of April.
“Trade Policy Uncertainty Indicator”
Customs policy and the national budget are the biggest US construction sites
In addition to the uncertainty, however, there are also question marks over the content of the US administration’s current economic policy. The vast majority of economists consider the current administration’s trade policy in particular to be extremely damaging. It is based on the misguided idea that trade deficits are a bad thing and surpluses are a good thing. And it sees international trade as a zero-sum game in which one of the two trading partners always wins and the other loses. Both are fundamentally wrong, as international trade is the result of voluntary specialization, which we have known since the founding father of economics, Adam Smith, to be the basis of prosperity. The drastic miscalculations are motivating the US administration to try to achieve a more advantageous result for the USA by imposing and/or threatening to impose massively high tariffs. If this is maintained, the foreseeable consequences will be lower economic growth, inefficient dismantling of global supply chains and inflationary surges.
The current fiscal policy is similarly misguided, with tax cuts and high spending producing a budget deficit as if the US were in a deep recession. And the longer-term fiscal plans do not bode well either. The US national debt will rise rapidly and the financing of the debt is likely to account for an increasingly large proportion of government spending; the US’s annual interest payments are already higher than its total defense spending. There are already clear initial signs on the bond markets in the form of sharply rising yields, which indicate that the financial markets are beginning to question the sustainability of the US budget.
Conclusion
How serious the impact of the problematic US economic policy will be depends above all on whether it is maintained in the longer term. If very high tariff barriers remain and there are no corrections to fiscal policy, this is likely to set the US economy in particular back considerably. However, there is also hope that this will not be such a hot potato. The advantage of economic policy mistakes is often that the feedback from the financial markets or macroeconomic data comes very quickly. For example, the announcement of very high tariffs at the beginning of April triggered such a strong reaction on the stock markets and in US government bond yields that the measures have since been significantly weakened. Although this increases uncertainty, it could ultimately ensure that the long-term costs of this misguided economic policy are lower than one might fear. In any case, the stock markets seem to be leaning towards this interpretation, as the losses have now been significantly reduced again. In terms of customs policy in particular, a far-reaching reversal of the announced peaks would be highly desirable, as a continuation of this course would force very costly adjustments to global value chains and initiate a process of de-globalization in which there would be almost only losers economically.
Responsible
Prof. Dr. Aymo Brunetti
Economist, Professor of Economic Policy at the University of Bern
Simon Lutz
Chief Investment Officer
s.lutz@tareno.ch
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