Economic Theory

Did the Federal Reserve cause Trump?


The blogosphere is not lacking explanations for why Trump “happened.” Trump was caused by his policy agenda energising the Reagan Democrats, economic anxiety, the singlemindedness of nominating Clinton, or even backlash against political correctness. Here’s a list of thirteen reason why Trump was elected. P.J. O’Rourke’s newest book is entitled, “How the Hell Did This Happen?” At the risk of this sounding too much like a hot take, please allow me to saturate the internet with yet another theory: monetary policy.

In a forthcoming paper at Review of Austrian Economics, co-authored with Taylor Leland Smith, we investigate a claim made by Scott Sumner in his 2015 book that severe recessions led voters to throw competent political parties out of office in favor of populist ones, ultimately resulting in ruinous changes in economic policy. Sumner’s historical examples include the U.S. in the Great Depression, Argentina in the 1990s, Sweden in 2013, and (per Godwin’s Law) Nazi Germany. It may also have played a role in the recent rise in parties on the populist right throughout much of Europe.

The mechanism is this. Center-right parties tend to move policy in a roughly free market direction over time, but err a bit towards excessively low inflation. If this is combined with a hard hit to an economy, things can go bad fast. Voters may not understand much, but they understand that deep recessions are not desirable. So they choose the opposite of free market policies, i.e., populism. This means socialism if mashed up with leftwing politics, or soft fascism if mashed up with rightwing politics.

Now, I understand that this narrative does not fit perfectly with events. Barack Obama, a progressive, held office during the time in question. On the other hand, the Tea Party talked up free markets quite a bit and played a large role in American politics following the midterm elections of Obama’s first term, up to the closing days of his administration. Also, for whatever reason, Obama spent a year’s worth of political capital on trying to get the Trans-Pacific Partnership negotiated and approved. And, of course, inflation remained low for years when U.S. unemployment rates remained high, under both a center-right economist (Bernanke) and a progressive economist (Yellen).

In our paper, Smith and I investigate Sumner’s claim empirically. We define an event of a recession wrought by severely restrictive monetary policy and an aggregate demand shortfall as occurring whenever the growth rate of Nominal Gross Domestic Product (NGDP) goes negative, meaning the overall level of nominal spending in the economy actually falls. This is very rare. It occurred in the United States during the Great Recession, but had not done so previously for a half century.

We establish a statistically significant fall in economic freedom five years, ten years, and fifteen years after the event, while including several controls. Due to our methodology, we had neither Nazi Germany nor the Great Recession in our sample, and given that these were the two primary motivating examples, it means that Sumner’s hypothesis held true “out of sample” in some sense. And now, at least arguably, the hypothesis predicted Trump, though I had no idea that electing Trump for real would be A Thing when I first started working on the project (the working paper version went online in October 2015, a few weeks before Trump *hosted* Saturday Night Live).

As an economist, I am very sceptical of any monocausal explanation of anything as complicated as an unprecedented presidential election. This is why I think the whole “why Trump won” genre of political commentary is a bit suspect. But we did just witness a populist rise against the institutions of free trade and globalism following a severe recession, throwing out a technocratic vision of the polity in exchange for a tribal one. It also may be entirely true, at the same time, that none of this would have happened had the Democrats nominated a stronger candidate. So while I do not view the events surrounding the financial crisis and the recession as inevitably leading to something as surprising as the results of the 2016 election, it increased the probability that it would.


Ryan H. Murphy is a research assistant professor at the O’Neil Center for Global Markets and Freedom at SMU Cox School of Business.

1 thought on “Did the Federal Reserve cause Trump?”

  1. Posted 08/04/2017 at 15:55 | Permalink

    I have always held the view that undue tight monetary policy leading to recessions and then to anti-free-market policies has been a recurring tragedy in the last 100 years.
    So I’m very glad about this paper. Ensuring that Aggregate Demand (= Nominal Spending = NGDP) remains stable is the way to make the world safe for Laissez Faire Capitalism.

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