Economics

On April 6, 2018, a group of journalists from the New York Times published an article that discusses the perspectives and risks of the possible trade war initiated by US President Donald Trump. As a main argument of the article, the authors expressed the opinion that the actual declaration of a trade war against China will create barriers to the economic growth of the US (Casselman & Tankersley). Among the main positive trends that identified the economic development of the state, the authors highlighted the role of the reducing unemployment rate, growing wages, and faster growth of US business. As for the causal analysis of the situation, the authors claimed that the beginning of the trade war against China will reduce incomes from the US export to China, increase prices for US households and businesses due to the absence of cheaper Chinese products, and increase inflation because of the reducing economic development volume.

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Among the arguments for the destructive influence of the trade war on the economic growth of the USA, the authors mentioned the negative reaction of the US financial markets and the reduction of the Standard & Poor’s 500-stock index (Casselman & Tankersley). Altogether, the experts aimed to create a negative image of the perspectives of the trade war and its consequences for the USA.

At the same time, the authors highlighted the role of the internal US economic policies in the development of crisis events. Thus, the role of tax cuts and an increase in government expenses as a catalyst for inflation growth was highlighted (Casselman & Tankersley). In addition, the question about the possible negative role of the Fed in the reduction of economic growth through the increase of the interest rate was discussed. In this case, it is possible to raise the question about the contradictions in the causal analysis of the situation in the US economy, and the relevance of the idea of the trade war against China.

The main causal statement of the authors about the negative role of the trade war on the economic growth volume in the country can be criticized from different points of view, mainly the issues of selection and omitted variable bias. As a main idea of the critique, it is possible to state that orientation on the Chinese trade war as the actual cause of the economic problems in the USA is irrelevant considering all other factors affecting the US economic system. Among them, it is possible to mention the significance of the increased interest rates of the Fed, and the changes in the state tax regulations and state economic investments. Here, it is worth mentioning that the Fed plays a negative role not only in the reduction of funds available for the national economy. It also contributes to the growth of the deposit rates in the bank accounts of US households and businesses (McClanahan). Thus, it is possible to state that the increase of the Fed rate results in several outcomes for the US economy. They are the removal of substantial sums of capital from the national economy that could be used for the needs of development, and the usage of another part of funds due to the increase of deposit rates and higher motivation of households and businesses to save money. Due to these initiatives, the increase of savings in deposits can cause a serious reduction in the consumption of goods and services inside the US. In the conditions of economic and political instability and the unpredictable presidency of Mr. Trump, US households and businesses are supposed to cut expenses and increase savings.
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The risk of increased savings does not only relate to the influence of the Fed. It also creates additional risks for the business sector. The decision of the government to increase wages for all groups of employees contributed to the potential increase in consumption. At the same time, this requirement provided additional pressure on businesses. If earlier the tax payments could allow the government to stabilize the situation, the case is even more complex today. Together with the possible risk of higher savings, the additional expenses of the business for wages may not be responded with the proper growth of consumption since significant sums can be saved for the worst times.

After thorough consideration of the current situation in the economic system of the USA, it is possible to present a completely different causal model. First, the analysis of the reverse causality in the aspect of wages is required. Though the initial discussions presented wage growth as an effect of economic growth, it can be stated that this is the cause of the economic slowdown. Since the potential increase in savings can cut the consumption expenses in the US, the increase in wages can be assessed as additional pressure on the business that will not cause the required effect on the growth of households’ well-being and consumption.

In addition to this, it is sensible to consider the reverse causality of the main causal statement of the paper. From the point of the earlier discussed arguments, it is possible to state that the decision to declare a trade war with China is not the cause, but the effect of the economic decline in the US economy. This statement can sound quite senseless, but it should be combined with other presented ideas. If the current situation in the US economic system contributes to the growth of the savings and reduction of consumption, the existence of cheaper Chinese products in the US market leaves even lower chances for the US producers to gain success. As a result, the decision to start the trade war can result in the occurring reduction of actual consumption in the US.

From the point of this logical model, the decision of the Fed to increase the interest rate seems to be relevant as a reaction to the actual state of the US economy. Here, reducing consumption can be considered as an effect of the high inflation level rather than the reduction of consumption and intention for savings in US households. As a result, the increase in the rate is supposed to cause a reduction in prices and an increase in consumption. If the presented assumptions are right, this action can only enhance savings and lead to further reduction of consumption in the US market.
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Paying attention to all the presented arguments about the selection and reverse causality effects of the discussed article, it becomes evident that there is a need for careful experiments to consider the relevance of the provided assumptions. First, the presented model of changes in the US economy is based on several assumptions. They include the actual growth of savings and reduction of consumption in the US society as a cause of economic decline; the influence of the increasing deposit rates on the decision of households to save money; the lack of funds in business as a result of the Fed rate increase; and the strong positions of the Chinese companies in the US market. Each of these assumptions should be assessed in the process of the ideal experiment.

For the analysis of the actual situation in the sphere of savings and consumption, the macroeconomic statistics for twenty years should be analyzed. The choice of this period for the study is explained by several factors. First, the period of two decades should demonstrate the long-term changes in the economic situation. At the same time, the orientation on the modern stage of the economic development of the state should reduce the influence of the economic cycles that were relevant for the twentieth century. As a result, the authors should be able to answer the question about the relevance of the assumption.

For the issue of the increased deposit rates and their influence on the decision of US households to save money, it will be important to perform a detailed analysis of the annual reports of the Fed and financial banking organizations in the country. They should provide information about tendencies in this sphere, and the actual role of savings in the US economy.

As for the question of the role of the increased Fed rate in the reduction of funds for business, it will be useful to analyze the statistics of business investments in the US. The discussed article highlighted the reducing investment activities in the country (Casselman & Tankersley). At the same time, the detailed analysis of statistics for the last two decades should support or reject this fact.

Finally, the analysis of the influence of Chinese products in the US market should be based on the investigation of the statistical data for the last two decades. Furthermore, it would be effective to perform a survey study of a big sample of US customers to define their attitude toward Chinese products and their perspectives on the trade war. Altogether, the format of statistical analysis had been chosen due to the set of advantages: considerably low expenses for the realization of the study and the reliability of the statistical data compared to the results of the surveys that are usually biased.

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