Nick Bloom on Economic Uncertainty and the Productivity Slowdown

Nicholas Bloom is a professor of economics at Stanford University and is the co-director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research. Nick joins Macro Musings to discuss his work on the causes and effects of economic uncertainty as well as how to measure uncertainty in an economy. David and Nick also discuss why productivity has slowed down in recent decades and why Nick is not especially optimistic that productivity will really improve anytime soon.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Nick, welcome to the show.

Nick Bloom: Hi Dave.

Beckworth: Oh, glad to have you on. We have read your work, and we'd love to get into it in a moment. Before we do that though, with all my guests, I like to ask them how did you get into economics?

Bloom: I don't really have the most direct story here. I was actually intending to go work in investment banking, or certainly make a lot of money. I did well as an undergrad. I got first in Cambridge, which meant I was enabled to get funding to do a master's in Oxford.

Bloom: At the end of that, I actually applied to a bunch of investment banking jobs, consulting, even an IT help desk, which is insane when I look back on it. And the interview that was by far and away the best was actually with the Institute of Fiscal Studies.

Bloom: The IFS is a research think tank in London. It was run by Richard Blundell and Andrew Dilnot, and it's part of UCL. It was just a fantastic interview. They talked about economics, it was fun. It was super interesting.

Bloom: In fact, back in those days, that was 1996, the pay gap versus finance wasn't that big. Whereas now, it would be huge. Anyway, back then, it wasn't a big pay cut. And I thought, "Great." I went to the IFS, and then once I was there, I started doing a PhD part time at UCL-advised by John [inaudible], and just kind of fell into economics. From that point onwards, I just loved it and I stuck with it.

Beckworth: Oh, very interesting. You're now at Stanford University, and you are pretty prolific. I was going through your work in preparing for the show. You have a lot of articles, lot of research done. One of the areas that you're well-known for, is this area of uncertainty, economic uncertainty.

Beckworth: You've created an uncertainty index, a policy uncertainty index. We'll get to that in a minute, but let's jump into this conversation about uncertainty. Let's first maybe define what is uncertainty. How would you define it, and how should we think about in our conversation today?

What is Uncertainty and How Does it Apply Today?

Bloom: It's a great question. There's two ways to think about it. One is the layman's definition, or if you read Wall Street Journal or the Economist. I talk to people all the time. Uncertainty is not knowing the future. You might say, "Hey, look. If I flip a coin, I'm going to be uncertain about what happens."

Bloom: There's also a more formal economics definition, which is slightly different. Frank Knight, the famous Chicago Economist, actually defined uncertainty is what we'll think of might be call it as Knightian Uncertainty.

Bloom: He would say flipping a coin is risk. You have a known probability distribution. You have 50% heads, 50% tails. Whereas, uncertainty is something of which you really have no sense of the probability distribution at all.

Bloom: An example might be the number of coins ever produced by mankind. I really have no idea how to assign a probability to that. Formally, that's uncertainty. Some people called that Knightian Uncertainty. Others kind of call it ambiguity.

Bloom: It's a bit of a mess, but certainly the [inaudible] concept is not knowing each one comes whether you know the distribution or whether you're even uncertain about the distribution is a more fine-tuned definitional difference.

Beckworth: Okay, but for our purposes of discussion today, uncertainty, it's kind of a mix of those two ideas. It's maybe a little more unclear. Is that right?

Bloom: Yes. Economists like to pick hairs over these two concepts, but in practice, I think reality is somewhere in between. You may look at options markets and think, "Well, look. The financial market has options traded all the time," which means people are calculating distributions about various states of the future and trading on it.

Bloom: So, in that sense, you think everyone has a pretty good idea of the distribution of future outcomes. You may then say, "Well, let's think of something that is a period of Knightian Uncertainty." Because I remember when I was starting my PhD, I was thinking a lot about, well, halfway through my PhD, anyway, 9/11.

Bloom: So 9/11, the planes hit the twin towers, markets closed down. We have no idea what's going on. Initially, actually Al-Qaeda took no responsibility for it. Nobody actually claimed the attacks for a while, and there's massive confusion.

Bloom: So, that you think, was a period of pure Knightian Uncertainty. We've never seen anything like that before. We have no idea what might happen. But at the same time, while American financial markets were closed down. European option exchanges were still trading.

Bloom: And you could buy options on the S&P500. So, it tells you that even in periods of seemingly immense Knightian Uncertainty, there are still people prepared to put probabilities on events. So, I think most people would actually put probabilities on most events, and so pure Knightian Uncertainty is actually a pretty rare occurrence.

Beckworth: Well, this has become a hot topic. Obviously, the past decade we had the Great Recession. You've done a lot of research on this. The Federal Reserve has talked about it. The IMF has talked about it. You mention it in your paper.

Beckworth: What got you into this area of uncertainty? Was it the 9/11 episode, or was there anything else that really prompted you along this path?

Bloom: I was the classic grad student. I was burrowing away on extending a paper. This was at 2006 paper in the Review of Economics Studies by Russell Cooper and John Haltiwanger estimating adjustment costs.

Bloom: It's a great paper, and it's well-cited, and I was trying to extend it from capital to capital and labor, which, ultimately, is not that interesting an extension. I was using some mathematical tricks to do it.

Bloom: I was so excited by this, and I start talking to anyone about adjustment costs, and I could see their eyelids starting to droop, and they're struggling to stay awake.

Beckworth: Nice.

Bloom: At some point, I thought, "Who cares?" Ultimately, my extension is not going to change the world, but ugly enough, while I was fiddling around with estimating labor and capital adjustment costs, at some point, I had this kind of eureka moment that if uncertainty was time varying, suddenly these things mattered a lot.

Bloom: I remember going to a conference, then the MBBR Summer Institute presenting it's paper, and about a month before I presented, I managed to figure out and do some basic simulations. And what happened if uncertainty changed over time.

Bloom: And suddenly figured out the look, actually, it will be very powerful. I hadn't read Ben Bernanke's 83 paper, it was kind of doing very much the same thing. So, I was operating in a sense in parallel, but later than him. But I realize that time variation, uncertainty generates powerful effects.

Bloom: And then, in that presentation, Russ Cooper asked me, "Does uncertainty change over time?" And again, I was just finishing up my PhD at the time and I kind of thought, I don't know, I've never looked. And then I was kind of great question. So, from that point onwards, which is the kind of late 90s, I started to look at, "Hey, how can we measure uncertainty and does it vary over time?"

Bloom: And at that point, the best measure of uncertainty was implied volatility on the S&P 500, what's called the VIX, is that kind of a measure of how volatile stock markets will be over the next month. And when I looked at that index, it was incredible. It just, every time there's a recession or a nasty event, it spiked up.

Bloom: So, going back to, for example, the assassination of Jeff Pay. So, back then we didn't have the VIX. I just looked at realized stock market volatility, stock market surge, and were bouncing all over the place. The Cuban missile crisis, OPEC one, OPEC two, Gulf war one. Basically every time there's a nasty event, uncertainty surged upwards.

Bloom: And from that point onwards, I began to focus heavily on... I look recessions and bad events seem denying any carry bad news. That's kind of the first moment or negative PFP or demand shots. They also seem to be associated with big spikes and uncertainty. And maybe it's the second that's causing some of the drops in activity.

Beckworth: And fortunately for you, the Great Recession came along, and really spike interest in this. Unfortunate for humanity, but fortunate for you. The Great Eecession really gave this a research agenda, a new lease on life.

Beckworth: And you had a 2009 and kind of metric article, I believe that looked at some of these issues and in subsequent spate of articles following that, let's go to some of these measures of uncertainty. You mentioned one already, one of the macro measures you, you listed in your papers, volatility of stocks.

Beckworth: You mentioned that the VIX, but there's some other ones. Tell us about bond markets, exchange rates and GDP. Can those also be used to get a sense of uncertainty?

Uncertainty in Bond Markets, Exchange Rates, and GDP

Bloom: Yes. There's a range of different measures and you can break them up into kind of micro or macro and forward looking and realized. So, at least talk at the macro level. Realized is things that actually see there's more volatility in recession.

Bloom: So, for example, you look at GDP growth rates, mostly GDP is growing upwards by two, 3% a year. But suddenly when recessions happen, it plummets downwards. And so, that generates, if you run Gotch models, that generates a big spike in volatility.

Bloom: If you look at industrial production, it depends on bounce up and down much on recession, you look at exchange rates, they tend to bounce up and down when recessions bond prices, stock market prices. So, all of those realized measures of volatility spike up in recession.

Bloom: You can also look at forward looking measures. For example, implied volatility in the stock market, the VIX index, which is being called to theorem index, which is backed out from kind of put and cool options and it looks at expected stock ball that goes up.

Bloom: If you can look at forecast the disagreement. So, if you use things like the separate professional forecasts is from the Philadelphia Federal Reserve Bank. They poll about 50 forecasters. Each I can't remember. Is it each month or each quarter, but whatever it is. You see there's much more disagreement in recessions.

Bloom: So, a normal periods, like now it's kind of, most people are predicting two and a half percent growth next year in 2008, 2009 it was wild disagreement. So those are macro measures.

Bloom: Another one I should say I've worked on recent is even newspapers. I've worked under the economic policy uncertainty index where we just do ultimated scrape of newspapers of the number of articles that appear to mention the words economic or economy uncertain or uncertainty.

Bloom: And one of the basic sets of policy worth like Congress regulation of White House and those index, the frequency of those articles also surges massively in recession.

Beckworth: And that data is available online. Your uncertainty index, correct?

Bloom: Yes. The economic and public policy uncertainty index is available online. We have a website, partly that website is just, I should step back a minute. You are in partly right?

Bloom: I was extremely lucky for my PhD research in the sense of the climbing of the great recession. I unfortunately had not bought a house and had some, I'd worked in McKinsey for bit, so I had some savings and for my pension in the stock market and that plummeted.

Bloom: They're all in actually Sterling had moved to the U.S. But all my savings when they the London Stock Exchange and that fell even more because the pound crashed on the financial side. It was a disaster.

Bloom: But on the my career human capital side, it was great because what happened, it was the great recession was obviously a huge recession, but it was accompanied by an unprecedented run up in every measure of uncertainty.

Bloom: And particularly off to the Great Recession. 2009, 2010 I was asked a lot about policy uncertainty, the impact of top and the pretty radical policies that were going on. And so I started working with Steve Davis and Scott Baker to try and measure it.

Bloom: And we started very small, a scraping a lot of newspaper articles because it seemed like really the only way to come up with a measure. And I'd say initially it was a very unambitious project and as we continued to work in that we got more and more interest and it was not high tech, it's super low tech, but it just appeared to kind of a pitch design guys in the sense of it's actually very hard to measure uncertainty.

Bloom: This isn't a perfect measure, but it seems to be not if it was about as good as the other measures out there. So, we put this thing out and we got a lot of pick up from financial sector from the fed, Bloomberg carries the data now. So, it's kind of in the last two, three years it's really taken off. It's just another measure of uncertainty.

Beckworth: And people are using it in their research, right? They're using it in their models and their statistical analysis. Correct?

Bloom: Yes. It's been used. So, the basic issue is you want to measure uncertainty. You want to say you're the fed or research or even a hedge fund. Early on, a lot of the people actually were using it were hedge funds because they wanted to measure the credit spread.

Bloom: So the difference in the interest rate on AAA versus say BBB bonds. So, how much do you pay for the risk of having holding a BBB bond, how much extra interest rate and traditionally they'd use the VIX.

Bloom: So, the VIX is a measure of implied volatility on the stock market. Historically it worked very well. But, post 2009, I think in 2010 the VIX and stock market volatility in general has been trending down and down.

Bloom: And in fact about three weeks ago, so in early October, 2017, the VIX hit an all-time low, nine. So, stock markets are incredibly quiescent and therefore all the measures of uncertainty based on stock market indicators are incredibly low right now.

Bloom: People don't think the uncertainty is low. I mean we have Trump and Brexit and North Korea and all kinds of things. And our policy uncertainty index is actually moderately high.

Bloom: It's not really high, but it's certainly not low. And credit spreads are also about medium. So, what's happened is a lot of hedge funds talked to them have said they'd been using policy uncertainty is another measure of-

Beckworth: Interesting.

Bloom: ... to kind of get a market risk. And it's been, so I really don't want to claim it's a perfect measure. It's based in newspapers, [inaudible] there's all kinds of problems with it.

Beckworth: We'll get to those in a minute. Some of the endogeneity issues. But I'm just curious off the cuff, I'm sitting here listening to you. It strikes me that measure would be useful and trying to maybe explain some of the term premium movements on say 10 year treasury yields, and the central banks had been active in doing large scale asset purchases and they believe that they're having some effect on term premiums.

Beckworth: But I was looking on your webpage, you have a global policy uncertainty index and I imagine something like that, it’d be interesting to see a steady kind of connecting that to the term premiums on long-term treasury bonds. Has anyone done anything like that?

Bloom: You are exactly right. So, struggling to remember who, geez. Her name is [inaudible] but I was at the IMF about three weeks ago and somebody sent me a paper looking at, so an IMF paper looking at term premiums and in fact swaptions which is a kind of complicated measure.

Bloom: It's basically the risk and the term premium and that turns out to be incredibly correlated with our policy uncertainty index, as does in fact the longer end of the implied volatility curve.

Bloom: So just to explain it's a bit more detail. So, the VIX index is an index put out by the Chicago board of options exchange, which is they put out a number everyday day, which is the implied volatility on the next 30 days.

Bloom: The S&P 500 index, when is high it means that the market thinks the index is going to be very volatile and this low, they think it's going to be pretty flat and that thing is very low right now. But there's also a VIX curve, Vol curve which is those from 30 days all the way up to 10 years.

Bloom: And I've got hold of that data from some contacts and Goldman Sachs, you can do it yourself, but looking at that nature it turns out policy and uncertainly is much more correlated with the long end of the curve.

Bloom: So, exactly as you say, a lot of the big policy uncertainty issues right now. For example, Trump's effect on free trade, on tax reform and social security, more generally on free markets stability, the political system, war with North Korea, the breakup of the European Union.

Bloom: Not all of these issues are huge issues in the long run, but they're not very likely to be resolved 30 days from now. So, you're precisely at long run focus measures of uncertainty, unlike the long end of the yield curve or the long end of the Vol curve are actually much more correlated with policy uncertainty. The near term measures.

Beckworth: Yeah, that makes complete sense. And it ties into something I've looked at recently and I've been dabbling around with and that is the safe asset shortage problem.

Beckworth: Getting a little ahead of myself here in an interview, but part of that discussion is if you look at long-term government debt yields across the world and countries that we consider safe assets, safe harbor such as Germany, the United States, United Kingdom their long-term treasury yields have been going down persistently.

Beckworth: Above and beyond that would have been implied from the QE programs, and one of the stories is there's increased risk appetite. Excuse me, risk aversion and people are clamoring for safe assets like treasuries and this uncertainty index would be a great way to flush out that story. And from what you're telling me, it does flush it up very nicely.

Bloom: Yes, exactly. As you know I'm an avid listening to your podcast so I've heard you discussed this before. Yeah, very much. I think if the policy uncertainty index, it has no precise time horizon because it's effectively how much there seems to be discussion of policy uncertainty in the newspapers.

Bloom: You can imagine most newspaper paper articles aren't really the newspapers are looking at, should have in mind that they're the biggest pen in the U.S. So the Wall Street Journal but also the New York Times, The USA Today, Chicago Tribune, Washington Post, etc.

Bloom: So, they are highbrow but they are not financial focus and they are talking about mainstream policy issues like healthcare reform and healthcare reform or social security reform is a big long run issue. The federal government is effectively bankrupt. They were looking 20 years out and something has to be done but we know that none of that's going to happen in the next 30 day.

Beckworth: All right. There's some other measures, but let's move on for the sake of time because I want to get to your productivity slow down discussion as well. Let's move to why uncertainty might be important.

Beckworth: So, you list two channels. I'm drawing from your Journal of Economic Perspectives paper in 2014, it's called *Fluctuations in Uncertainty.* We'll provide a link to that and some of those other articles on the SoundCloud webpage for the podcast.

Beckworth: But in that article you present two channels, two transmission mechanisms through which uncertainty could have real effects on the economy. And I take it independent and beyond and above kind of other forces at work. So, the first one I want to turn to is kind of a risk aversion risk premium there. So tell us how uncertainty would work through that to effect the real economy.

Risk Aversion and Risk Premia

Bloom: So, great question. Why uncertainty math is, in order for uncertainty to math it in models of behavior, what we need is curvature. So, when things are linear, you have what's called certainty equivalents. You don't mind whether you're uncertain or not.

Bloom: And as soon as you have curvature, uncertainty begins to play a role. And there are two places economists typically include curvature and they think about the economy. One is on the household side, which is consumers have concave utility.

Bloom: Each dollar they get, they value less than the last one. And therefore, like security, they hate risks. This is a very old concept in economics. It goes back at least to the Nobel prize winner, James Tobin who was at Yale, Haynes talk about it.

Bloom: The idea here is if risks goes up, if you're more on certain consumers will save more and consume less and that will generate, that drop in consumption at least in an open economy would generate a drop in output.

Beckworth: You also have an uncertainty story tied to risk aversion through businesses as well, right? You mentioned if uncertainty goes up, risk premiums go up, firms want to hoard more cash less likely to invest in capital spending. Is that another angle there?

Bloom: So, that's a more finessed story, but that was actually, looks like it was an important issue around the great recession, which is imagine, basic models.

Bloom: We don't think firms are risk averse. We think firms are owned by diffuse shareholders and they basically, but in practice of course firms are controlled in large part by their managers. This is a corporate governance issue and managers of course certainly don't want to load up on masses of risks.

Bloom: And the last thing they want to do is discover the firm bankrupt. So, there's plenty of evidence and I have a I paper is RG Lynn, Ivana Firo looking at their school. The finance and certainty multiply that when uncertainty goes up, firms hoard cash.

Bloom: And again, this isn't a new finding, it's gone back to decades in the financial literature, but it seems to take on particular relevance now, if you're uncertain, I cut back in investment, I cut back on paying out dividends and I stash cash because I don't want to be left high and dry.

Bloom: So, that's another way for how uncertainty can slow down the economy. It does increase risk premium, but it also leads firms holding risk beam and constantly to stash cash.

Bloom: So, you've got multiple negative effects of risks. Consumers spend less, the risk premium goes up to firms invest less. And also they stash cash. The only kind of thing to push back slightly is go to the capital enclosed economies.

Bloom: This is becomes more complicated because imagine consumers say, consume less. They save more. What we know that in a closed economy, savings equals investment. So, it's less clear how this affects growth in a big economy like the U.S.

Bloom: It's very clear that risk is very damaging for small firm, for mall economies. So, there's a great paper by group in the AAR a few years ago that showing that in small open economies there's South American countries, when risk goes up the domestic economy tanks.

Bloom: The story is basically the money flies out of the country that they look at, for example, Ecuador. And if you're in Ecuador savings definitely doesn't equal investment. Interest goes up. You can imagine, if I'm Ecuadorian, the last thing I want to do, because there's an unstable government is save at home.

Bloom: So, all the money flies out of the country in the kind of free collapses. In the U.S., the risk goes up. Actually there's often was full the fight quality that people save more. But that savings can end up in investments.

Bloom: So, that risk aversion channel, it's very powerful and negative in smaller open economies, in logic closed economies which are more like the U.S. To the whole of Europe it's less obvious actually whether it's negative.

Beckworth: Ben I read that in your articles thinking about it. But one point you do make in the article, it does become very prominent and severe when you hit the zero lower bound. Right? Because at that point you've got a rigidity that it's preventing that market from clearing.

Beckworth: I mean, the story you're telling is you increase savings and interest rates should dropped at some point to where the market clears. But if you get stuck in the zero lower bound, if there's some kind of price rigidity, then all bets are off.

Bloom: That's exactly right. So, another way you can have powerful effects are from big increases and uncertainties with the zero lower bound. And there's a couple of papers on this and it is, I'm blanking on the exact coworker's names, but they show precisely that when uncertainty goes up, you'd like interest rates to drop.

Bloom: So, that savings equals investment. They're jammed at zero. That doesn't happen and you get a nasty recession. And another way is actually prices don't adjust. So, there's a paper by Basu and Bundick in the AAR, the argues, when on uncertainty goes up, savers, consumers want to consume less and save more and prices drop.

Bloom: But if you have sticky prices as you do in these new Keynesian models, again, markets don't clear and you can get drops in output. So, uncertainty through risk aversion can be a powerful negative demand shock. But you need to go beyond the kind of classic linear rewrite business psychomotor and include some of the rigidities we see more recent models, that the Keynesian models or the ZOB. And you can then get very powerful negative drops down in that.

Beckworth: Yeah, I was just reading this, I also was thinking along the lines of what John Cochrane and Roger Farmer have recently advocated. So, John Cochrane, I remember he had a paper in the journal of finance when he was president where he kind of, I don't know if he introduced, but maybe he reintroduced this idea that discount rate theory of the business cycle.

Beckworth: That everything's about the change in the discount rate and the look at the present value of future resources and you're discounting it. And his story is, business cycles are driven by sudden changes in discount rates. But as I look at it, it's not all that different than the certainty shocks.

Beckworth: In my mind anyhow, there's some connection there. I also, we've had him on the show. We also had Roger Farmer on this show and he's a Keynesian, but he is very rigorous with his work. He has what's called a belief function in his model where he's trying to more carefully captures idea of animal spirits.

Beckworth: But both of these, they seem related and they seem related to your idea of uncertainty, right? If there's a sudden uncertainty, shock is going to affect the discount rate is going to affect animal spirits. So, I think there's some overlap. Am I reaching here? Do you agree?

Bloom: No. I very much agree. Interestingly enough, there's a long been a discussion in the literature over the price of risk and the quantity of risk. So in fact, I was discussing it with my graduate students here. But, I always focus on the quantity of risk.

Bloom: The amount of uncertainty going up in our recession. And I think it's almost certainly the case that happens. In fact, I missed earlier discussing, there's also lots of micro evidence, so you look at firm volatility and individual volatility.

Bloom: The other story is the price of risk, which is the risk premium goes up and recessions. And there's also lots of evidence for that. And that's more the John Cochran line. And I I'm pretty sure, I mean, we've seen the data, both happens, both more risk and it's more expensive as relating to animal spirits and Roger Obama's work.

Bloom: I like his work very much and yes, I would see this is a way to meld these together. For example, Martin Schneider and the mics department here at Stanford as work in ambiguity aversion. So, people don't like risks and pessimistic and of course if risk goes up. They become much more pessimistic.

Bloom: And so the kind of intersection of this work with behavioral, generate some pretty powerful effects. If you dislike risks, if you're pessimistic, if you have kind of animal spirit beliefs, you can easily find that upticks and uncertainty generate pretty strong negative effects on investment demand on consumption and therefore drops outcome.

Beckworth: Okay, let's move on to the other transmission mechanism. The other channel. So, we just got done discussing the risk aversion risk premia channel. You also mentioned the real option theory channel. So, explain that to our listeners. How does uncertainly work through it?

The Real Option Theory Channel

Bloom: Yes, this is what I initially focused on in my PhD. I had a motto which is it goes back, I'll come back to this later because I hadn't entirely read the literature.

Bloom: You generated a bit of a heart attack from it. Some point in my job market, but there is a literature Dixit Pindyck, the best known for this literature showing the real options, effective uncertainties.

Bloom: So, the idea here is if it's expensive to buy a piece of equipment and then sell it, or it's expensive to hire or work or train them up and then fire when your uncertainty tend to force.

Bloom: So, on the consumer side, you can think of an equivalent version of you're uncertain as to whether you're going to keep your job. The last thing you do is go out and buy a new car or buy a new refrigerator. This is cool.

Bloom: The real option because you think of before you've gone out and bought a farmer has gone out and bought a new piece of equipment or hire the new work, it has the option to take that powering or investment decision. Once it's done, it loses the option.

Bloom: And as you know from finance, options are more valuable when uncertainty is higher. Therefore, when uncertainty is high, it's more valuable to weight. And therefore, lots of firms wait, you got to go drop in activity.

Bloom: So, the real options model is very simple. It says, when uncertainty goes up firms are more cautious. They pause hiring, they pause investment, consumers are more cautious. They pause, particularly spending on consumer durables and that causes a recession.

Beckworth: Yeah. In a minute, we're going to talk about the productivity slowdown, but I'll just have to ask right here and now when I read that part of your paper, I instantly thought of the productivity slow down. Right?

Beckworth: If firms aren't doing as much capital spending, investment spending is declining, that has to play at some degree into a potential productivity. Slow down. Yes.

Bloom: Yes and no. So, I well before I go any further, I should, if you who attribution to the person, actually when I did, I came up to give a job pool at Stanford and I was talking to Bob Moore, and Bob Moore, I was explaining my job market paper and Bob Moore said, "Hey bro, we've heard this all before."

Bloom: That was a paper by Ben Bernanke that point I panicked and Bob says, but go on. Go on. And obviously I got the job but as soon as I left Bob's office, I basically as soon as I had a break I ran it downloaded Ben Bernanke.

Beckworth: That's not what you want to hear in a job talk presentation.

Bloom: No, it's terrifying. It's been done for the worst, but it turned out it was right. It was totally right. In fact, away, it was very nice for me. So Ben Bernanke, his PhD, the key paper out of his PhD, and I believe his job market paper was on exactly this.

Bloom: He published it in 1983 and a TJ and it talks about how an increase in uncertainty can lead through a temporary dropping out but then a rebound and he had a very nice stylus model in a sense I was doing this quantitatively and bringing data.

Bloom: So, then to come to your question, both my paper and Ben Bernanke's paper show the same style as fact, which is a rise in uncertainty, generates us a pause in activity when uncertainty drops back down again, activity resumes.

Bloom: You can kind of think of it like a stream, the dam, the stream and surely you stop the stream but all the water building up behind the dam and once you remove the dam all flood back down.

Bloom: So, in terms of linking up to the product, you can just slow down and my paper and other work like this, Bernanke much other work, you can have a temporary, quite negative effect of uncertainty in productivity. In order to have a long effect, it needs to be uncertainties.

Bloom: Iron actually probably is rising over time. So, my own view is it probably had quite damaging effects in 2008, 2009, 2010, it would have quashed a lot of R&D projects and investment by firms, but I don't think it can play a role in driving the secular decade by decades and in productivity.

Empirical Importance of Uncertainty

Beckworth: Well, let's move on then to empirical estimates of the importance of this issue. So, you've mentioned some studies that have gone out and I'm going to recall one from your journal of economic perspective paper and this was published in 2014 so maybe things have changed, but you mentioned you estimate roughly like a 9% GDP loss.

Beckworth: That was both like a 3% actual decline in real GDP and then kind of GDP not growing on its trend path. And if I'm correct, you attributed about 3% of that 9% loss and GDP to uncertainty. Is that right?

Bloom: Yeah, those are the numbers in the paper. They have pretty big standard errors around them. The uncertainty dropped. I think it was the things on the run, on the good and the bad side in that number. Obviously the bad side, it comes with pretty big standard errors.

Bloom: I got that off both from a VAR and using a model as you know, with everything in macro everything's endogenous. Everything is driven by retail. So, much as a kid in an impress goes first moment shots or endogenous so my uncertainty shop, so is the ZOB.

Bloom: So is everything policies, board looking, it's a nightmare to attribute this so they should be taken with a lot of a big standard error around them. But those are the best number I could come up with from triangulating both from day to a model.

Bloom: The other thing to point out is that it's a temporary phenomenon. So, uncertainty, going back to the earlier analogy generated a shot drop, but then once uncertainty subsides, that goes and you get a quick to the rebound. So, uncertainty tends to be very damaging in the kind of year of the recession.

Bloom: But I think the full often uncertainty is one of the reasons typically as Milton Friedman described them, recessions have these V-shape so he called it the guitar string theory. As you know, the harder you pull it down, the foster it snapped back. And that's partly because uncertainty generates big drop would also stores up the rebound.

Beckworth: Well, let's maybe step back and ask maybe for a more fundamental question about uncertainty and you brought it up earlier, this question of endogeneity. So, probably many people would say, yes, we believe in uncertainty, but the uncertainty is just a byproduct of bad policy if financial crash something else.

Beckworth: But my takeaway from reading your articles is that it becomes a force of its own. That kind of maybe it starts out because it's something else, but it can grow into its own damaging force that needs to be taken seriously. So, do you see it that way? It maybe it starts out indulgence sleep. It becomes kind of an exogenous independent force of its own.

Bloom: Yes, I see two roles. One is as an impulse, so if you look back of recessions going back over the last 30 years, they're normally driven by some nasty event. So, a war on oil price shock in the case of 2008, 2009, the housing market collapse and well 2001 was 9/11 in large part.

Bloom: So, these events turn out typically to be bad news. They also, which is a negative personal shock. They also increase uncertainty. So, 08, 09 Lehman's collapse. The housing market goes into meltdown. It's clearly bad news, but there's also dramatically more uncertainty.

Bloom: And that's the sense in which I actually think the shocks that hit the U.S. economy are multiple moments. They're not some kind of laboratory clean car PFP shocks, they comprise several elements. One of them is uncertainty.

Bloom: Then the second element is [inaudible] as you got through, I think there's also amplification and propagation mechanism, which is the response of policymakers often can make things worse.

Bloom: So, John Taylor's, argued a lot in this case, Lucas [inaudible] and Petra Varanasi, sorry, at Chicago, have papers arguing that, when times get bad policy makers thrash around and that creates more uncertainty and you can see it in the radical political outcomes you've had both in the U.S.

Bloom: And much of Europe. Recessions have generated more polarizing and more uncertain politics, which I think has increased problem slow down growth burden.

Beckworth: All right, Nick, what about your AER paper where you discuss uncertainty, not just in a kind of a shock sense, but you look at the trend and you've a paper that looks at the growing trend of policy and uncertainty since the 1960s. Can you summarize that for us? What's going on?

Growing Trends of Policy Uncertainty

Bloom: Yes. So, I should be clear, an AER papers and proceedings papers. That's a short summary paper and it's Scott Baker, Steve Davidson, two political scientists, Jonathan Rodden and Canise Princeton and we look at policy uncertainty.

Bloom: We measure policy uncertainty going right back to the beginning of the last century. And we see this U-shape. So, policy uncertainty was high around 1900, it was bad up until the great depression seemed to stabilize in full after world war two and then has been rising ever since. And this maps very closely actually to the U shape and political polarization.

Beckworth: So, there's plenty of evidence showing that politics was much more consensual after world war two, Democrats and Republicans weren't so far apart. Well, as you've seen particularly recently, they're completely non-overlapping and that appears to be one of the factors behind rising policy uncertainty.

Beckworth: So, the Democrats get in they swing one way, the Republicans get in they swing the other. And of course for businesses it makes it very hard to predict what's going on. And that was a great example.

Bloom: I mean, Trump has a pretty radical agenda. It's not clear what's going to be passed and what isn't. Congress is Republican, but it's marginal. And there are certainly a number of Republicans that don't agree with Trump and go to Europe.

Bloom: The same thing in a Europe, for example, my homeland Brexit, It is ever been an uncertainty bomb. That's Brexit. They'll unknown. I mean, nobody has any idea what's happening with Brexit.

Bloom: The politicians it's like some kind of gunfight force. They were shooting each other and falling apart. So, that's very much a sense in which politics become more polarized and I think that's won over the last 20, 30 years. In the U.S. That you're going back to world war two and that seems to increased political uncertainty.

Beckworth: Well, I guess there's something reassuring from that. We've been here before. Maybe there's hope that we can see a decline at some point in the future and political polarization.

Beckworth: Hopefully, it won't require a war, but something might hopefully bring us back down. Well, let's move on to another area you've done a lot of research in, you look at productivity, innovation management issues. So, why don't you share with us some of your findings in particular to the big question that's at hand right now. It's very topical and that is why has productivity growth slowed down so much?

The Productivity Growth Slowdown

Bloom: Yeah, so I have a paper, with John Jones, Mike Webb and John Van Renin probably our ideas getting harder to find, and this for me is kind of a bit of an intellectual journey and I've change my views about 180 degrees over the last five years.

Bloom: So, this paper argues there is a productivity slowdown is a very a good both in that position. It basically argues by looking at the data going back to the 1930s, particularly the World War II. But what we're seeing in the U.S. is a productivity growth has been slowing down.

Bloom: It's not that surprising, but it's not news to many people, but it's actually particularly convincing if you look back over many decades, its productivity growth was about 3% post world war two, it fell to kind of a couple of percent in the 80s, 90s.

Bloom: It's now down to about 1%. So, it's fallen to a third of its long run, third of its postwar value at the same time, R&D expenditure has been doubling roughly every two decades.

Bloom: So, there's a frightening trend in this which is with spending evermore money on research and development, but actually creating fewer and fewer ideas certainly as measured by the growth rate of GDP.

Beckworth: Well, that's very sobering. So, it's getting more expensive to produce new ideas, new innovations?

Bloom: And I live on Stanford campus. I, spend a lot of time talking to scientists and engineers. My dad is actually a scientist the hustle was, it was on a second biotech startup.

Bloom: None of them are remotely surprised by this. So, the story of it is you can think of, there's kind of two areas of history, well maybe three. So, the first year of history is fascinating long and it goes from the Romans almost to a 1,700 AD, where we had almost no growth.

Bloom: So, the estimates of growth is like 0.1% a year, just pitiful, basically zero. And then we have the industrial revolution, which is a huge epoch changing event, but actually growth only jumps up to 1%, which now would seem in a horribly low. But back then was a tenfold acceleration and growth.

Bloom: Actually, from 1800 when the industrial relations started off in the UK has been roughly increasing up to about two, 3% around World War II. And that's an era of what I recall standing on the shoulders.

Bloom: So, that goes back to Newton's quote, which is if I've seen further than you, it's because I've stood on the shoulders of giants, the idea that you can build off other people's ideas and research to be more productive.

Bloom: And if you think of someone like Newton, he lived in an era where he had to work by candlelight. There was no electricity, there was no penicillin, there was no heating, there's no cars. He had a short day to work and it was freezing. He got sick, he died young. But from the 1800s to then about World War II onwards, there's more and more inventions coming on and it's made feature inventors more productive.

Bloom: So, we saw an acceleration in productivity growth around World War II. The second era seemed to, well I guess the third report seemed to set in, which is the apple tree model whereby ideas are getting harder and harder to come by.

Bloom: And here the view is by World War II, we had a large number of elite research, active universities. We had many industrial labs and they're just pouring huge billions of dollars into research and development. And it's actually stomach start to come more and more crowded.

Bloom: And it's becoming harder and harder to find new ideas. And we're very much in that era now. No, that doesn't mean it can't change. It doesn't mean 20 years from now, suddenly we make a revolutionary breakthrough in productivity growth accelerate.

Bloom: I think it's a reasonably safe bet. Looking at recent history where say productivity growth is going to remain reasonably poor as in one, maybe we're lucky 2% a year for the next 10 or 20 years.

Beckworth: Nick, that's not very inspiring, not very hopeful.

Bloom: Yeah. Maybe you have to renew your expectations. So, the one pushback I want to say is our expectations in some ways it just got out of line, right? We used to expecting three, 4% growth, because that's what I knew history has. But if you took an average over the last 100,000, 10,000 years, you'd be ecstatic with one to 2% growth.

Bloom: So, we are actually heading back towards the growth rates we're experiencing around the industrial revolution. A and point B is, it's not even clear. I mean, this could change 20 years from now.

Bloom: In Stanford, I see all kinds of amazing inventions. Things like the driverless car 9, 8 technology, genetic engineering, some of these things you could have revolutionary breakthroughs.

Bloom: The saying is people are over optimistic about change in the next five years and under optimistic in the next 20 years. I just think rather than looking at science fiction, we should look at history and recent history and the picture is not very optimistic on growth rates for the next 20 years.

Bloom: But if you want to look at it optimistically, just compare it to the more distant past and on those grounds doesn't look so bad.

Beckworth: Well, a couple of points on that. I'd like you to respond to first. I wonder if the declining rate of innovation or the more expensive costs of innovation can be a product of our increasingly risk averse society.

Beckworth: So, I've had Tyler Cowen on the show and I kind of latched onto this idea that we, his argument in his book, *The Complacent Class*. As we've become more wealthy, more fluent, we're more risk averse in all areas of our lives. We're comfortable with what we have.

Beckworth: And so, from everything from how we raise our kids to who we let into our neighborhood, to regulations protecting labor, I mean, one example he gives and I've used repeatedly on the podcast is it'd be very difficult for us to build the Hoover dam again because of all the regulations and laws we're not as dynamic.

Beckworth: And there's a lot of other research going on at this speaks to this as well. But I guess I wonder if is the increasing cost of innovation a byproduct of our increasingly risk averse culture that's manifested in these many different ways?

Bloom: Is a very interesting question. So, living out in Silicon Valley, you often get the pushback for the not more risk of us look at the huge, flood of venture capital, which is risk loving investment that's pouring out.

Bloom: On the other hand, you do hear lots of stories. So, one good anecdote in favor of Paella Cohen and I listened to that podcast as your podcast with Paella is think of the way that pharmaceutical innovation has moved from big pharma to biotech.

Bloom: So, my father talks a lot about this stuff 20, 30 years ago. You used to have a lot of research done in big pharmaceutical firms. They were pouring out amazing inventions with massive R&D programs. But what's happened is there's something stultified by the fact they have huge labs. There's a bit of a nine to five safety culture.

Bloom: He says if you visit these pharma zones, the lights are not on, on the weekends, there's hardly anyone in them. Whereas instead, if you go to biotech firms, these small startup that has spun out of universities there, you'll see people working 100 hour weeks taking huge risks, really sweating out because they own the equity.

Bloom: And in fact, the whole business model of pharmaceuticals has moved from, big pharma firms doing R&D in house to now just having a war chest of cash they used to spend on successful biotech startups and therefore effectively they're paying indirectly for the research going into biotechs. And that's one way to get round, the regulatory death and the safety-

Beckworth: Interesting.

Bloom: ... death happening in pharmaceutical firms.

Beckworth: Okay. My other point is one that Alex Tabarrok has raised. He had a Ted talk man, it's probably three, four years ago now, but he talked about the potential for global growth coming from China and India.

Beckworth: We've already seen some of that. But his argument is as more and more Chinese become part of the middle class as their income levels go up. And same thing in India, at some point they're going to really want, their demand for things that we take for granted today.

Beckworth: We'll source, there'll be a huge increased demand for cures for cancer, for AIDS, maybe driverless cars, who knows? But his argument is once you get this huge market over there and you get people who are no longer subsistent living, they're actually a part of the middle class.

Beckworth: You're going to have ideas, the more and more people you have, the greater the likelihood you're going to have an Einstein among that crowd. So, are you hopeful that innovation maybe or research other parts of the world might emerge and make up for the decline? The costliness in the U.S.?

International Innovation’s Role in Fixing the Slowdown

Bloom: Yes, and I think that's already been incredibly helpful. So, there are two trends going on. One is ideas are getting harder to find and in fact Moore's law is a great example of this Moore's law, which is the number of silicon chips or this number of transitions on the silicon chip to double roughly every other year.

Bloom: That's actually held pretty constant since go to Moore made that prediction in the 60s. But the amount of scientists involved in that R&D has got 25 fall. So, it's becoming harder and harder for scientist to make this innovation, then you think, hey, hang on a minute, but Moore's law has kept constant as, am I still making those breakthroughs?

Bloom: Why is that? And the reason is the market's grow ever bigger, do you have I'm entail. Now I know that if I come up with the next generation chip, I'm not only selling to wealthy people in America, I'm selling to most Americans, Europeans and the large massive market in Asia, some of South America, some of Africa, so thankfully grow, there's two forces moving in opposite directions. One is each innovation is getting harder to make.

Bloom: The opposite one is that for a given innovation, we can now sell to a ever-growing market and those two are roughly offsetting each other. The first seems to be slightly dominant and that's why growth is slowly slowing down.

Bloom: But it'd be slowing down a lot faster if it weren't for the growth of the rest of the world. So, yes, absolutely. That's helping, that's preventing a cataclysmic drop in growth is making meaning instead of we having a gradual trend down.

Beckworth: Yeah. But I take your point and Robert Gordon type points that we are still in a world that's very similar to one 30, 40 years ago. We've had a lot of innovations, but we still drive cars, we still live in homes.

Beckworth: Transportation is still relatively the same. What would a radically changed world look like? Maybe Hyperloops and maybe cheaper transportation across the globe in an instant.

Beckworth: So, we are a long ways from maybe this next stage, whatever it might be. So, I think it's a fair critique that you raise along with Robert Gordon. I just want to remain optimistic here and be hopeful.

Bloom: And I don't want to say what pessimism, I gave a very high profile talk out here three years ago, claiming productivity growth is not slowing down. It's on the web. It's embarrassing there in the sense.

Bloom: And changed my mind just by looking at the data. I mean, I'm a data guy and the data shows are stolen. On the other hand, 2% growth isn't bad. The reason, by the way, I think there's such an angst over slowing growth is that we actually not only have slowing growth, but far worse, we have rising inequality.

Bloom: Slowing growth if inequality wasn't rising, would not be such a problem. And nobody really minds that much. 3% versus 2%. The reason it's been so horrible and we've seen the rise in protest politics and I think breaking apart society is inequality is going off at the same time. And actually I think that's the much bigger evil than slowing growth rate.

Beckworth: Okay. One last question. So, you've written on management practices as they relate to productivity. So, share with us your findings and your research on that topic.

Management Practices and Productivity

Bloom: Sure so, long ago I worked at Mackenzie, the management consultant in London and I assume management being a hugely variable and very important. And I kind of got frustrated though when I came back to academia, the economist poo-pooed the whole idea of management.

Bloom: I used to joke that I'd give a seminar and people would hear my English accent and they'd give me a 20 IQ point bump up estimation. But then that see the M word, the management word in the title and deduct 25 points are and a half to two minutes method.

Bloom: So, I should also to say management, it's not like it's a modern topic. Francis Walker who was the founder of the American Economics Association around the 1817, 1880 census. And in fact it was the second president of MIT hence the Walker Memorial.

Bloom: He had his book a paper in the first volume of the quarterly journal economics. So, oldest economics done logging that management drives differences in business performance. It somehow kind of got forgotten about in the 40s, 50s and 60s.

Bloom: And I came back to it with a number of other people. John [inaudible] and Rockway Alyssa in particular, just measuring management practices across firms, using surveys and census measures and showing it's highly correlated with some performance.

Bloom: So, it's not rocket science. It's kind of painful, tedious day to work, but that we just see in the data massive variations in management practices and they're strongly related to performance and coming back to your earlier points, better managed firms tend to be in competitive free markets without much regulation.

Bloom: When they run by professionals and terrible firms or in government or family owned with heavily regulated areas with no competition.

Beckworth: Very interesting. Well, that leaves us with a glimmer of hope that we can get better management and higher productivity growth. Our guest today has been Nicholas Bloom. Nick, thank you so much for joining the show.

Bloom: Great. Thank you very much.

David Beckworth
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Nov 20, 2017
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Productivity has seen a steady decline over the last few decades, and a lack of innovation paired with ineffective management practices may be to blame.

Nicholas Bloom on Economic Impacts of COVID-19 in the Short-run and Long-run

Nicholas Bloom is a professor of economics at Stanford University and a leading scholar on management, productivity, innovation and economic uncertainty. Nick is a previous guest of Macro Musings and returns to share his thoughts on COVID-19 and what it means for the US economy, both short-run and in the long-run.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Nick, welcome back to the show.

Nick Bloom: Thanks for having me.

Beckworth: Well, great to have you back on. I know you're on the other side of the country. You're on the West Coast at Stanford University on the campus there. So, how have you been holding up?

Bloom: For all of us, it's obviously a tough experience, though I think we're very lucky living out here from talking to a lot of my friends and relatives are in London or in Glasgow, and I think being in a suburban setup is a lot easier. So, we have a bit of space. The lockdown's got progressively tighter. Initially it was reasonably relaxed, but now much of the open space, all the parks, sports fields, everything is closed down. I see a lot of my neighbors walking up and down repeatedly on my street. But yeah, it's like everyone else who are trying to get through it.

Bloom: Trying to get food, as well, actually the other issue is, it's increasingly really hard to get any food if you want to deliver it. So, you either go to the supermarket or eat old bags of rice.

Beckworth: So, is it difficult when you go to the grocery store? Do they space you and time you when you go in?

Bloom: We've been too nervous to go out right now.

Beckworth: Okay.

Bloom: Right now old rice is looking more appetizing, but honestly we're running pretty low. It feels like medieval times when you're coming to the end of the winter. Will you make it through to the spring to get more food? I don't know, we've been having this discussion.

Bloom: Actually, around here it seems like in Santa Clara County where we are the infection rates are kind of flatlining, if anything slowing off. So, we may actually in two, three weeks it may be fine to go out.

Beckworth: Okay. Well I hope it continues to get better there. I mean, California's done relatively well, compared to say New York, so you guys have done that really intense locked down early on, so maybe it's paying off. But you have some great work on the crisis. You have a new NBER paper on COVID-19 with your colleagues, ones you've done work with before and we want to talk about that. And we want to frame our conversations today around what you see are the short-run consequences as well as the long-run consequences of this pandemic in the United States and elsewhere as well.

Beckworth: So, you have a paper with your colleagues titled “COVID-Induced Economic Uncertainty” and you've written papers before with these colleagues of yours on economic uncertainty. But it was an interesting paper because you're taking a look at what the implications will be here in the short-run. So, walk us through that paper and some of the big conclusions you find in it.

Short-run Impact: Dealing with Uncertainty

Bloom: Absolutely. So, yes, this is with Steve Davis from Chicago, Stephen Terry and Scott Baker, who were both previous students of mine at Stanford, co-authors now. So, one of the things we started to do is like how would you measure uncertainty in the COVID recession? So, traditionally there's this whole literature on measuring uncertainty. There's a number of different indicators. And until recently, there's a big debate about what you should use for identifying recessions, but suddenly under COVID an immediate factor's been the speed of the change, means you want an indicator that's both timely and forward looking.

Bloom: So, just to put this in context, February, 2020 was the best labor market in probably 60 years based on unemployment numbers. So, they were 3.4%, by April 2020 it's looking like it's going to be the worst since the Great Depression. And so you need an indicator that was available basically with a lag of one, two, three days and is also forward looking. So, that rules out some of the classical measures which look at, say, historic GDP volatility. So, we know that GDP is much more volatile in recessions than in boom times, but of course we don't even have GDP yet for quarter one and we're not like to get it, for a while, for quarter two. And so, we really want something forward looking.

Beckworth: And so, you look at three indicators, stock market volatility, newspaper base, economic uncertainty, and subjective uncertainty in business expectations surveys, is that right?

Bloom: Yes, exactly. So, the three measures you look at is basically, firstly there's a set of financial market indicators, so things like realized vol, so how much the S&P moves up and down within the day, or a day by day. Very related to that will be for example, VIX, so that's the implied volatility in the S&P 100 Index. You know the standard measure is one month ahead. But in fact with Ian Dew-Becker and Stefano Giglio, we've been looking up to two to four years ahead. So, one is a series of financial measures. You could look at things like bond price volatility or exchange rate volatility. A second set looks at newspapers and, in fact, in particular looking at all daily U.S. newspapers, there's around 2,000 of them available on a data source called NewsBank and how much their articles discuss economic uncertainty. And then thirdly is looking at surveys.

Bloom: So, with the Atlanta Fed and with the Bank of England, I've been involved in two monthly online surveys and they get mailed out on the first Friday of the month. And then firms have two weeks to respond and then it closes. And all three of them have the big upside that the data's available almost real-time. The surveys take two weeks, but the other two are basically that day or the next day. And also, of course they're forward looking, so you notice, for example, throughout March that the Economic Policy Uncertainty Index starts to really climb very rapidly.

Bloom: So, at the beginning of March, COVID wasn't, it was an issue ... Remembering, I really date it from the 24th of February, which is the first major stock market drop in the U.S. based on COVID. And so, by early March you're still really a week in, but by the end of March fears are for a great recession and it's just totally dominating all measures.

Beckworth: Now, if I understand your paper correctly, you take this measure and you plug it into a model, and you try to pull out or extract what it means for GDP. And you have this pretty staggering conclusion that GDP will contract 11% in 2020, quarter four, and there's a wide confidence interval around that, but is that number right?

Bloom: Right, a VAR based on another paper I've been working on with Stephen Terry and Scott Baker, which looks at GDP growth over a panel of 40 countries, going back 40 years. But the idea of that paper originally was to look at the causal effect of uncertainty and to get at that we wanted to look at what we call disaster shock. So, kind of exogenous unpredicted events like terrorist attacks or natural disasters, coups or revolutions, and pass them into the first moment effect. So, the impact of those that literally just lowers demand and supply. And then the second moment effect, the effect that's really all about uncertainty. And use that to try and think about how much these events, and basically first and second moment effects, drive GDP growth.

Bloom: And we take the parameters from that model that we estimate on the big panel and then feed in the COVID news from the U.S. So, we feed in the stock market level and volatility, and that predicts a drop in GDP this year bottoming out at around minus 11 or 12% later in this year.

Beckworth: Yeah. Which is a very large number. I mean, the Great Recession, what was it, 3%, 2%? I mean, the contraction we had back then and ... Yeah go ahead.

Bloom: Yes. I was going to say, I mean, it's huge, but on the other hand I think, I'm aware that I've been very pessimistic. So, at the end of last week I had to give a reasonably big talk here in Stanford about it. And my numbers are ... I've been looking a lot at the consensus forecast. So, the consensus forecasts for the U.S. are about minus 4% in quarter two. So, that's a quarterly growth rate. If you times it by four you get the annual growth rates of minus 16%, which you hear in the news.

Bloom: Just to give you a benchmark, Goldman Sachs gave that as minus 6%, which is where their annualized growth rates of minus 24 is. But the consensus forecast actually has growth rebounding in quarter three, 2020. So, to give you for example, just to put the numbers on the table for Goldman Sachs, the latest figures, quarter by quarter they predict the U.S. economy is going to be down almost 10% in quarter two but we'll bounce back at about four to 5% in quarter three, and about a couple of percent, quarter four, and quarter one beginning of next year.

Bloom: So, on their numbers by quarter one next year, so by about a year from now, we're back to trend. My forecasts, I have to say, are much more pessimistic than that. I have as a much bigger drop next quarter, and quarter three, I don't think is going to see a large rebound. So, that even by mid next year I think we'll still be quite below trend from where we are now.

Beckworth: Yeah. Just to put this in historical perspective, so the Great Depression over three years or so, from '29 to 1933 saw contraction of the real economy, about 20%. Nominal GDP fell about 50%, so another 30% in the price level. But a 20% contraction over three years, still a pretty devastating experience. But you're suggesting something half that big within a year. And if you look at your confidence intervals, you actually do take it all the way down to 20% possibly. So, it could be as severe as the Great Depression but compressed within a year.

Bloom: Yes. So far, so there's two kind of parts of the debate. One is the short-run effect, which I say, what's going to happen in the next three months? And I don't know, this podcast probably goes out next week. So, is right now, April the 13th, we're not going to know for another two, three months, but pretty soon we're going to know what the, at least, measured GDP figures look like for 2020, quarter two. And we can come back and discuss what the actual GDP, because GDP measurement has a number of issues, which is problematic right now. So, one debate is how big the drop will be immediately. I'm more pessimistic than others and I can come back to some other data on that. I think the much harder to pin down issue, and what there's far more uncertainty over, is what the longer-run rebound's going to look like.

I think the much harder to pin down issue, and what there's far more uncertainty over, is what the longer-run rebound's going to look like.

Bloom: And back in early March, people were talking about I-shaped recession, so an instant drop and rebound. And then, mid-March it was more the debate about the V-shapes recession. So, I don't know if you remember that old saying by Milton Friedman, he compared recessions to like plucking a guitar string. So, the harder you pull it down, the faster it snaps back. So, that's the V-shape and now I think the debate has moved on to rather we're going to have a U-shape, so a longer drop and recovery, and that's my own personal view. I don't think we're going to quickly bounce back throughout 2020 and that's also consistent with the forecast out of our VAR model.

Beckworth: Yeah. So, you have a very depressing outlook for this year, to put it mildly. And something that's really hard for, I think, anyone in our generation to fathom, go back 1930s, '40s, people might understand this better than us, but even they, again, they had three years to kind of embrace this shock that caused the economy to contract this much. Now, one other thing that you bring out in this exercise is that most of that contraction will come from the uncertainty. I just wanted to think through some of the channels through which this virus, this pandemic shock is affecting the economy. So, one obvious one would be simply the negative supply shock. We've shut down a portion of the economy. We were talking about this early on when China was shut down, people were talking about global supply chains are shutting down. So, that's clearly a supply shock and now people are saying, well there's demand shock involved as well.

Beckworth: So, you can think of like the stock market contracting, there's wealth effects, there's maybe risk aversion effects, but there's many channels you could tell the story through. But what you find is the most important channel is the uncertainty channel. So, walk us through why is uncertainty so high in this particular crisis as compared to say a financial crisis?

Bloom: Sure. So, I mean our numbers are like 60/40 but I would say there's big confidence intervals around them. I'd say, broadly speaking, uncertainty is roughly equal magnitude to the first moment component. And then the question is, why? Well, firstly, uncertainty is incredibly high right now. So, the best two metrics for real time analysis, I think, are stock market volatility and the VIX is up about 400% on this baseline.

Beckworth: Wow.

Bloom: It's fallen back down, but it went over 80, where it was averaging about 15 beforehand. And then the other measure is our Economic Policy Uncertainty Index, again, has gone up about four X, it's long-run average around a hundred, and it's right now averaging around 400. I mean, actually interesting, other indicators that are useful are more anecdotal ones. Like last week, General Electric pulled all its forecasts for profits, saying it was impossible to make any predictions in the current scenario.

Bloom: Starbucks, FedEx, various other companies have literally pulled forecast, which I've never seen before. So I think the uncertainty is incredibly high. The way in which it's damaging growth is from a couple of dimensions. One on the business's side, you can imagine that no businesses right now are going to be investing in tangible, and particularly intangible capital, so R&D, training, et cetera. You're going to be preserving cash. They're going to probably almost completely frozen hiring. Even Amazon is not dramatically increasing hiring, nowhere near the amount that other firms are dropping.

Starbucks, FedEx, various other companies have literally pulled forecast, which I've never seen before. So I think the uncertainty is incredibly high.

Bloom: Then if you flip it to the consumer side, of course, consumers are likewise not buying durables, becoming much more risk averse, saving. So it's hard to tell how much of this is pure uncertainty versus an increase in risk aversion. But I think both consumers and firms are going to be dramatically reducing expenditure, and that's driving a lot of what we see as the drop in demand. Now of course, supply is also dramatically hit directly, so it's hard to parse the two of them out. But just feeding in the stock market drop and increase in goal based on prior numbers gives us a roughly 50/50 split between just first moment versus the uncertainty effects.

Beckworth: The uncertainty stories sure seems intuitive to me. I mean, every day there's a different story for how long this will take or have we bent the curve, yes, no, what's the approach going to be, are we going to open up the economy, yes, no? It goes back and forth. There just seems to be so much uncertainty in general. This has to be an important challenge based on anecdotal readings of news stories and such, and you provide systematic evidence that that is the case.

Bloom: Yeah, again, it's very hard to be precise with numbers, but just as measurements, the only uncertainty measures I think we have that are available going back are the long time series and looking forwards, which is stock vol, these media measures are up four fold. The survey data I've been getting is also horrendous, so the firms forecasts and their reduction in sales. You know the numbers in March, at the beginning of March these surveys are only open for two weeks, but even the first people responded in early March, they're giving minus five, 6% numbers by late March is like minus 15, 20%. Some more recent work I've been doing with a large FinTech company here, they survey thousands of small businesses, they're predicting sales slowdowns of about 40%.

Bloom: If you look at, there was just an NBL working paper that came out today by, I'm going to forget all the people, I feel terrible, but Zoe Cullen, Ed Glaser, Marianne Bertrand, there's like five or six people. They had sales drops that were predicted from their respondees of minus 40, 50%. Another way to look at it that I actually really liked, the analysis is by Moody's, so what Moody's have done is they've done a bottom up looking at state by state, sector by sector, looking at the amount of activity that's been prevented by the shutdown. And they estimate that across the U.S., we are now per day losing roughly 30% of GDP. So once you do those numbers, you can figure out that quarter two 2020.

Bloom: Imagine the best case scenario, the lockdown runs until the end of April and then from May onwards, a return to normal. In April alone you've lost about 30%, so on average for the three months you must be down 10% but then on top of that I can't imagine we're going to instantly bounce back in May or June. Which is why it's hard to see GDP dropping by five, 6%. I think GDP in quarter two is going to drop, at least if it's properly measured, by 10, 15, maybe even 20%. The caveat that is on the measurement because a number of sectors in the U.S. it's hard to measure GDP and they typically measure on input.

Bloom: So for example, the public sector, universities, they measure it based on expenditure. For example, salaries and how much these sectors are spending. And of course they're still spending the same amount because people are still employed. But I don't know what other faculty think, but I think my output in terms of teaching research, annual government officials output is substantially lower than it normally is. But of course we're apparently as productive as we ever were by the official statistics.

Bloom: And I think how this is going to show off is the rebound is going to be really slow because there's a lot of stuff that's being shelved right now. A good example would be R and D, so all of the labs across a Stanford is shut down. Unless you're working on COVID, your lab has been closed. It's the same across MIT and other elite universities of people I've talked to. The same would be true in firms. The local NASA, there's a big NASA facility nearby here, and of course if all of that shut down, there's a huge drop in intangible investment that in the U.S. is not now taking place and it's going to really hamper the recovery.

Beckworth: Yeah, we're going to come back to this later in terms of long run effects, but I imagine just starting up the lab again is a very tedious process because you got to get funding, you've got to get the right staff, you've got to get approval. We got boards sign off on projects so you can easily turn the switch to off, but you can't easily turn it to on.

Bloom: Yeah, exactly. You're exactly right. A friend of mine, she was telling me about some research involving animals that she was terrified before the shutdown about how would this continue, how would it restart? And there's years of work. If you think of things like the OncoMouse, some of this work, genetic work with animals, is very hard to restart. There's a number of long run projects in the material sciences that go on for long periods of time. I think the short run is extremely bleak. A figure I saw today was actually fascinating from Deutsche Bank pointed out that the entire gain in employment, the roughly 20 million jobs that are being, or 22 million jobs, I think it was that were being gained between July, 2009 and February, 2020 and the long expansion, the longest expansion, I think since records have begun will be entirely have been lost within four weeks. So by the end of next week, forecasts are we lost 22 million jobs.

Beckworth: How tragic. I mean we were just at the cusp of a truly full employed economy, a hot economy. We're so close to the finish line and then suddenly -

Bloom: I know, I know. 11 years of amazing job creation, through thick and thin, through everything, through the Euro crisis, through the debt, through the fiscal cliff, all of it, through the change in administration and suddenly in four weeks it's gone. And this is why, for what it's worth, this is not about financial advice, but I'm actually much more pessimistic than the stock market. The drop, I think, in quarter two is going to be pretty bad and I just don't see us so rapidly bouncing out. And the uncertainty measures are very high in part reflecting it. People are skeptical slash uncertain about what's going to happen and that itself feeds back into the process and makes it hard to rapidly recover. You need firms. In order to rapidly recover what you need is massive hiring by firms in quarter three 2020 and massive investment. And of course they're not likely to do that while uncertainty is very high, so uncertainty also retards the recovery.

In order to rapidly recover what you need is massive hiring by firms in quarter three 2020 and massive investment. And of course they're not likely to do that while uncertainty is very high.

Implications for the Economics Profession

Beckworth: So there was another paper that compliments or really underscores the points you're making here. It's the New York Fed Paper and James Stock along with Daniel Lewis and Karel Mertens are the authors. I think the latter two are New York Fed economists. But it's a paper and they've updated it, but it's titled “U.S. Economic Activity During the Early Weeks of the SARS-Cov-2 Outbreak” and they have a weekly economic indicator and they have a number of indicators. I'll just read them real quickly here. I'm looking at them. They have red book research, retail sales, they have Rasmussen Consumer Index, unemployment insurance claims, insured unemployment, American Staffing Association staffing index, federal withholding tax collections, raw steel production, fuel sales to end users, railroad traffic, electric utility output. And they some kind of, on a primary component or some kind of factor model, but it's a weekly series and they parameterize it so that it comes out on the annualized growth rate on an annualized basis. So it kind of reflects what GDP, so you can think in similar terms.

Beckworth: And as of the week ending April 4, they have almost a 9% decline on annualized basis. And that's April 4. If you look their series actually goes back to before the Great Recession, before 2008, 2007. And during that crisis, they show about 3% of a contraction at the bottom, at the worst point. And so we're well past that according to their data. And presumably it's going to get worse, because it's only through April 4th. So it kind of confirms your story, but it's another interesting use of data. And one silver lining, if there is one, and again I don't want to make light of all the suffering that's going on out there, but one at least silver lining for economists and for folks like us, it's great to see all this big data being used and that people like you and others are tapping all these data sources. And again, maybe one silver lining is we'll rely more on those types of data than some of the data we use for GDP surveys that take a long time to record. What are your thoughts on that?

Bloom: One is, I think, on the first point you're exactly right. It was interesting for unemployment. People have switched, I'm still discussing this for a while with Steve Davis. People have switched from the non-farm payroll, let's say labor Friday, looking at the unemployment figures from that to actually now looking at the weekly unemployment insurance claims and Steve was saying, well administrative data is just very quick to come out. It has all its flaws and issues, but it comes out extremely fast and so all the attention's focused to that. In a similar way when I've been measuring uncertainty, I wouldn't have traditionally focused so heavily on stock market volatility or newspapers because there's a range of other indicators, but things are moving so quickly you need to focus on what you have that's available real time.

Bloom: The other thought I have that I think is going to be important for the profession and why, actually, I think these forecasts are overly optimistic. And I've been kind of looking through Blue Chip forecasts, they have about 30 different forecasters, is this is really kind of a play on the Lucas critique. So if you remember the old Lucas critique the turning point is when these non-structural models get things wrong. It feels like if ever there was a turning point, it was March, 2020, where you've had 11 years of expansion and suddenly completely abruptly, everything's changed. And I think a lot of the traditional forecasting models, the VAR types, the extrapolations or implicitly complicated trend fitting models, but they really don't work in periods like this. So if I'm forecasting in March 2020 I basically throw away all the prior data. Trends up to February 2020 are really uninformative.

Bloom: And at this point it's alternative data sources or looking at similar episodes like the Spanish flu of 1919, 1920, Hurricane Katrina ... A fascinating thing is Louisiana's labor market, the increase in unemployment is almost identical to the increase in unemployment in a couple of weeks after Hurricane Katrina. So it's more like a natural disaster than a regular recession. I think it's a challenge or call to arms for economists to find good, alternative, real time data sources and alternative forecasting methods, actually.

I think it's a challenge or call to arms for economists to find good, alternative, real time data sources and alternative forecasting methods.

Beckworth: Yeah. So this is going to be a very fruitful time for economist, but again, it comes at the expense of mass human suffering unfortunately. Well let's move to the long run effects. We've touched on the short run effects and just to summarize, bleak, not very optimistic. This is going to be a rough year. So much for the hopes of 2020 being a great year, maybe in an election year, maybe ... You know, one thing I was looking forward to this year was the Fed's big review coming out in June. Will we moved to average inflation targeting. Of course, I'm in the back row raising my hand, how about nominal GDP targeting?

Beckworth: But all that seems so quaint, so far removed from the present challenges we face and then moving forward, long run, there's going to be even bigger ones now that we're going through this. So we have a sharp contraction this year and we're going to have some long lasting effects. And we've talked about this offline before and I want to run through a list. So you made a list. I'm going to run through and I've added a few and I want you just to respond to them as I go through them. So the first one I want to bring up is just people and businesses, households and businesses may have permanently higher risk aversion because of this crisis.

Long-run Impacts: Increased Risk Aversion

Bloom: Yes. I noticed even just today, in fact, there was a piece in the Wall Street Journal discussing a paper by Stefan Nagel and Ulrike Malmendier, I think it's called Depression Babies, but they have a number of papers and other people around this arguing that individuals that live through major shocks are just more risk averse running forwards. And of course we've all lived through this shock. We will have our implicit distribution or function of outcomes based on what we've seen. And suddenly we've all been hit by left tail outcome. Another paper that's related to this, it's interesting, I teach is, Antoinette Schoar and Marianne Bertrand's paper called “Managing With Style”, back in the QJE in 2003. And that looks at the behavior of CEO's, and it argues and finds evidence that CEO's in large firms that lived through the Great Depression, so the oldest CEO's, tended to be much more risk averse, have lower debt levels. I think there's plenty of evidence that this is going to increase the risk aversion parameter for all of us for a while. It does mean, by the way, that running forward, for the next few years, the equity risk premium should be higher. So oddly enough, the expected return from the stock market for the next few years, once things settled down, should actually be higher, relative to interest rates versus normally, because of course the risk aversion parameter is higher and risk, at least, is probably at least as high as it was before.

I think there's plenty of evidence that this is going to increase the risk aversion parameter for all of us for a while.

Beckworth: The implication of this is that even if we get through this pandemic and there's a vaccine, is that households and businesses may be very leery to start new endeavors. So households may be cautious, they may save more than they normally did. Businesses will be slow to invest and do more capital formation. So even if things on paper should move back online, they may not very easily.

Bloom: Yes. Knowing the net impact of that, I totally agree. Deciphering the net impact of that is tricky because on the one side there should be a global increase in the savings rate. And in the U.S. there was after the Great Depression. So Americans, Europeans, Asians should all be increasing their level of savings and you'd think that would increase the level of investment, but as you point out on the other side, businesses themselves may be more risk adverse. And which effect dominates it is hard to tell. But certainly you may think another twist in this may be longer run, more risky investments. For example, if you think of startups or in R&D, maybe reduced in favor of shorter run, less risky investments. And in fact, another stylized fact that has just come out is if you look at the number of business startups in the U.S., it's fallen by 40%. So you can record that by the number of EINs, employment identification numbers that the IRS has requested to handout to new businesses, and that's down versus the same month last year by 40%. So startup rates have absolutely flatlined, which is A, not surprising but B, is a strong reflection that a lot of people are very risk averse and don't want to start new businesses.

Long-run Impacts: Decline in Trend Productivity Growth 

Beckworth: Second potential long run effect is a decline in trend productivity growth. Total factor productivity, you argue may decline. And a lot of this has to do with the lockdown. So we are now away from our places of employment. If you're at Stanford and you're doing research, you're not at your lab anymore. For you it may not be interacting with your colleagues, maybe in a different environment. Now what's interesting is you did research earlier in your career where you showed there were some productivity gains from working at home, but not this kind. So why don't you talk about your earlier research and why it's different now.

Bloom: Sure. So it actually relates to two very different papers. I never thought that they'd intersect. But one is I have something, it coincidentally is just out in the AER last month in March, 2020 with Chad Jones, Mike Webb and John Van Reenen, just pointing out the productivity growth in the U.S. and Europe has actually been declining in a pretty secular level since the '50s. So it's called “Are Ideas Getting Harder to Find?” And already we were on a gradual downward trend in productivity growth that's been going on. It's basically harder and harder and it requires more and more R&D expenditure to get the same increase in productivity as it did historically. So that's a longer run trend. What's thrown on top of that that's tricky is right now we're all working from home and I'm skeptical about the productivity impact of mass working from home.

Already we were on a gradual downward trend in productivity growth that's been going on. It's basically harder and harder and it requires more and more R&D expenditure to get the same increase in productivity as it did historically.

Bloom: So you asked me about an earlier paper I did. So I ran a somewhat unusual, a randomized controlled trial, I'm working from home, in China in about 2012-13. The backdrop to this was a grad student of mine, a Chinese PhD student turned out to be, strangely enough, this founding CEO and current chairman of the large Chinese startup called Ctrip. So Ctrip is like China's version of Expedia. It's worth about $10 billion on the NASDAQ. It's a really large company at about 15,000 employees. And their headquarters was in Shanghai and they were interested in having more employees work from home to save on office space. So we managed to persuade them to set it up as an experiment. And they took a group of 500 volunteers that asked to work from home. They randomized them by even an odd birthdays. You're one if you're odds. If you're born on the second, fourth, sixth, eighth, 10th of the month you got to work from home for four days a week for nine months. And then they just evaluated them.

Bloom: And they found that productivity of people working from home is up 13%, which is huge. That's more or less an extra day a week. The reason being the home workers said it was quieter and they saved time. They weren't late from commuting or having to take long lunch breaks, et cetera. And then the other factor was quit rates dropped by about 50%. So that study seems like I'd be really positive on working from home, but the COVID crisis is really different. There's a number of problems. One is we have our kids. So my four-year-old regularly bursts into my office. I actually had to lock my office to prevent her bursting in. But she bursts in looking to play. From everyone I'm speaking to, this is such a common problem about having kids home.

Bloom: We're five days a week. So Ctrip only did it four days a week because it's actually really hard to be creative and remain motivated if you're permanently away from the office. Many of us have totally inappropriate working spaces. We're sharing offices or we're working from... I just had a video call with one of my students that she took it from her closet since she shares a bedroom with her boyfriend and she has no other space. And then finally there's a lot of an issue about choice. So in the Ctrip experiment, we deliberately chose jobs that people could do at home. They're answering calls. And gave them the choice, and only half of them actually opted to work from home.

Bloom: In the U.S. there's a number of studies and one I saw a recently I thought was really great, by Jonathan Dingel and Brent Neiman at Chicago. They looked at what share of U.S. jobs currently out there could actually function well at home and discovered that came to around one-third of employment and roughly 50% of the wage bill. So basically higher paid people tend to more effectively be able to work from home. That tells you there's a lot of economic activity, much of retail, a lot of services, being a dentist, being a pilot are activities you really can't do effectively at home. Or as you mentioned earlier, R&D lab scientists, you just can't access your lab equipment. So I think right now there's a massive reduction in productivity of even those of us that are able to theoretically work at home, our actual true productivity, I'm sure, is way below what it would otherwise be.

Higher paid people tend to more effectively be able to work from home. That tells you there's a lot of economic activity, much of retail, a lot of services, being a dentist, being a pilot are activities you really can't do effectively at home.

Beckworth: So that means going forward, less capital formation and lower economic growth.

Bloom: I was going to say, the interesting thing, it may not actually show up in GDP this quarter. So both of us are working in the not-for-profit sector and we're typically measured as expenditure for GDP. So apparently our GDP is unchanged. But the way it was sharp is, of course, we and large chunks of the economy are not going to be doing as much training and we're not going to be creating as many products and innovations. For example, I bet patenting in 2021 and 2022 will be well down because labs are all closed down. And so this is really going to... And investment, physical investment would be down. So this is really going to hold back the rebound that we're looking for.

Beckworth: So lower productivity growth. Now do you see this as a decline in trend growth or maybe a one-time blip?

Bloom: It's a good question. Productivity now in 2020, so if you take a classical solo model, output equals K to the alpha, times A, L to the one minus alpha, it's hard to know how we'll eventually decompose the impact, but a lot of it must be from A. It's really inefficient working from home. It's really inefficient doing stuff by Zoom. But as you imply it, I think quite a chunk of that will be persistent. So three years from now most of it will have blown through, but for example, all the lab closing. There's a long debate about what's driven the American success story. How did America go from basically similar levels of GDP or below Europe 120 years ago to far above it? And one of the big stories is just being very focused on innovation. And I think that innovation engine is almost completely stalled right now and we're going to see lower growth and lower productivity growth, in fact, in the next two or three years from now.

Beckworth: And the point you raised earlier is a good one that this decline in any other time would be less consequential because now it takes more effort and more ideas for that next dollar of economic growth. So this is the worst time we could have had an experience like this when it's harder to generate new ideas and new economic growth. Something else this raises though in my mind is both this point with there'll be lower productivity growth, but also the first point, permanently higher risk aversion. It's going to mean that we're going to be stuck at zero interest rates for a long time. Both of those factors are going to weigh down on rates so it's going to complicate life for the Fed, even beyond the many complications that now faces. Monetary policy around the world is going to be one that operates with interest rates at zero or slightly negative numbers going forward. So I think there's all kinds of effects here we haven't begun to process. We've just looked at two of them so far.

Bloom: The Fed, as you know, I religiously listen to all of your podcasts.

Beckworth: Well, thank you.

Bloom: There's a frequent discussion of the Fed and I think as previous guests have mentioned it, it's an incredible time for the Fed and its normal tools, the interest rates, they're jammed a zero. There is the huge risk of politicization of the Fed as it becomes more and more involved. Another related concern I have for longer run growth is the expanded share of government in the economy. Another factor that's really driven U.S. success versus Europe is Americans don't like government. So Americans, traditionally, have done everything they can to cut back the role of government. It goes back to the spirit of the founding fathers, to be honest, to escape the clutches of government. And we've seen a huge expansion through expenditure and through controls, and I think that's going to actually hold back growth. The Fed is doing, right now, and I don't think I would have done anything different, but the problem is a very strong medicine, it comes with very strong side effects and I think this is... The very strong medicine of the Fed of massive QE and slashing of rates and extension of loan programs has all kinds of programmatic side effects.

Another related concern I have for longer run growth is the expanded share of government in the economy.

Long-run Impacts: Decline of Globalization 

Beckworth: So in terms of long term effects, we've discussed potentially higher risk aversion, lower productivity growth, and another point you make is we may see a sustained drop in globalization. So drop in trade and immigration. So walk us through that argument.

Bloom: Again, since World War Two really, if you look at what's a big driver of growth, it's been an increase in trade. You notice going back, it now seems like ancient history, but the market was bouncing up and down, driven by every tweet war that Trump had over trading with China. So every time it looked like trade with China is about to slow down, the market dropped. And the reason is trade is important for growth. It's actually interesting and particularly important for some of the largest publicly listed American firms that are particularly international. So I don't see how we're going to rapidly get back to the levels of globalization we had before the crisis. It's easy to put in trade barriers, it's much harder to remove them.

I don't see how we're going to rapidly get back to the levels of globalization we had before the crisis. It's easy to put in trade barriers, it's much harder to remove them.

Bloom: And then on the other side, immigration, again, the U.S. and particularly Silicon Valley and some of the science and engineering parts of America that drive a lot of overall growth are very immigrant dependent. So I think the figure is within Silicon Valley more than half of the PhDs are immigrants. I would be an example. I'm not a scientist, but I'm an immigrant. And the COVID crisis has probably almost completely stalled immigration, which is in some odd sense is, to the gain of the rest of the world that was leaking this massive brain drain to the U.S., but it's going to be a huge cost to America. That it's just not going to have the flow of top end immigrants. Bill Kerr has numbers looking, as you go higher and higher within science and academia and research, you start to see a higher and higher share of immigrants. So I think in the U.S. something like half of U.S. Nobel prize winners, American located are also immigrants. So that end is going to be really hit.

Beckworth: So this reinforces your earlier point about the decline in productivity. You'd take away the future brain power from immigrants, total factor productivity will be going down even more. So just another strike against U.S. growth in the future and, again, reinforces my point about zero lower bound. This is not looking nice at all, Nick.

Bloom: I hate being a... I was talking to some journalists. They said now I know why you economists, it's nicknamed the dismal science. It's like all I can do is suggest sell your shares. I wouldn't even... putting them in bonds is... I don't know what to do. One way it could manifest itself would be we have some form of snapback but to a lower trend for the next 10 or 20 years. Productivity has been declining. You could see that trend rate of productivity growth drops and remains lower for much longer than were predicted. A lot of these factors are slower burn, so reducing immigration, reducing innovation, stopping trade. I mean another one we should come to discuss is tax rates, higher tax rates. All of these things tend not to be so immediate, but if you accumulate them over five, 10 years, they do hold back growth rates. And if you look at the things that America was lauded from as driving a success, innovation, trade, immigration, low taxes, light government, almost all of these seem to be reversed in the current COVID crisis and the response to it.

Beckworth: Yeah, absolutely. So maybe the best way to paint all these bleak points as we're creating a baseline, so that anything better than this will be amazing.

Bloom: Yes yes, the only way is up.

Beckworth: Exactly. Set your expectations appropriately, then you'll be pleasantly surprised when things are better. All right, so you mentioned taxes. Taxes are going to have to go up in the future. There's going to be some form to accommodate the bigger footprint of the US government. Although I would mention now we still don't see any increase in the treasury bond rates. So maybe the issuance of debt has just been proportionately met by an increase in risk aversion, but we don't know that will hold after everything calms down.

Bloom: Yeah, I mean if you look at total government debt is about 25 trillion right now, of which about 22 is federal, and about 1.5 is state and 1.5 is local, municipal. So you've got about $25 trillion worth of debt in the US, that's roughly the same as GDP. So roughly speaking we're about debt to GDP, of government debt of around 100%. Forecasts are that's going to go to something like 100 to 130 to 140%. That's going to overtake the level we saw at the end of World War II, which is about 110%. But then after World War II, if you look back at tax rates, tax rates surged from the '50s onwards. So the top marginal tax rate, it was 90% throughout much of the 50s. So there're two ways you can repay back debt is high taxes or inflation. And assuming ... If you think inflation is the less likely outcome, then higher taxes seems the more obvious course. And I presume it will be income taxes will be a chunk of it. Some of it would be corporate income taxes.

Bloom: So I see, given the trends in US politics with ... They didn't get elected, but obviously Sanders and Warren were popular in the democratic side of things. I wouldn't be surprised if there's an increase in taxes and there's pushes towards the top end of the income distribution.

Beckworth: So Nick, do you think I'm being too optimistic that the increased risk aversion will bear some of that additional debt that we issued, so it won't be as bad as it otherwise would be?

Bloom: Yeah no I think, I mean, interest rates are not going up for, as you say, the market is just absorbing, seems to be able to absorb an unlimited amount of-

Beckworth: For now.

Bloom: ... fiscal debt. For now. At some point that stuff matures. So even if we think the market absorbs it, we have to pay it back. I mean, I guess you could roll it over indefinitely. The problem with the rolling it over indefinitely strategy is what's happening to Italy and southern Europe right now. So the US could say, "Let's just keep debt. The GDP ratio. Government debt to GDP 150% indefinitely." And if interest rates remain at 1%, that's 1.5 percent of GDP goes in debt servicing, that's not too terrible. The problem would be if we get hit by another crisis. So what's happening right now in southern Europe is they'd never really paid off the debt from the financial crisis, the European crisis. So that now, whereas the US is entering this thing with debt levels that are around 100% of GDP. For example, Italy right now has debt, public debt to GDP of 140%, so it has very little wiggle room. So the US either just has no spare cash left, or it has to pay it down. And personally I'd probably rather pay it down but that of course implies higher tax for it.

Beckworth: Yep. Okay. Let's move on to the next item you talk about. You mentioned the impact of the pandemic will not be evenly distributed. So talk about that.

Who Bears the Brunt of these Impacts?

Bloom: Yeah, I mean another unpleasant factor, the pandemic, I mean as part of a broader theme honestly going back for 30 years is, it appears to be increasing inequality. So the pandemic, maybe it's just kind of more obvious and apparent, but the people who've lost in the short run are much more likely to be hourly pay contractors or self-employed. So large numbers of those people who've lost jobs more proportionately than we see in the data from people who are salaried. And if you look historically at salaried employees, if you look at prior recessions, you can do something called estimate a wage beta, which is how sensitive your wages are to the economic cycle. Again, we've done that. I've done this in the UK and Matthew, for example has done this in the US using administrative data. And you see that typically people, younger people, in fact younger men working in small firms turn out to be the most sensitive historically to the economic cycle.

The people who've lost in the short run are much more likely to be hourly pay contractors or self-employed.

Bloom: There's a bunch of factors why that, and it's not so clear this recession would be so actually anti-male, but it's certainly likely to hit, amongst salaried employees, younger men and much more strongly. So those with part time or hourly pay. And they tend to also be the lowest paid. So, in terms of the loss of earnings and the GDP cost, I think it would disproportionately fall on lower income people in society.

Beckworth: Yes, it's not easy being poor in America, that's for sure. The system-

Bloom: No, and it's harder now. It just ... I mean on the other side it's even ... If you look at some of the articles they've used cell phone data to track who's self-isolating, you notice that people at the wealthy end, so the top 10% by income have self-isolated much more effectively than the bottom 10%, in part because they can. In part because if you're a salaried employee that can work from home, you can do that. So this I think is important politically because it means ... I mean there's a welfare side of it obviously about increases in equality. I think it's politically important for their recovery, because it suggests that in terms of A, politics becomes very unpredictable. If you have a set of people that have lost very heavily, you're not surprised they're going to be extremely unhappy with where things are, and you have more radical politicians potentially coming to the front.

Bloom: But the other issue is just in terms of where taxes are likely to fall, I think it suggests they're going to be falling on wealthier parts of society, which would be probably corporate income taxes and top-end income taxes, and possibly even wealth taxes. But Sanders and Warren were pushing for wealth taxes. So I don't see that as impossible as a way to pay down some of the COVID depression debt.

Beckworth: I live in Nashville, and technically I'm on the outskirts of Nashville, so I have one foot in the world that both of us exist in. Economists, research, the urban setting. And I have one foot in the more rural setting, and it's striking to see the difference. It's been there, as you mentioned, for many years, but in the present situation I feel so blessed, so fortunate to have the job that I do have, as you mentioned, I've got a salaried job. It's been, if anything, an opportunity for me. I hate to say this, but this crisis is great for people like us who write papers and discuss ideas in how to solve problems. But for many of my friends and my community here, it's been a horrible time, horrible experience. And one practical side is I really drilled this idea into my kid's head, that this education's important, and you can see the difference. We're just very blessed, very fortunate to be on this side, but many are not. And moving forward, this divide's probably only going to grow as the year continues to deteriorate.

Bloom: Yeah, I think so. One of the economic questions, I was actually talking to pretty senior policy official about one of the challenges about trying to figure out when to end the lockdown or resume to work. But if you think about who's taking the choices right now, it tends to be older salaried people. So everyone that's running companies, that's running the government, all the politicians, are salaried, so their losses are typically lower. And they're older so therefore their health risks typically are higher. On the other hand a number of the people that are worse affected tend to be younger. So I think there's a political tension between the people calling the shots and what ... The most likely outcome is I think is we go back and we have rolling waves of clampdown and recovery and clampdown and recovery.

Bloom: I should say, on another note on productivity, I don't know if you can hear in the background, but one of my kids is ... My wife is a Scot, and one of our kids is learning to play the bagpipes. And so working from home, there's an enormous amount of noise now pouring through the wall.

Beckworth: No I don't hear anything, you're good. But that's great to know.

Bloom: Okay. Tells you everything about working from home with your kids around, it's hard to be that fully productive.

Beckworth: Well, we like to keep it real on Macro Musings, so that's a great story to add to the show. Perfect. Okay. One last point I thought I would bring up, and this is something you didn't raise in your presentation, but we've discussed it before, and that is urban living. What will this mean for urban living? Will places like New York City be less attractive now that we know one, you can ... at least some people can work from home, do meetings via Zoom, but also maybe there's again more risk aversion. Maybe you don't want to live in a dense urban area. So do you think this effect will be big or just minor, or will there be meaningful changes going forward?

Long-run Impact on Urban Living

Bloom: Yeah, I think this is the end of a long trend. So I was at the Ely Lectures and the AEA a couple of years ago, and David Autor was talking about income and population density. And he was pointing out that basically from the '60s to the '80s, the center of cities did really badly. So they did increasingly badly. So what happened in the '60s onwards is, or really the '50s, there was a rollout of the freeways and roads and cars became a lot cheaper, and a lot of middle class people moved out to the suburbs. And by the early '80s the center of cities become incredibly low income, with the crack epidemic and really some of the worst blighted parts of the country with incredibly low property prices. And the '80s was really the turning point, until now, so the last almost 50 years, or 40 years. We've seen increasing valuation of the center of cities as more and more young and high school people have moved in.

Bloom: My guess is 2020 maybe another turning point, in A, the move towards working from home, not full time but probably part-time. And B, honestly, fears of social contact may lead people to start to move out again from the center of cities. And so we could see the '80 to 2020 trend of increasing value. So now if you, by the way, if you look at charts, so he showed two charts. One is the value of property versus density. And in 1980 the cheapest property was in the most dense areas, city centers, which were absolutely blighted. They were like gang land areas you'd never want to step foot in. And then by 2020 they were the most expensive real estate in the US. That premium, I suspect, is going to rapidly start shrinking back down again.

Beckworth: Yeah. It will be interesting to see what happens to the areas like San Francisco close to you, New York City, where it's been very difficult for people to move in there because of the high real estate prices.

Bloom: Yeah, I mean that's a very ... I was talking to someone recently, a policymaker locally. To end on a positive note, that's actually a much more positive take on it. So at least around us there has been a big fear of affordability. And Silicon Valley, there in particular, has this crisis of no one in a normal job can basically afford to rent an apartment around here or to live here. And that at least is going to be one of the benefits of this. I think there'll be a lot of medium and higher income people, take folks like us that may basically end up commuting into work two, three days a week. And if you're doing that, of course you half your commute frequency, you may think about adding an extra 50% distance. And so I wouldn't be surprised if the center of cities empty out a bit, and therefore it reduces the cost of living there.

I wouldn't be surprised if the center of cities empty out a bit, and therefore it reduces the cost of living there.

Beckworth: Which is interesting because I have colleagues, you have colleagues too that have been working really hard on the fight against nimbyism, and allowing more urban living, building higher, building more dense living. And that, I don't know, that struggle might not be as important now. But on the other hand, again, the developments we just talked about may lead to deal with the same outcome that they were fighting for.

Bloom: Yeah. I mean so much stuff has been changed. The environmental movement. A another short run at least, a silver lining from the COVID crisis has been of course the reduction in pollution. The affordability ... I don't know how much ... I assume what will come out will be ... There's no ... So a lot of young people want to live in areas with good bars, restaurants, amenities. Rebecca Diamond's stuff on the fact that the center of cities is this self-fulfilling outcome. Young people move in, therefore bars and restaurants come, therefore it becomes more appealing and more people move in. You may find that instead concentrates on certain suburbs. So if you go to cities like LA, in LA there are suburbs that are just known to have good bars and restaurants, but they're not all in the center of town. So I wouldn't be surprised if LA or Houston is more like the template for much of America whereby you have localized centers, but nowhere gets too expensive.

Beckworth: Okay. Well on that note, our time is up. Our guest today has been Nicholas Bloom. Nick, thanks so much for coming back on the show.

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David Beckworth
Calendar Date: 
Apr 20, 2020
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COVID-19 will cause immediate and lasting economic damage in the form of increased uncertainty, heightened risk aversion, lower productivity growth and more.