Jumps in Uncertainty
The old example of an uncertainty shock that I used in my Ph.D. work in the early 2000s was 9/11. This eventgenerated a spike in every measure of uncertainty. Then the Great Recession hit, and this made the 9/11 uncertainty spike look like a small blip. Measures of uncertainty — like the VIX index of stock market volatility [the Chicago Board Options Exchange Market Volatility Index], which measures the market’s expected volatility over the next 30 days — went up by about 500 percent. Similarly, newspaper indices of uncertainty jumped up by about 300 percent. Even the Federal Reserve’s Beige Book had a surge of discussion of uncertainty — before the Great Recession, each month had about three or four mentions of the word “uncertain,” but after the Great Recession it hit nearly 30.
Interestingly, the Great Depression of 1929-1933 was another period where there was broad concern over uncertainty. Newspaper coverage of uncertainty and stock market volatility rose sharply in this period. In fact, one of Ben Bernanke’s key papers before he became Fed chairman was, amazingly, on how uncertainty can impair investment. Christina Romer, chair of President Obama’s Council of Economic Advisers during the Great Recession, had studied uncertainty too. So some of the key policymakers in Washington at the time were acutely aware of what uncertainty could do to an economy.
How Policy Can Generate Uncertainty
It may be that policy actions generate more uncertainty damage than help. One reason is that policymakers have an incentive to be policy hyperactive. I saw this when I worked in the U.K. Treasury. Politicians had to be seen as acting in response to bad events; otherwise, the public and media claimed they were not responding or, worse, claimed they didn’t care. So politicians would act, often based on partial information or hastily developed ideas, when often the best course would be to stay calm and inactive. So hasty or unpredictable policy response to recessions can actually make the recessions worse. A classic example is the accelerated depreciation allowance that Congress debated introducing for several months after the 9/11 attacks. Many commentators argued that this delayed the recovery as businesses waited to see what the decision would be. In fact, the Nov. 6, 2001, FOMC minutes even contained an explicit discussion of the damaging policy uncertainty this introduced.
Uncertainty and the Great Recession
The full experiment is this: If you held everything else constant and did not have the rise in uncertainty, what would have happened to the drop in economic output? I think, based on some rough calculations I lay out in my 2014 Journal of Economic Perspectives paper, that the recession would have been about one-third less. So I think uncertainty was a major factor, though not the biggest factor, which I think was a combination of the housing and financial crises.
On the Importance of Management to Productivity Differences
Economists have, in fact, long argued that management matters. Francis Walker, a founder and the first president of the American Economic Association, ran the 1870 U.S. census and then wrote an article in the first year of the Quarterly Journal of Economics, “The Source of Business Profits.” He argued that management was the biggest driver of the huge differences in business performance that he observed across literally thousands of firms. Almost 150 years later, work looking at manufacturing plants shows a massive variation in business performance; the 90th percentile plant now has twice the total factor productivity of the 10th percentile plant. Similarly, there are massive spreads across countries — for example, U.S. productivity is about five times that of India. Despite the early attention on management by Francis Walker, the topic dropped down a bit in economics, I think because “management” became a bad word in the field. Early on I used to joke that when I turned up at seminars people would see the “M-word” in the seminar title and their view of my IQ was instantly minus 20. Then they’d hear the British accent, and I’d get 15 back.Some Drivers of Good Management
I think the key driver of America’s management leadership has been its big, open, and competitive markets. If Sam Walton had been based in Italy or in India, he would have five stores by now, probably called “Sam Walton’s Family Market.” Each one would have been managed by one of his sons or sons-in-law. ...
The absence of rule of law is a killer for good management. If you take a case to court in India, it takes 10 to 15 years to come to fruition. In most developing countries, the legal system is weak; it is hard to successfully prosecute employees who steal from you or customers who do not pay their invoices, leading firms to use family members as managers and supply only narrow groups of trusted customers. This makes it very hard to be well managed — if most firms have the son or grandson of the founder running the firm, working with the same customers as 20 years ago, then it shouldn’t be surprising that productivity is low. These firms know that their sons are often not the best manager, but at least they will not rampantly steal from the firms.Future Research on Management
These have been major milestones in management technologies, and they’ve changed the way people have thought. They were clearly identified innovations, and I don’t think there’s a single patent among them. These management innovations are a big deal, and they spread right across the economy. In fact, there’s a management technology frontier that’s continuously moving forward, and the United States is pretty much at the front with firms like Walmart, GE, McDonald’s, and Starbucks. And then behind the frontier there are a bunch of laggards with inferior management practices. In America, these are typically smaller, family-run firms. ...
Anything that can be said to be “high” or “low” can be quantified, and economics is good at this; it’s one of our strengths as a social science. ... There’s an old saying: What gets measured gets managed. I think in economics it’s what gets measured gets researched. ... Likewise with management — we hope if we can build a new multifirm and multicountry database, we can spur the development of the field.