84 - Nick Bloom on Economic Uncertainty and the Productivity Slowdown

Episode Summary

Executive Summary: Nicholas Bloom explains how uncertainty is defined, measured, and transmitted through the economy, arguing it spikes in recessions and can temporarily depress output via risk aversion and real-option delays. He also links policy uncertainty to political polarization and discusses the productivity slowdown, arguing innovation is getting harder while management quality still matters.

Main Topics: Defining economic uncertainty (Priority: 5/5): Bloom distinguishes everyday uncertainty from Knightian uncertainty/ambiguity, emphasizing that in practice most events involve some probability assessments rather than pure unknowability. Measuring uncertainty (Priority: 5/5): He reviews macro, financial, and newspaper-based measures such as stock volatility, the VIX, forecast disagreement, and the Economic Policy Uncertainty Index, noting that each captures different horizons and dimensions. How uncertainty affects the economy (Priority: 5/5): Two main channels are highlighted: households and firms become more cautious because risk premia rise, and firms/consumers delay irreversible decisions because waiting becomes more valuable. Policy uncertainty and political polarization (Priority: 4/5): Bloom argues policy uncertainty has risen over the long run alongside political polarization, with recent examples including Trump, Brexit, trade, tax reform, and North Korea. Uncertainty and the productivity slowdown (Priority: 5/5): He says uncertainty can cause temporary drops and rebounds in activity, but it is not the main driver of the multi-decade productivity slowdown, which is more about ideas becoming harder to find. Innovation, management, and growth (Priority: 4/5): Bloom discusses evidence that productivity growth has slowed and that management practices strongly influence firm performance, while global markets help offset some of the slowdown in idea creation.

Key Arguments: Uncertainty is best thought of as not knowing future outcomes; Knightian uncertainty is stronger because probabilities themselves are hard to assign. Most recessions feature both bad shocks and large spikes in uncertainty, so uncertainty should be treated as part of the shock process, not just a side effect. Financial-market measures like the VIX capture near-term uncertainty, while policy uncertainty indexes better reflect longer-run political and regulatory risk. Uncertainty raises precautionary saving and lowers spending, but the effect is more damaging in small open economies; in large economies, the impact depends on price/interest-rate rigidity and the zero lower bound. Firms respond to uncertainty by hoarding cash and postponing hiring, investment, and durable purchases because waiting preserves options. The productivity slowdown is likely structural: research productivity is falling even as R&D spending rises, suggesting ideas are getting harder to find. Better management practices are strongly associated with higher firm performance, and poor management is more common in regulated, family-owned, or government-run settings.

Data Points: Great Recession uncertainty surge: unprecedented run-up in every measure of uncertainty - Bloom says the Great Recession sharply raised interest in uncertainty research VIX all-time low: 9 - He notes the VIX hit an all-time low in early October 2017 U.S. productivity growth post-World War II: about 3% - Used as the high postwar benchmark in the productivity slowdown discussion U.S. productivity growth in the 1980s-1990s: a couple of percent - Bloom describes a gradual decline from postwar levels Current U.S. productivity growth: about 1% - He says recent growth is roughly one-third of the postwar pace R&D spending trend: doubling roughly every two decades - Bloom cites this as evidence that innovation is becoming more expensive Economic Policy Uncertainty Index coverage: 10 major U.S. newspapers - He describes scraping articles from outlets such as the Wall Street Journal, New York Times, USA Today, Chicago Tribune, and Washington Post GDP loss estimate: about 9% total, with about 3% attributed to uncertainty - Bloom references estimates from his 2014 Journal of Economic Perspectives paper Policy uncertainty trend: U-shaped over the 20th century - He says policy uncertainty was high around 1900, fell after World War II, and rose again afterward Forecasting sample size: about 50 forecasters - He mentions the Survey of Professional Forecasters as an example of disagreement-based uncertainty measurement

Pivotal Quotes: "Uncertainty is what we would think of might we might call as Knightian uncertainty." — Nicholas Bloom: Bloom defining the formal economics concept of uncertainty versus risk "When uncertainty goes up, firms are more cautious, they pause hiring, they pause investment." — Nicholas Bloom: Explaining the real-options channel of uncertainty transmission "Ideas are getting harder and harder to come by." — Nicholas Bloom: Summarizing his view of the productivity slowdown and rising R&D intensity

Implications: Listeners should view uncertainty as a measurable macro force that can delay investment and hiring, amplify recessions, and interact with policy polarization. Long-run growth may stay modest unless innovation and management improve.