Uncertainty Shocks: Measuring the Implications for International Trade and Economic Growth
Yeutter Institute
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11/13/2024
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The COVID-19 pandemic, the United Kingdom’s Brexit journey, and the U.S.-China trade war have all contributed to greater uncertainty in international trade. How do we measure it? In the opening keynote for the Yeutter Institute webinar series “International Trade: Measuring and Managing Risk and Uncertainty”, Dr. Nicholas Bloom discusses the World Uncertainty Index he co-created and what it can tell us about uncertainty shocks affecting international trade and prospects for global economic growth.
Featuring:
Dr. Nicholas Bloom, Eberle Professor of Economics, Stanford University
Moderator:
Jill O’Donnell, Director, Yeutter Institute
This webinar is part of a six-session series on “International Trade: Measuring and Managing Risk and Uncertainty,” hosted by the Yeutter Institute with support from the CME Group Foundation.
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- [00:00:00.960]Good afternoon, everyone.
- [00:00:02.360]My name is Jill O'Donnell.
- [00:00:03.840]I am the director of the Yeider Institute here at the University of Nebraska-Lincoln.
- [00:00:07.840]Thank you all for joining us today.
- [00:00:10.560]Every other year, the Yeider Institute hosts an international trade symposium with the
- [00:00:14.360]generous support of the Chicago Mercantile Exchange Group Foundation, or CME Group Foundation,
- [00:00:20.000]in honor of Clayton Yeider, who served as president and CEO of the CME from 1978 to
- [00:00:25.720]1985.
- [00:00:26.720]I'd like to thank the CME Group Foundation for its support.
- [00:00:29.880]Today's webinar is the first in our series on the theme of measuring and managing risk
- [00:00:33.880]and uncertainty in international trade.
- [00:00:36.280]There will be five more webinars following this one between now and October 9th, so you
- [00:00:39.820]can check our website for more information.
- [00:00:42.520]Before we start, I'd like to highlight a few people in the audience to give everyone a
- [00:00:45.760]sense who is joining us today, even though you can't see their faces.
- [00:00:49.840]So welcome to Ted Alden of the Council on Foreign Relations, Michael Sutherland with
- [00:00:54.440]the Congressional Research Service, and Cindy Allen with the Nebraska Secretary of State's
- [00:00:58.760]Office.
- [00:00:59.760]Welcome to them and to all of you.
- [00:01:01.680]As a reminder to all attendees, your audio is muted and your video is off, but we are
- [00:01:05.520]eager to engage you with your questions.
- [00:01:07.620]Please use the Q&A function in Zoom to submit your questions for our speaker.
- [00:01:11.880]This webinar is also being recorded and will be posted to our website afterwards.
- [00:01:15.600]And now I'm pleased to kick off our webinar series by welcoming Dr. Nicholas Bloom, Professor
- [00:01:20.660]of Economics at Stanford University and co-director of the National Bureau of Economic Research,
- [00:01:26.300]Productivity, and Innovation Program.
- [00:01:29.640]We have all heard the word uncertainty with some frequency over the last few years, but
- [00:01:33.260]it can be a hard concept to quantify.
- [00:01:35.260]Dr. Bloom and his colleagues have figured out how to do just that and how to assess
- [00:01:39.260]its impact on trade and economic growth.
- [00:01:42.000]With that, I'll turn it over to you, Dr. Bloom.
- [00:01:44.720]Okay, Jill.
- [00:01:46.280]Thanks very much for having me here.
- [00:01:48.820]I have about 30 minutes of slides, so I was going to suggest I'll take questions at the
- [00:01:54.040]end, but if anyone has any questions during, feel free to punch them out into chat and
- [00:01:59.520]Jill can kindly interrupt me and I can take them.
- [00:02:02.240]So I'm happy to take questions during.
- [00:02:05.000]So at this point, I'm going to share my slides, here we go.
- [00:02:10.640]So I'm going to talk about uncertainty in trade.
- [00:02:16.000]So there's a general view that uncertainty matters for the economy.
- [00:02:19.400]In fact, I did my PhD on uncertainty back in the 90s and it's become a huge topic starting
- [00:02:26.720]with the, in fact, 9/11 was a few, you know,
- [00:02:29.400]big event, but in particular the global financial crisis, here's a piece in The Economist by
- [00:02:33.740]Olivier Blanchard, the former chief economist of the RMF, arguing uncertainty is a big issue
- [00:02:39.000]in the drop in 2009.
- [00:02:40.880]There was more recently, you know, a piece here in the Wall Street Journal concerned
- [00:02:45.420]about political uncertainty after the 2016 election of Donald Trump.
- [00:02:50.580]In the UK, I know you can hear I'm British.
- [00:02:52.860]I'm actually a dual national, so I'm British American, but in the UK, very similar timing
- [00:02:59.280]to 2016.
- [00:03:00.280]There was the Brexit vote, another obviously huge trade shock that raised tremendous amounts
- [00:03:04.420]of uncertainty in the UK.
- [00:03:05.420]In fact, I have a long run project I'm happy to talk to people about working with the Bank
- [00:03:09.420]of England and Nottingham University on this.
- [00:03:12.440]Then most recently, most exceptionally, uncertainty around COVID and the pandemic.
- [00:03:19.600]And here's a very somber looking official from the Federal Reserve looking extremely
- [00:03:23.520]concerned about uncertainty, and in fact, the Fed has made repeated comments and somewhat
- [00:03:29.160]coincidentally, I spoke at Jackson Hole two weeks ago about economic uncertainty.
- [00:03:35.380]This is a two-day conference the Fed runs that Jerome Powell spoke on the morning of
- [00:03:38.720]the first day, and I'm going to show you some of the slides I showed at Jackson Hole then.
- [00:03:44.680]So for some people, it depends on your politics, but for some of my colleagues at Stanford,
- [00:03:50.260]people like John Taylor and John Cochran, who are Republicans, the best evidence that
- [00:03:55.120]uncertainty is important is that Paul Krugman thinks it's not.
- [00:03:59.040]I disagree quite a lot with what a lot of Paul Krugman says.
- [00:04:04.000]People have strong views on him either way, but for some people, if you disagree with
- [00:04:07.220]Paul Krugman, the best argument that uncertainty matters is that Paul Krugman thinks it doesn't
- [00:04:11.740]matter.
- [00:04:12.740]So Krugman has written multiple pieces in the New York Times arguing uncertainty doesn't
- [00:04:17.980]matter.
- [00:04:19.400]Unlike standard Krugman, they're mostly quite polite, but then they start to get less polite
- [00:04:24.540]as time goes on and on and on and on.
- [00:04:28.920]Big debate about it.
- [00:04:31.000]What I want to do today is show you some data about uncertainty, in particular about trade
- [00:04:37.080]uncertainty.
- [00:04:38.080]I kind of let you make your own mind up about how much this matters.
- [00:04:41.500]I think it does matter, but there's a debate about quite how much.
- [00:04:44.840]And then I end by wrapping up with some concluding comments.
- [00:04:50.280]So first, there are four ways I'm going to discuss today about measuring uncertainty.
- [00:04:54.540]One is looking at the stock markets.
- [00:04:57.380]So stock market volatility.
- [00:04:58.800]Volatility is a classic measure of uncertainty, and I'm sure all of you noticed the markets
- [00:05:02.980]over the last week were particularly volatile.
- [00:05:05.240]We had three big jump days.
- [00:05:07.560]If you cast your mind back to what now seems an incredibly long time ago, which was before
- [00:05:12.380]the pandemic.
- [00:05:13.660]So in particular, I'm thinking about 2018 and 19.
- [00:05:17.580]Most of the stock market jumps and most of the big spikes were actually around trade.
- [00:05:21.700]So here's five headlines after five different jumps on Wall Street, on the S&P 500, all
- [00:05:28.680]of them about trade.
- [00:05:29.680]In fact, there are nine jumps over that year where we defined jumps of two and a half percent
- [00:05:33.700]or more and five of them are due to trade.
- [00:05:35.920]So before the pandemic, trade was actually the biggest driver of stock market volatility
- [00:05:41.000]and there were jumps up and down.
- [00:05:42.340]And basically, mostly these are around the China-US trade dispute, but there was one
- [00:05:48.540]that was also related to Brexit.
- [00:05:51.880]So one measure of stock market volatility, one catch-all measure is I plotted here, it's
- [00:05:57.560]called the VIX.
- [00:05:58.560]So the VIX, you're probably hearing this more and more in the media, it's the one month
- [00:06:03.940]ahead implied S&P 500 volatility.
- [00:06:06.880]So it's basically the market's best guess of the volatility of the stock market looking
- [00:06:11.940]over the next month.
- [00:06:12.940]So it's the kind of short-run volatility measure, and I've just plotted it here back to 2015.
- [00:06:18.820]You can see in gray is COVID.
- [00:06:22.060]This is a plot from FRED, which is a very good online data set, if you want to find
- [00:06:28.440]the online data, you can just type FRED and then whatever data series you want is run
- [00:06:32.300]by the St. Louis Federal Reserve Bank.
- [00:06:34.320]So you can see the big spike is obviously under COVID-19.
- [00:06:37.280]The stock market's been incredibly volatile since the beginning of the COVID pandemic,
- [00:06:42.220]which the first stock market jump on the COVID was February the 23rd.
- [00:06:46.040]So for the last roughly six months, the stock market's been on a roller coaster and we've
- [00:06:50.560]kind of forgotten mostly about trade.
- [00:06:52.940]But before then, the two big spikes in stock market volatility were flare-ups in the China
- [00:06:58.320]US trade dispute in 2018 and 2019.
- [00:07:02.500]So stock markets think trade's important, but they don't think it's nearly as important.
- [00:07:07.020]It's a big deal.
- [00:07:08.020]Don't get me wrong.
- [00:07:09.020]It's certainly a big deal, but in the scheme of things, it's not as important as the COVID
- [00:07:12.900]pandemic.
- [00:07:13.900]And in some ways, that's going to be the theme of the presentation.
- [00:07:16.580]Trade uncertainty is a big issue, but right now it's been eclipsed by an even bigger issue,
- [00:07:20.940]which is the COVID pandemic uncertainty.
- [00:07:23.840]So a second way to measure uncertainty is to look at newspapers.
- [00:07:28.200]So I'm part of a group which is using newspapers to measure uncertainty.
- [00:07:32.420]And if you're interested, you know, there is an academic article on the left.
- [00:07:36.260]It's published in the Quarterly Journal of Economics.
- [00:07:38.360]It's actually the oldest journal of economics in the world.
- [00:07:42.080]It's, I think, goes back to 1886, that's what, 130 years, 140 years old.
- [00:07:49.060]It's the Harvard MIT Journal.
- [00:07:51.100]And on the right is our website.
- [00:07:53.020]If you just type in, you know, www.policyuncertainty.com, this website comes up.
- [00:07:58.080]There's a lot of data, research, media, et cetera.
- [00:08:00.620]So I'll give you a kind of a five-minute overview of what this is all about.
- [00:08:06.200]So the basic idea is, this goes back to discussions I had.
- [00:08:10.020]So this work is with two other coauthors, Steve Davis at Chicago and Scott Baker at
- [00:08:15.480]Northwestern.
- [00:08:16.480]Scott used to be my graduate student.
- [00:08:18.360]And the basic idea goes back to a discussion I had with Steve Davis in around 2006, was
- [00:08:23.740]how we might measure uncertainty, particularly policy uncertainty, and we came up with the
- [00:08:27.960]idea of scraping newspapers, basically doing text-to-data.
- [00:08:32.500]So this is what we do.
- [00:08:33.520]We take 10 major US newspapers, I'll show you what they are on the next page, but they're
- [00:08:37.460]like the Wall Street Journal, the USA Today, the New York Times, you know, they're the
- [00:08:40.880]usual suspects.
- [00:08:42.960]And we count the number of articles in each newspaper that mentions an E word, economy
- [00:08:49.680]or economic, a P word, one of six policy words, so regulation, deficit, Federal Reserve, Congress,
- [00:08:55.540]legislation, or White House.
- [00:08:57.840]Uncertain or uncertainty.
- [00:08:59.620]So it's a very simple exercise.
- [00:09:00.760]We just count the number of articles that mention one from each of these three EPU terms.
- [00:09:06.400]We then divide the count for each month by the count of all articles in the newspaper
- [00:09:09.960]because newspapers kind of grow or shrink over time because of say, you know, even paper
- [00:09:15.420]prices and, you know, the amount of news affects the length of newspapers.
- [00:09:19.220]We then normalize each newspaper to the same standard deviation, add them up to generate
- [00:09:24.760]a monthly index.
- [00:09:26.700]Here are the 10 newspapers.
- [00:09:27.700]In case you wonder what they are, they are very standard mainstream newspapers.
- [00:09:31.720]So in a sense, what I'm going to show in a minute represents the view of, you know, mainstream
- [00:09:37.380]media on policy uncertainty in the US.
- [00:09:40.960]And we pick these as the 10 highest circulation newspapers that we can easily search online.
- [00:09:49.780]So here's our index.
- [00:09:51.300]Our index is normalized to 100 from 1985 to 2010.
- [00:09:56.000]So that's kind of its mean.
- [00:09:57.560]And you can see that some of the major events that hit the US economy over the last 30 years
- [00:10:04.140]are plotted out here.
- [00:10:05.140]So casting your mind back, right back at the beginning, it was Black Monday.
- [00:10:09.300]That was in 1987.
- [00:10:11.800]That was the biggest stock market drop of all time.
- [00:10:13.960]That was a 20% fall, which is enormous.
- [00:10:16.440]In fact, I believe the biggest drop with the pandemic was, I think, 11 and 1/2%.
- [00:10:21.560]So Black Monday was almost twice as bad as the worst day of the pandemic in terms of
- [00:10:26.520]the stock market.
- [00:10:27.420]And there was a lot of policy uncertainty in the newspapers after that.
- [00:10:30.960]There was a lot of uncertainty over, would the SEC regulate the markets?
- [00:10:34.740]Was there going to be a recession, et cetera?
- [00:10:36.300]And you can see other spikes, Gulf wars, elections, et cetera.
- [00:10:40.980]You can see the most recent and highest spike of all time is the pandemic.
- [00:10:45.360]So on this basis, the pandemic, the current pandemic we're living through, has increased
- [00:10:50.200]policy uncertainty by about fivefold.
- [00:10:52.600]And I'll show you in a minute what that is, but the pandemic is not only terrible in New
- [00:10:57.280]Year's news, economically and medically, obviously, but also has generated an enormous
- [00:11:00.880]amount of uncertainty.
- [00:11:03.260]Here I put a circle around the big news just before the pandemic, which was the China-U.S.
- [00:11:08.960]trade dispute.
- [00:11:09.960]So it's hard to quite see it because the scaling isn't ideal, but before the pandemic, in fact,
- [00:11:14.160]the highest spike just was the first of these two spikes for the China-U.S. trade dispute.
- [00:11:19.680]So before the pandemic, trade uncertainty was in some senses the biggest spike we'd
- [00:11:24.460]seen.
- [00:11:25.460]You know, the fears that the whole global trading system would uncover.
- [00:11:27.140]But of course, this has now been overtaken by the pandemic.
- [00:11:30.900]But, you know, don't get me wrong again.
- [00:11:32.720]The pandemic will, you know, I hope will come to pass eventually and will come back in some
- [00:11:37.320]senses to normal service.
- [00:11:39.520]And at that point, trade uncertainties can come back to being an incredibly important
- [00:11:43.480]driver of the economy.
- [00:11:46.780]So the nice thing about newspapers is we can drill down to find out in terms of overall
- [00:11:52.100]uncertainty what's driving this.
- [00:11:54.160]So what this graph does here is it plots four different
- [00:11:57.000]categories of economic policy uncertainty.
- [00:11:59.840]So the way we do that is we search for the frequency of articles that mention economic
- [00:12:04.180]policy and uncertainty, and then we require them also to mention one of several different
- [00:12:09.800]policy terms, policy categories.
- [00:12:12.780]So for example, for fiscal policy, it would have to mention words like government spending
- [00:12:17.000]or budget deficit.
- [00:12:18.000]To be a healthcare policy term, it'd have to mention, for example, Medicare, Medicaid,
- [00:12:22.220]hospital, et cetera.
- [00:12:23.780]So what you can see here is under the pandemic,
- [00:12:26.860]the two big surges in economic policy uncertainty were in fiscal and health policy.
- [00:12:33.260]So that isn't surprising.
- [00:12:34.760]With fiscal policy, there is obviously the CARES Act and all the debate around that.
- [00:12:38.800]There's still the option of a possible CARES Act II, of a stimulus checks, unemployment
- [00:12:43.540]insurance, rebates on federal tax cuts, et cetera.
- [00:12:48.680]So there's enormous amount of fiscal policy uncertainty.
- [00:12:51.820]Health policy uncertainty, again, is not surprising.
- [00:12:54.000]This is, after all, a healthcare crisis.
- [00:12:56.720]And there's issues about how the health industry itself is going to do.
- [00:13:02.180]Interestingly, monetary policy uncertainty is quite low.
- [00:13:05.900]I personally think the Fed has done a fantastic job in the pandemic.
- [00:13:10.240]It's been extremely aggressive, acting in terms of stabilization policy, in terms of
- [00:13:15.920]cutting rates, pumping money into the system.
- [00:13:18.040]It's also been very predictable and clear.
- [00:13:20.000]The Fed has tried as hard as it can to be transparent.
- [00:13:22.260]So monetary policy uncertainty isn't high.
- [00:13:25.260]In orange is trade.
- [00:13:26.580]Trade policy uncertainty.
- [00:13:28.560]And you notice that that spike was the highest element in 2019 during the China-US trade
- [00:13:33.960]dispute, but it's fallen back down again.
- [00:13:36.300]So currently, trade policy is low, it's like a-- but it could jump up.
- [00:13:42.900]My youngest kid is five, I was reading her the other day a story about a sleeping giant.
- [00:13:49.640]The China-US trade dispute seems like the sleeping giant that's taking a very temporary
- [00:13:54.520]nap right now.
- [00:13:56.440]Wake up, get enraged, and destroy the economy again.
- [00:14:00.120]So currently, trade uncertainty is low, but I don't think that's going to remain that
- [00:14:03.840]way for long.
- [00:14:06.580]Another great thing about newspapers is you can look at data from other countries that
- [00:14:09.900]have newspapers.
- [00:14:11.400]So you can-- I show you data here for the US, this is the same US trade index I showed
- [00:14:16.820]you in the last slide, just for comparison.
- [00:14:18.940]I've now added on data for Japan, where I've used four main series Japanese newspapers.
- [00:14:26.300]Now, you can worry a little bit about the independence of the Chinese newspapers.
- [00:14:33.020]They're not fully independent, so you should take it for what it is.
- [00:14:37.120]But if you look at this, actually, interestingly, both the Japanese and the Chinese newspapers
- [00:14:41.020]show a very similar time series.
- [00:14:43.700]So they also show, in Japanese newspapers and Chinese newspapers, there's a lot of discussion
- [00:14:49.700]about trade economic policy uncertainty from 2018 to 2020.
- [00:14:54.660]In both cases, they mostly died off.
- [00:14:56.160]China is still talking about it a bit.
- [00:14:58.440]They both also had smaller spikes in 2016 due to Brexit and the election of Donald Trump.
- [00:15:07.840]So another country with trade uncertainty is the UK, of course, due to Brexit.
- [00:15:15.740]Just avoiding confusion over which country this is, I went for a massive flag for Great
- [00:15:21.640]Britain.
- [00:15:22.640]I was also tempted to-- in fact, I will put up a picture of the queen.
- [00:15:26.020]But amazingly enough, recently now, if you search for the queen on Google image, the
- [00:15:31.420]other image that comes up a lot is Freddie Mercury from Queen, who was also-- well, he
- [00:15:36.840]was-- yeah, he was British.
- [00:15:38.640]I think-- I can't remember if he was born in Britain or born in Zambia.
- [00:15:43.220]But I think he was a British national, but he certainly comes up when you search for
- [00:15:47.520]queen.
- [00:15:48.520]So anyway, back to trade policy uncertainty, here is an overall index for policy uncertainty
- [00:15:55.260]for the UK.
- [00:15:55.880]And you can see for the UK, the pandemic is an issue, but the biggest spike was Brexit.
- [00:16:01.120]I was actually in the UK for the Brexit vote.
- [00:16:04.340]I voted in it.
- [00:16:05.340]I, you know, I'll be, I'll be open.
- [00:16:06.900]I voted against Brexit.
- [00:16:08.180]You can probably guess I, you know, from my, I'm a graduate, the Brexit vote was very driven
- [00:16:13.040]by more educated people tended and people from cities voted against Brexit, less educated
- [00:16:18.540]people in more rural areas voted in favor of Brexit.
- [00:16:22.840]But it's generated tremendous uncertainty, not least because the process.
- [00:16:25.740]The process is still ongoing.
- [00:16:27.180]So the vote was in June 2016.
- [00:16:30.740]We are now in September 2020, over four years later, and we still have not left the European
- [00:16:36.640]Union customs union.
- [00:16:37.980]We formally left the EU, but we're still trading in the same regulations and nobody knows what's
- [00:16:42.700]going to happen on December 31st when we properly leave.
- [00:16:46.880]I'll pause in case there's any questions, by the way, I'll take a break now.
- [00:16:54.240]Thank you, Dr. Bloom.
- [00:16:55.600]There's an interesting question that's popped up here related to the newspaper index and
- [00:16:59.920]that is, have you ever considered applying your uncertainty search terms to social media
- [00:17:05.780]platforms in addition to the newspapers that you mentioned?
- [00:17:08.880]Oh, whoever answered that question is like prophetic.
- [00:17:13.100]So yes, I'm going to show you exactly that in two slides.
- [00:17:16.900]Maybe even one slide.
- [00:17:17.900]I can't remember quite how many slides, but yes.
- [00:17:20.480]Let's see.
- [00:17:21.480]Oh, no.
- [00:17:22.480]Okay, two slides.
- [00:17:23.480]I'm sure it's slide after next.
- [00:17:24.480]So yes, I'm going to show you some results.
- [00:17:25.460]I'm going to show you some social media.
- [00:17:26.460]Perfect.
- [00:17:27.460]Very good.
- [00:17:28.460]And I'd like to ask one question of my own, actually, at this point.
- [00:17:31.560]You just mentioned that trade policy uncertainty has been overshadowed to a great degree by
- [00:17:36.440]uncertainty related to the pandemic.
- [00:17:39.180]Although we know the sources of trade policy uncertainty really have not gone away.
- [00:17:42.600]We have the collapse of the World Trade Organization appellate body.
- [00:17:45.520]We still have multiple issues in the US-China trading relationship and others.
- [00:17:50.140]Those haven't gone away.
- [00:17:51.140]They've just been overshadowed, it seems, by the pandemic, as your presentation has
- [00:17:55.320]been so far.
- [00:17:56.320]So I want to ask you a question about how you account for the gatekeeper role that the
- [00:17:59.820]news media plays, and social media to a large degree these days, where they set the agenda,
- [00:18:05.840]they decide what they're going to report about.
- [00:18:08.260]There's that gatekeeper agenda setting function.
- [00:18:11.020]So how do you account for what might not get through that gate, so to speak, where a pandemic
- [00:18:16.440]is certainly going to overtake headlines?
- [00:18:18.300]That makes sense, but how do you account for what is still there in terms of driving trade
- [00:18:22.740]policy uncertainty, but it's just not getting reported about?
- [00:18:25.180]Maybe as much during the pandemic?
- [00:18:26.860]No, that's a great question.
- [00:18:28.540]So I think there's a gatekeeper effect.
- [00:18:30.580]You're exactly right.
- [00:18:31.580]There's lots of evidence on this, like, for example, the day that Michael Jackson was
- [00:18:35.680]found dead.
- [00:18:36.680]You know, the news are full of that.
- [00:18:37.920]And our measure of economic policy uncertainty drops a bit, not because Michael Jackson's
- [00:18:42.880]death has any impact on it, but of course, it just crowds out other news.
- [00:18:46.660]It's also true that that same phenomenon tends to happen for policymaking.
- [00:18:51.180]So Congress, the president, you know, I used to work in the UK Treasury, the Finance Ministry,
- [00:18:55.040]so I've seen it more from the UK side, but politicians only like CEOs only have so much
- [00:18:59.480]bandwidth.
- [00:19:00.480]So they can only deal with so much policy going on.
- [00:19:02.760]So active trade policy, at least at the presidential and congressional level, may have died down
- [00:19:09.280]a bit.
- [00:19:10.600]Whether that reduces uncertainty is less clear.
- [00:19:12.820]So the president of Congress is doing less on trade because it's focused on COVID.
- [00:19:18.020]Does that, you know, you're right that measured uncertainty drops in newspapers and Twitter.
- [00:19:22.820]It's not clear that it really does drop.
- [00:19:24.900]So, yeah, I'm totally aligned with the sentiment your question.
- [00:19:27.760]I think trade policy uncertainty is hugely important.
- [00:19:30.480]And in fact, I mean, my kind of parable would literally be the sleeping John for this is
- [00:19:37.000]that, you know, trade policy uncertainty could easily flare up again.
- [00:19:40.280]In fact, almost certainly is going to flare up again.
- [00:19:42.280]Until six months ago, it was the biggest single source of uncertainty.
- [00:19:45.600]COVID pandemic, you know, I pray will hopefully die down.
- [00:19:49.480]And my guess is two years from now, trade policy uncertainty may be higher again
- [00:19:53.100]than pandemic uncertainty.
- [00:19:54.380]It's hard to tell.
- [00:19:54.760]But you're absolutely right.
- [00:19:56.440]It's been crowded off the agenda.
- [00:19:57.960]It's no longer such a focus right now, but, you know, any forward-looking firm that's thinking six
- [00:20:03.220]or 12 months ahead should be concerned with this, as with policymakers and voters.
- [00:20:07.040]Okay. And one more before we move on here.
- [00:20:10.560]And this is from an economist here in the university.
- [00:20:13.260]And he asks, thinking of gravity work in annualized panel data, how would you apply your index
- [00:20:19.480]to capture trade costs related to trade policy uncertainty?
- [00:20:22.840]Ooh.
- [00:20:24.620]That's a great and tough question.
- [00:20:30.100]Trade costs.
- [00:20:31.100]You know, normally, the way often I think about this is trade uncertainty probably retards
- [00:20:36.880]most the creation of new trading relationships.
- [00:20:40.180]So in the research and in survey data, there's been a lot of emphasis recently.
- [00:20:46.540]I mean, like, you know, amongst academics, for example, Kostas Akulakis, who said, yeah,
- [00:20:51.000]I mean, it's going back 10 years now, but what's really sensitive to uncertainty?
- [00:20:54.480]It's the creation of new trading relationships.
- [00:20:56.740]So if you think about, I don't know, I'm, you know, I'm making a type of cell phone,
- [00:21:01.880]a new cell phone, and I want to open it up and sell now to, you know, to Zambia, looking
- [00:21:07.660]at Freddie Mercury.
- [00:21:09.920]If I've already been selling there for the last 10 years, trade policy uncertainty may
- [00:21:13.300]impact me less.
- [00:21:14.300]If I'm thinking about setting up a new trading arm, I've got to go and, you know, find a
- [00:21:18.880]local partner, probably deal with, you know, various pieces of regulation, pay some taxes,
- [00:21:24.340]et cetera.
- [00:21:25.520]That time of new instigation of trading activity seems particularly sensitive.
- [00:21:29.740]So the evidence seems to be you may continue with current trading activity, but you're
- [00:21:34.680]not going to initiate any new activity, much less like to initiate new activity if uncertainty
- [00:21:39.440]goes up.
- [00:21:41.020]I think in something like, I mean, Brexit, to be clear, is just, you know, an order of
- [00:21:45.440]magnitude bigger.
- [00:21:46.440]Brexit is completely ripping up the old rule book.
- [00:21:49.320]And I've been running a survey called the Decision Maker Panel with the Bank of England
- [00:21:53.320]and Nottingham University.
- [00:21:54.200]And the impact of Brexit on the UK firms, and it's massive.
- [00:21:57.620]So that goes way beyond just trade.
- [00:21:59.460]That also includes immigration, regulations, imports, exports, you know, finance.
- [00:22:05.540]So you, depends on how narrowly or broadly you define trade.
- [00:22:09.240]I mean, it's true that COVID, by the way, is impacting trade just because of obviously
- [00:22:13.920]movement of people and migrants has been heavily restricted and therefore that tends to reduce
- [00:22:17.880]trade, certainly in the long run.
- [00:22:19.200]So I think trade costs have gone up.
- [00:22:21.180]There's lots of evidence that in order to trade.
- [00:22:24.060]You need personal relationships, you know, business people that trade a lot tend to travel
- [00:22:30.300]a lot internationally and obviously on the COVID you can't travel, therefore, it's harder
- [00:22:33.460]to trade.
- [00:22:34.460]So yes, trade costs also generally have gone up.
- [00:22:37.280]Okay, thank you, why don't we proceed and then we'll collect some more questions here
- [00:22:43.140]as we go.
- [00:22:44.140]I'm happy we've left the picture of the Queen up for a long time.
- [00:22:46.560]So you know, makes me feel very patriotic staring at the British flag, so I'll keep
- [00:22:51.280]going onwards.
- [00:22:53.920]This Economic Policy Uncertainty Index has been used a lot.
- [00:22:56.580]I gave a talk at the RMF, this is like the highlight of my career, there was like Janet
- [00:23:02.420]Yellen and the heads of the G20 central banks in the room, Mario Draghi, etc, talking about
- [00:23:08.200]economic policy uncertainty.
- [00:23:10.920]So what about, someone asked about social media, you know, they're like, whoever asked
- [00:23:14.720]was like reading my mind, maybe they hacked into my slides and seen this coming.
- [00:23:19.540]But I'm going to talk about Twitter.
- [00:23:21.360]So it seems you can't escape Twitter.
- [00:23:23.780]I'm not really active on Twitter, so I may make some mistake.
- [00:23:27.580]I have a Twitter account, but I've posted all of about three tweets ever, but I read
- [00:23:33.280]a lot of tweets.
- [00:23:34.280]I mean, I read them kind of research.
- [00:23:35.560]So there are around 200 million English language tweets a day.
- [00:23:38.940]There are 280 characters, but that's a lot of texts to analyze.
- [00:23:41.660]You can imagine we can do great stuff with Twitter.
- [00:23:44.180]You know, I don't know how many of them came from the Kardashian family.
- [00:23:48.520]There's a classic Kardashian tweet on the top left.
- [00:23:52.640]There's Pope Benedict.
- [00:23:53.640]The 16th on the right, you know, a more classic kind of sweet tweet.
- [00:23:57.960]I bless all of you from my heart.
- [00:24:00.280]On the bottom left is a kind of an inspiring tweet from, you know, astronaut Massimino,
- [00:24:06.220]who's up in orbit.
- [00:24:07.880]On the bottom right is the kind of thing that maybe, you know, Twitter is famous for just
- [00:24:11.640]kind of, you know, amusing circulates around on social media.
- [00:24:15.540]No one can quite understand what's going on, but it's highly amusing.
- [00:24:18.500]So there's a lot of tweets each day.
- [00:24:21.360]Not surprisingly, quite a few of them.
- [00:24:23.500]The President is very active, as everyone knows, on Twitter, and a lot of his tweets
- [00:24:29.720]are about trade.
- [00:24:32.200]I don't know how many, but you know, there's certainly a lot.
- [00:24:34.860]Google search Donald Trump trade tweet, you'll get hundreds of different tweets.
- [00:24:38.340]I mean, here are three.
- [00:24:39.340]Here are some of the most high profile, more competitive tweets he has about trade.
- [00:24:43.800]So what does text-to-data analysis of Twitter tell us?
- [00:24:47.120]So here's a graph.
- [00:24:49.000]We scraped all 200 million, or searched them, we didn't quite scrape a site.
- [00:24:53.360]So we searched all 200 million daily tweets a day back from 2011.
- [00:24:58.100]This is a project also with Thomas Renault, who's at Paris One in France.
- [00:25:04.800]And we scraped them for the frequency of the words "economic" or "economy" and "uncertain"
- [00:25:09.860]or "uncertainty."
- [00:25:10.860]So because it's only 280 characters, if we search require EP and U terms, it gets harder.
- [00:25:16.200]We're just searching for the word "economic" and "variance" and "uncertainty" and "variance."
- [00:25:20.340]And here is the graph.
- [00:25:23.220]Yellow and the EPU, the index I showed you earlier, just again for comparison, is in blue.
- [00:25:27.800]So what do you notice?
- [00:25:30.440]Well, one thing that's kind of striking is Twitter exploded over Brexit.
- [00:25:34.560]So Twitter does seem more sensitive, and that's in that dimension, to
- [00:25:38.420]trade, or certainly Brexit. I mean, they're almost as high as COVID-19,
- [00:25:43.580]which I don't know whether I should find it surprising or not actually, but Twitter was, you know, a light after Brexit.
- [00:25:49.180]Having been in the UK at the time, I voted, and I remember we were all very confident
- [00:25:53.080]that Brexit would not happen. And in fact, that was the government's position.
- [00:25:56.960]That was the betting markets. The betting markets gave Brexit a 13% chance of succeeding
- [00:26:04.080]and remain an 87% chance. They completely got it wrong.
- [00:26:07.300]And so, you know, it's a huge surprise. Maybe that's why there was such a huge spike in tweets.
- [00:26:14.000]You can see the China trade dispute registered pretty heavily in the tweet Twittersphere.
- [00:26:18.720]COVID-19 is obviously extremely high, but at this point now, COVID-19,
- [00:26:22.940]in terms of Twitter level, has dropped back down almost to China trade dispute level.
- [00:26:28.580]So yeah, trade registers very heavily on Twitter.
- [00:26:31.520]Happy to take, Jill, let me, feel free to interrupt me if there are any questions.
- [00:26:38.820]Otherwise, I'm happy to take any questions at this point if anything else got asked.
- [00:26:43.000]There is a, you know, a social media related question.
- [00:26:45.660]I think this is a good time to ask.
- [00:26:47.040]And it is, do you think the ability of virtually anyone to voice their own opinions
- [00:26:52.800]to a wide audience through social media is a major factor in the spread of uncertainty?
- [00:26:56.760]And if so, how big of a player is that?
- [00:26:58.740]Again, you know, it's a really great question because there's two ways to view this.
- [00:27:05.200]Having, you know, from all the work I've been doing on newspapers in particular,
- [00:27:08.540]going back 10, 15 years, you can ask the same question.
- [00:27:11.020]Actually, I'll come back to social media.
- [00:27:12.200]But with newspapers, there's two ways.
- [00:27:14.060]So one thought is it's what I call the Geiger counter type approach,
- [00:27:17.900]which is the Geiger counter, you know, counter radiation.
- [00:27:20.620]And it has that thing that, you know, clicks.
- [00:27:22.660]Every time it gets hit by, I can't remember if it's an alpha or a gamma array,
- [00:27:26.520]whatever it is, but it clicks every time it detects radiation.
- [00:27:29.160]And the more rapid the clicks, the more radiation it detects.
- [00:27:31.620]So think of newspapers like that.
- [00:27:33.360]There's some underlying level of economic policy uncertainty or uncertainty.
- [00:27:37.460]And the newspapers are just a noisy signal of that.
- [00:27:39.660]The other view is newspapers actually set the agenda.
- [00:27:43.300]And here, this is basically the same issue, really,
- [00:27:46.220]of Twitter that Twitter is actually setting the agenda.
- [00:27:49.080]And under that view, newspapers and Twitter and people that tweet and editors,
- [00:27:52.520]I mean, for example, Rupert Murdoch is extremely influential.
- [00:27:55.040]He's probably the single most influential person in global media,
- [00:27:58.640]given he controls News International that controls, you know,
- [00:28:01.500]the Wall Street Journal, Fox, Sky, et cetera.
- [00:28:04.040]These channels and these individuals have a major role to play.
- [00:28:09.380]I don't know where it's at.
- [00:28:11.880]I think the sum of the second, I don't think, I mean, I agree with the sentiment.
- [00:28:15.560]I don't think that it's entirely the newspaper and newspapers and Twitter
- [00:28:20.000]more obviously are unvastly reflecting.
- [00:28:22.380]The truth.
- [00:28:22.920]I think there is some, you know, positioning on this is interesting on Twitter.
- [00:28:28.180]We were trying to do some political analysis of Twitter by people stated
- [00:28:32.420]political preference.
- [00:28:33.580]And you find on Twitter, actually, at least until recently,
- [00:28:36.820]there were more people that were registered Democrats and Republicans to give
- [00:28:40.220]you a sense of Twitter does tilt more Democrat than Republican.
- [00:28:44.900]And just in terms of sheer number of users that are registered,
- [00:28:47.520]it's hard to tell who's registered because we can only look at high profile
- [00:28:50.380]users and get, look at their affiliation.
- [00:28:52.240]So amongst high profile people that we know who they are, that's at least true.
- [00:28:55.100]So, yes, I think this is a view and I don't think, you know,
- [00:29:00.320]this is not Lord of the Rings.
- [00:29:01.640]So there is not one uncertainty measure to rule them all.
- [00:29:04.180]You know, there's no one ring to rule them all.
- [00:29:06.480]This is, I'm only, I'm showing you here four different measures,
- [00:29:10.860]actually, I'll show you one more,
- [00:29:11.920]but I have kind of eight or nine different uncertainty measures.
- [00:29:14.700]They tend to move together, but they're not identical.
- [00:29:17.520]And just looking here at this slide,
- [00:29:18.940]you see that Twitter exploded after Brexit and newspapers didn't.
- [00:29:22.100]And that maybe that social media has a better or worse take.
- [00:29:26.280]I kind of think in a sense that as time's gone on,
- [00:29:29.360]I mean, I've been working in uncertainty since the 90s
- [00:29:31.420]when I started my PhD.
- [00:29:32.380]I think it's much more multidimensional.
- [00:29:34.520]And it's not the sense of just high or low.
- [00:29:36.660]There's short and long run.
- [00:29:38.020]There's, you know, perception versus reality.
- [00:29:39.960]There's things that hit firms versus consumers.
- [00:29:42.120]There's, you know, downside risk, upside risk,
- [00:29:44.480]downside uncertainty, upside uncertainty, et cetera.
- [00:29:46.440]So yes, I think social media can set the agenda.
- [00:29:49.420]I think primarily, if you look at this, most of the movement,
- [00:29:52.040]it's probably reflecting true events rather than social media driving it,
- [00:29:56.140]but it can probably amplify it.
- [00:29:57.420]Okay.
- [00:30:00.700]Do you want me to move on?
- [00:30:02.260]Why don't, let me ask one more and then we'll-
- [00:30:04.860]Okay, sure, go ahead.
- [00:30:05.480]This has to do with what we discussed a few minutes ago
- [00:30:10.140]with respect to how trade policy and
- [00:30:11.740]uncertainty has been overshadowed to some degree
- [00:30:13.770]by the pandemic.
- [00:30:15.450]And this is the question about supply chains.
- [00:30:17.250]So supply chain uncertainty, this
- [00:30:18.910]can be created by trade policy, such as the US-China trade war,
- [00:30:22.290]Section 301 tariffs, the phase one trade deal with China,
- [00:30:26.430]but can also be created by health policy,
- [00:30:28.230]such as a supply of PPE and how countries
- [00:30:31.110]can secure that supply.
- [00:30:33.630]Or fiscal policy, protectionist procurement
- [00:30:35.510]would be an example there.
- [00:30:38.010]So how do we separate these, or how should we view supply chain
- [00:30:41.430]uncertainty is the question.
- [00:30:45.010]I mean, I think this is a major part of trade uncertainty.
- [00:30:49.370]You can think of--
- [00:30:50.450]I mean, at its most basic, you could break, I guess,
- [00:30:52.610]trade up into imports and exports.
- [00:30:55.290]And I think of supply chain as more import uncertainty.
- [00:30:58.870]It all depends.
- [00:30:59.610]I mean, if you're exporting into a global supply chain,
- [00:31:01.710]you think of it as exports.
- [00:31:02.790]But you could think of--
- [00:31:04.150]I mean, I've thought of that more concretely
- [00:31:05.790]of the UK for Brexit.
- [00:31:07.190]But we had four dimensions, which you
- [00:31:09.430]can get wider and wider.
- [00:31:11.130]There's trade exports.
- [00:31:12.370]There's trade imports.
- [00:31:13.250]So there's a lot of stuff that comes in.
- [00:31:15.330]So the UK or the US produces--
- [00:31:18.170]a lot of manufacturing goes, I'll take my cell phone.
- [00:31:20.570]I mean, these cell phones are produced
- [00:31:22.810]in a very complicated supply chain
- [00:31:24.650]that wraps around the world.
- [00:31:26.410]So if I remember rightly, the iPhone,
- [00:31:29.510]it's assembled in China.
- [00:31:30.650]But major components are made in South Korea, Germany.
- [00:31:34.410]I think parts of it in Thailand.
- [00:31:36.150]It's, of course, designed in the US.
- [00:31:37.650]It's probably prototyped in the US, et cetera.
- [00:31:40.050]So yes, there's both.
- [00:31:40.830]There's both imports and exports, uncertainty
- [00:31:42.630]that's going to be a major barrier.
- [00:31:44.610]And an issue that's come up--
- [00:31:46.650]I've been talking to a lot of execs over uncertainty
- [00:31:49.170]is, of course, slimming down supply chain.
- [00:31:53.310]So right up until the pandemic--
- [00:31:56.210]well, actually, up until the China-US trade dispute,
- [00:31:59.050]we used to be totally focused on lean.
- [00:32:01.350]So long ago, in an earlier life, I was in McKinsey.
- [00:32:05.010]And when I was at McKinsey, I was involved
- [00:32:06.750]in some lean implementation.
- [00:32:08.790]So lean is the idea of just in time.
- [00:32:10.530]And minimal inventory and being very efficient.
- [00:32:13.170]And I was completely bought into lean.
- [00:32:15.070]I still think it's a very good idea about reducing defects,
- [00:32:18.190]et cetera.
- [00:32:18.910]But one issue that turned out to be somewhat problematic
- [00:32:21.390]with it is minimizing inventory, that if you suddenly
- [00:32:23.870]get hit with a trade shock or something like COVID pandemic,
- [00:32:27.330]where you can't import or export,
- [00:32:28.930]you're left with no inventory and your whole production line
- [00:32:31.510]breaks down.
- [00:32:32.210]And so I think uncertainty induces increased trade costs,
- [00:32:37.510]but also slightly changes the way you operate your
- [00:32:40.230]supply chain.
- [00:32:41.070]And the broad sense I've got from talking to lots of
- [00:32:43.110]executives is making more domestically and also having less
- [00:32:47.490]steps. So, A, you want to make more in the US,
- [00:32:50.010]but B to the extent you want to make stuff outside the US,
- [00:32:52.590]try and minimize the number of links in the chain,
- [00:32:54.510]because if you have a weak link risk,
- [00:32:56.550]the more links there are.
- [00:32:57.750]I mean,
- [00:32:57.930]if you have a product that goes through five different
- [00:32:59.690]countries before it comes to the US,
- [00:33:00.930]it only takes one of those five to have a trade problem for
- [00:33:03.510]the thing to never arrive.
- [00:33:04.650]So that may make the cost of goods sold higher.
- [00:33:08.490]So for example,
- [00:33:09.530]just come back to that,
- [00:33:09.930]back to the iPhone,
- [00:33:10.830]Steve jobs,
- [00:33:12.130]when he launched the iPhone,
- [00:33:13.710]Steve Bomer at the time back in,
- [00:33:15.930]I think it was 2007 said,
- [00:33:17.990]you know,
- [00:33:18.190]the thing is going to be a complete flop.
- [00:33:19.990]No,
- [00:33:20.250]one's going to buy a phone that costs $500 and jobs went
- [00:33:24.250]ahead.
- [00:33:24.510]And Apple was obviously highly successful,
- [00:33:26.210]but at the time it was pretty marginal as to whether
- [00:33:28.210]anyone would buy a $500 phone.
- [00:33:30.070]If that phone had been entirely made in the U S the
- [00:33:32.690]estimates would have,
- [00:33:33.390]it cost about $1,500 and clearly never would have worked.
- [00:33:36.350]So you can see that,
- [00:33:38.590]you know,
- [00:33:39.130]long,
- [00:33:39.830]trade and complex supply chains are important for producing
- [00:33:43.370]products and for innovation.
- [00:33:44.670]But at the same time right now,
- [00:33:46.510]there's some extent under threat.
- [00:33:47.870]And in fact,
- [00:33:48.310]that's a problem for innovation and growth.
- [00:33:50.250]I think it's,
- [00:33:50.710]this is one of the costs of trade uncertainty and trade
- [00:33:54.150]disputes is it makes us less likely to offshore stuff and
- [00:33:56.670]therefore less likely to innovate.
- [00:33:57.830]But so yes,
- [00:34:00.710]it is a big issue.
- [00:34:01.430]And then broaden it out.
- [00:34:02.250]It's going to say Brexit,
- [00:34:02.990]the four things,
- [00:34:03.890]you know,
- [00:34:04.410]and you know,
- [00:34:05.070]depends how broadly defined trade is,
- [00:34:06.630]there's imports and exports.
- [00:34:07.510]And another thing is regulation.
- [00:34:09.730]Often under things like the WTO,
- [00:34:11.150]you're subject to certain regulations.
- [00:34:12.910]With the European Union,
- [00:34:13.850]you're definitely subject to regulations.
- [00:34:15.590]And so trade negotiations,
- [00:34:18.090]you know,
- [00:34:18.590]you've heard about chlorinated chickens
- [00:34:20.250]and hormone beef and all this stuff.
- [00:34:21.890]So that's another angle.
- [00:34:23.550]And then finally,
- [00:34:24.290]there is immigration.
- [00:34:25.430]So immigration tends to be a different policy from trade,
- [00:34:29.830]but they are definitely connected.
- [00:34:31.490]There's masses of evidence in economics,
- [00:34:34.570]for example,
- [00:34:35.010]that you're more likely to trade with a country.
- [00:34:37.090]You have high immigration and migration,
- [00:34:39.630]those with both to and from.
- [00:34:40.670]So,
- [00:34:42.430]you know,
- [00:34:43.070]again,
- [00:34:43.750]these are broader issues and they're not supply chain,
- [00:34:46.070]but they are broader parts of the trade discussion.
- [00:34:47.950]So I'll go on.
- [00:34:50.550]So finally,
- [00:34:51.250]it's going to talk about the economist intelligence unit.
- [00:34:53.430]So here's a fourth measure of uncertainty.
- [00:34:55.410]I've been working with two people at the RMF,
- [00:34:57.310]Hitesa here and Davide Fiorceri,
- [00:34:59.790]to generate a measure for 140 countries.
- [00:35:03.930]So the issue with what I've shown you with newspapers is it's fantastic for
- [00:35:08.410]the UK and for the,
- [00:35:09.530]US and France and Germany,
- [00:35:10.770]et cetera,
- [00:35:11.130]or we have really good high quality daily newspapers.
- [00:35:14.230]And we have series for about 20 countries on our website.
- [00:35:16.830]The problem comes to countries,
- [00:35:18.690]let's say like Ghana,
- [00:35:19.830]Sierra Leone,
- [00:35:21.210]or maybe,
- [00:35:21.770]you know,
- [00:35:22.070]North Korea,
- [00:35:22.890]whereby there's either very few daily newspapers.
- [00:35:26.190]They're not high quality.
- [00:35:27.150]Maybe they're controlled or maybe there's not any at all.
- [00:35:29.710]So as an alternative,
- [00:35:32.090]we use this.
- [00:35:35.350]So these are the economist intelligence unit have these monthly country
- [00:35:39.430]reports.
- [00:35:39.790]Here's just an example for France.
- [00:35:41.230]They are,
- [00:35:42.350]they look like this.
- [00:35:43.290]There's a regular structure and then just,
- [00:35:45.230]you know,
- [00:35:45.910]on average,
- [00:35:47.070]the 29 pages of text that turns out to be the mean and the median.
- [00:35:50.350]So for each country,
- [00:35:51.630]they're basically 30 pages of text talking about the country in a very
- [00:35:56.250]standardized structure.
- [00:35:57.330]They're edited and disseminated from London,
- [00:35:59.730]but they have hundreds of correspondence in countries around the world.
- [00:36:03.310]We've interviewed quite a few of them to ask about the process.
- [00:36:05.490]There's multiple stages of editing the country's correspondent files to
- [00:36:09.330]report.
- [00:36:09.750]They write it up.
- [00:36:10.430]It's edited by regional,
- [00:36:11.550]then a district then goes out to London and the final thing's put
- [00:36:14.410]together.
- [00:36:14.710]So there's not a lot of text,
- [00:36:17.470]but there's 30 pages we have once a month.
- [00:36:20.170]So you can work out,
- [00:36:21.330]you have,
- [00:36:21.890]you know,
- [00:36:22.190]roughly 350 pages of text a year.
- [00:36:24.930]And we can search that just to look for the frequency of the word
- [00:36:28.230]uncertain or uncertainty.
- [00:36:29.290]And so if you look at the French report here,
- [00:36:31.470]it's highlighted.
- [00:36:32.090]This is uncertainty about global effects.
- [00:36:36.330]There's one here about French elections.
- [00:36:38.250]There's another effect,
- [00:36:39.230]another effect about US impact.
- [00:36:42.050]So these reports talk about uncertainty
- [00:36:44.890]as due to domestic factors.
- [00:36:46.570]In this case, it's the election of Sarkozy,
- [00:36:48.610]but also international factors that affect France.
- [00:36:52.450]So uncertainty in the US, uncertainty in trade.
- [00:36:54.410]So this is the global average.
- [00:36:57.630]This is taking all 143 countries in the world
- [00:37:00.410]that we have data for.
- [00:37:01.290]So it's pretty amazing.
- [00:37:02.090]It's kind of every country more or less you can think of.
- [00:37:04.170]We've weighted it up by GDP
- [00:37:06.890]to give you a kind of world weighted average
- [00:37:09.130]and this is what the graph shows.
- [00:37:10.650]So again, it looks pretty sensible.
- [00:37:13.170]If you have sharp eyes,
- [00:37:15.390]you'll notice obviously coronavirus is high.
- [00:37:18.090]The Iraq war, SARS,
- [00:37:19.890]the US recession 9-11 is pretty high.
- [00:37:21.830]The global financial crisis is less of a spike here.
- [00:37:25.290]Somewhat surprising,
- [00:37:27.090]but if you read these reports,
- [00:37:28.650]it just talks about that as being bad news.
- [00:37:30.570]It doesn't talk so much about uncertainty.
- [00:37:32.370]Oh, I don't know what that,
- [00:37:35.390]thank you, that information thing is,
- [00:37:39.030]see fewer notifications.
- [00:37:40.890]Yes, thank you.
- [00:37:41.810]So you'll be surprised,
- [00:37:45.070]2008, 2009 is somewhat lower.
- [00:37:49.370]The debt crisis in Europe is higher.
- [00:37:51.030]This is because this is a global perspective.
- [00:37:53.330]So the European debt crisis was a big deal
- [00:37:55.230]for a large number of European countries,
- [00:37:56.890]slightly less than the US.
- [00:37:57.910]So this is the global average.
- [00:38:01.050]We can also look at the trade component.
- [00:38:03.270]How do we do that?
- [00:38:04.190]Well, we take any sentence
- [00:38:06.270]that has the word uncertain or uncertainty
- [00:38:08.210]and look at whether
- [00:38:08.930]it mentions one of a large number
- [00:38:10.890]of trade terms.
- [00:38:11.990]And this is what we get.
- [00:38:13.470]This trade index was pretty flat.
- [00:38:15.970]There was not a lot of uncertainty
- [00:38:17.770]about global trade regimes
- [00:38:19.330]until really the 2016 onwards
- [00:38:22.090]and 2017 onwards
- [00:38:23.450]in the China-US trade spat.
- [00:38:25.130]So that has been a huge issue globally.
- [00:38:27.490]It was kind of kicked off by Brexit.
- [00:38:29.730]So Brexit and you can kind of
- [00:38:31.850]think of them together.
- [00:38:32.490]Basically, 2016 onwards
- [00:38:34.530]as what's been seen
- [00:38:35.930]as kind of the unraveling
- [00:38:37.050]of globalization, Brexit.
- [00:38:38.830]And the China-U.S. trade dispute,
- [00:38:41.530]the election of Trump,
- [00:38:42.530]all of those have been seen
- [00:38:43.730]as pushbacks on globalization,
- [00:38:45.530]major changes to the direction of U.S.
- [00:38:49.230]Sorry, the global trade regime,
- [00:38:51.430]major changes to the direction
- [00:38:53.030]it's been following
- [00:38:53.690]over the last 30, 40 years.
- [00:38:55.110]So not surprisingly,
- [00:38:55.910]uncertainty is incredibly high.
- [00:38:57.770]We can, the other nice thing
- [00:39:00.150]about these Economist
- [00:39:01.130]Intelligence Unit reports,
- [00:39:02.170]we can look at which countries
- [00:39:03.310]are mentioned, if any.
- [00:39:04.150]So here's the number of times,
- [00:39:06.790]the share of the number of times
- [00:39:08.210]uncertainty
- [00:39:08.730]is mentioned.
- [00:39:09.330]And the US is mentioned
- [00:39:12.550]in the same sentence.
- [00:39:13.930]So United States, US,
- [00:39:15.930]we include the presidents
- [00:39:17.330]and all the heads
- [00:39:17.870]of the Federal Reserve.
- [00:39:18.630]So, you know, we include Trump,
- [00:39:20.250]Obama, Bush,
- [00:39:22.210]Powell, Yellen, et cetera.
- [00:39:24.750]And you can see here
- [00:39:27.050]that the US,
- [00:39:27.870]up until the Trump election,
- [00:39:30.110]was not mentioned that much
- [00:39:32.030]in uncertainty around the world.
- [00:39:33.390]It's maybe, you know,
- [00:39:34.050]an average three, four percent.
- [00:39:35.250]Suddenly after the election of Trump
- [00:39:37.330]and the China-US trade dispute
- [00:39:38.630]US is mentioned,
- [00:39:40.530]you know, the average,
- [00:39:41.670]I think is about 10, 15 percent.
- [00:39:43.410]So it's gone up fourfold roughly.
- [00:39:44.790]The number of times America's mentioned
- [00:39:47.170]or some American figure
- [00:39:48.490]in the same sentence
- [00:39:49.790]as the word uncertainty.
- [00:39:51.390]So the US has become
- [00:39:52.930]a significant exporter
- [00:39:55.090]of uncertainty globally since 2016.
- [00:39:57.730]You know, the UK,
- [00:39:59.010]my other nationality,
- [00:40:00.390]has seen the same thing.
- [00:40:02.230]So initially the Brexit vote
- [00:40:03.890]generated an enormous spike.
- [00:40:05.430]Of course, you can imagine
- [00:40:07.030]lots of countries concerned
- [00:40:08.150]over what it will do
- [00:40:08.530]and what it might do to them
- [00:40:09.630]and whether that heralds
- [00:40:11.070]greater global disintegration
- [00:40:13.470]or kind of disengagement.
- [00:40:15.350]And then the Brexit process itself.
- [00:40:17.490]So there's another spike
- [00:40:19.030]in early 2019
- [00:40:21.030]when Britain did not manage
- [00:40:23.370]to successfully leave
- [00:40:24.270]the European Union.
- [00:40:24.970]I don't know if you remember,
- [00:40:25.850]there was those multiple votes
- [00:40:26.910]in Parliament
- [00:40:27.370]when Theresa May eventually resigned.
- [00:40:29.330]So this is UK export
- [00:40:32.010]to global uncertainty.
- [00:40:32.750]So I'm happy to pause, Jill.
- [00:40:34.950]I think there was a question maybe.
- [00:40:38.430]Yes, we have a few methodology questions
- [00:40:42.930]for you that have come in
- [00:40:44.150]regarding the index.
- [00:40:45.150]One is, do you look at all synonyms
- [00:40:47.770]for uncertainty?
- [00:40:48.510]And also, do you code articles
- [00:40:50.410]at all by tone,
- [00:40:51.610]as in whether they're positive or negative?
- [00:40:53.430]So great.
- [00:40:54.870]So we've looked at both.
- [00:40:56.130]On synonyms,
- [00:40:56.990]you know, I have my slides
- [00:40:59.410]from my PhD class.
- [00:41:00.570]Whoever that is,
- [00:41:01.330]you're welcome to email me after.
- [00:41:02.450]Just don't have it here.
- [00:41:03.470]But yes, synonyms do matter.
- [00:41:05.450]So I'm trying to remember
- [00:41:06.690]off the top of my head,
- [00:41:07.390]but the word uncertainty
- [00:41:08.330]in all of these reports
- [00:41:09.710]over all the year,
- [00:41:10.470]going back to 96,
- [00:41:11.330]I think comes up
- [00:41:12.110]something like 100,000 times.
- [00:41:13.410]All the other synonyms
- [00:41:16.110]like unsure, ambiguous, unclear, etc.
- [00:41:18.550]I think come up about 50,000 times
- [00:41:20.810]except for risk.
- [00:41:21.990]So there's kind of uncertainty 100K
- [00:41:24.210]or the other kind of less used,
- [00:41:25.710]less common about 50K times.
- [00:41:28.350]And then risk comes up
- [00:41:30.890]something like 200,000 times.
- [00:41:32.250]So if you add in the word risk,
- [00:41:34.610]then uncertainty appears
- [00:41:36.870]to be rising even more
- [00:41:38.230]We don't do that
- [00:41:39.590]because we're worried
- [00:41:40.530]about the use of the word risk
- [00:41:42.210]becoming increasingly popular
- [00:41:44.050]because of more
- [00:41:45.010]financial sophistication,
- [00:41:46.370]but we could do.
- [00:41:46.930]And it's not obvious.
- [00:41:47.990]And you're exactly right.
- [00:41:48.910]These synonyms become
- [00:41:50.050]even more sensitive
- [00:41:50.910]actually across countries.
- [00:41:51.890]So I'm working
- [00:41:53.050]one of my grad students,
- [00:41:54.050]she's Serbian.
- [00:41:56.570]She's looking at Serbian newspapers.
- [00:41:58.790]And in Serbian,
- [00:41:59.870]there's more tricky to find
- [00:42:01.910]what exact translation
- [00:42:02.950]is of uncertainty.
- [00:42:04.030]And she's used the word crisis
- [00:42:05.910]when debating.
- [00:42:06.590]And it doesn't seem like crisis
- [00:42:08.130]the same as uncertainty,
- [00:42:09.010]but how close should we get?
- [00:42:10.650]So you're exactly right.
- [00:42:11.610]Synonyms of uncertainty are sensitive.
- [00:42:13.490]The big one is risk,
- [00:42:14.930]whether you include it or exclude it.
- [00:42:16.310]And if you look at a dictionary,
- [00:42:17.850]the definition of risk
- [00:42:18.790]tends to imply it's more downside.
- [00:42:20.630]Then on sentiment, yes,
- [00:42:22.870]there's an enormous literature
- [00:42:24.370]on looking at sentiment.
- [00:42:25.170]We have done this here.
- [00:42:26.350]It's slightly tricky
- [00:42:29.190]because sentiment words,
- [00:42:31.110]again, aren't ambiguous.
- [00:42:32.150]So for example, the word tax
- [00:42:33.850]may seem a negative.
- [00:42:35.570]It's in the negative sentiment
- [00:42:36.930]dictionary for newspapers
- [00:42:38.030]but for company reports
- [00:42:39.730]it's a neutral word.
- [00:42:40.810]Cost is the same.
- [00:42:42.110]So cost normally is a negative
- [00:42:43.590]sentiment word.
- [00:42:44.250]If you look at company accounts
- [00:42:45.550]or financial texts,
- [00:42:47.210]it tends not to be.
- [00:42:48.070]So sentiment we should look at that.
- [00:42:50.250]And again, great question.
- [00:42:52.090]If I had the data,
- [00:42:52.830]I'd show you now.
- [00:42:53.430]I just don't have it.
- [00:42:54.330]But yes, you can definitely
- [00:42:55.230]do sentiment analysis as well.
- [00:42:56.670]Okay, thank you.
- [00:42:58.950]And one more on methodology here
- [00:43:00.310]before we move on.
- [00:43:01.210]And that is,
- [00:43:02.130]are there certain criteria
- [00:43:03.530]you're using to determine
- [00:43:04.890]whether news outlets
- [00:43:05.890]are high quality?
- [00:43:06.830]Chinese state
- [00:43:07.930]and social media
- [00:43:08.670]may be highly controlled,
- [00:43:09.670]for example,
- [00:43:10.250]but could your index
- [00:43:11.490]tell us anything useful
- [00:43:12.670]about how China's leadership
- [00:43:14.090]views economic policy uncertainty?
- [00:43:16.170]Yes, again,
- [00:43:18.350]I mean, this is even an issue,
- [00:43:20.390]by the way, in the US.
- [00:43:21.650]So in the US,
- [00:43:22.830]you have 10 newspapers.
- [00:43:23.830]There's the Genskau and Shapiro
- [00:43:25.610]media lean index.
- [00:43:28.550]And our most left wing
- [00:43:30.150]is the Washington Post.
- [00:43:31.270]Our most right wing
- [00:43:32.210]is the Wall Street Journal.
- [00:43:33.230]It turns out,
- [00:43:34.470]if you break it into, say,
- [00:43:35.690]the most right wing
- [00:43:36.690]and left wing five newspapers,
- [00:43:37.910]in the U.S.,
- [00:43:39.190]we get a very similar measure.
- [00:43:40.270]So I am worried about this,
- [00:43:42.370]even in the U.S.
- [00:43:42.990]It turns out,
- [00:43:43.430]at least among the top circulation
- [00:43:45.150]mainstream newspapers,
- [00:43:46.790]we don't get a difference.
- [00:43:48.150]My guess is if you compared, say,
- [00:43:50.090]you know, CNN versus Fox News,
- [00:43:53.470]things would look
- [00:43:54.070]somewhat more different.
- [00:43:54.730]But we don't use broadcast media.
- [00:43:56.330]In China, this is a much bigger issue.
- [00:43:59.370]We also have used
- [00:44:01.610]the South China Morning Post
- [00:44:02.750]that comes out of Hong Kong.
- [00:44:04.310]That was pretty independent
- [00:44:05.410]for a while.
- [00:44:05.950]But recently, I mean,
- [00:44:06.910]Jack Ma has taken it
- [00:44:07.890]over and I'm not so sure
- [00:44:09.170]of its independence
- [00:44:09.810]the last kind of five, six years.
- [00:44:11.190]If you compare
- [00:44:12.810]the Chinese policy
- [00:44:15.410]uncertainty index
- [00:44:16.270]with one we can create
- [00:44:17.430]from U.S. newspapers,
- [00:44:18.450]you can do something
- [00:44:19.090]in U.S. newspapers
- [00:44:19.810]looking for the word China
- [00:44:20.970]in the same sentence.
- [00:44:21.850]They are similar,
- [00:44:23.250]but the U.S. newspaper
- [00:44:25.070]one goes up faster
- [00:44:25.930]than the Chinese one.
- [00:44:26.570]So, yes, there probably
- [00:44:28.390]is some censorship in China.
- [00:44:29.950]I don't know how much.
- [00:44:31.070]It's useful looking
- [00:44:33.090]at high frequency spikes,
- [00:44:34.390]but some of the long run
- [00:44:35.470]changes, certainly,
- [00:44:36.330]I think it looks,
- [00:44:37.030]it rises less
- [00:44:37.870]and censorship in China,
- [00:44:38.910]my understanding of it,
- [00:44:39.750]is anything getting worse
- [00:44:40.890]in the last three or four years.
- [00:44:43.470]So yeah, that is a problem.
- [00:44:45.090]And we don't have an index
- [00:44:46.030]for North Korea.
- [00:44:46.610]There's no free press.
- [00:44:47.550]We don't have an index
- [00:44:48.270]for a lot of countries.
- [00:44:49.030]Turkey, actually,
- [00:44:50.390]we wanted to put
- [00:44:51.150]a Turkish index together,
- [00:44:52.390]but Turkey's press
- [00:44:54.370]is so controlled by Erdogan
- [00:44:55.930]that it just seemed pointless.
- [00:44:57.150]So, and Iran was another country
- [00:44:58.570]I'd like to, but again,
- [00:44:59.450]we didn't get the sense
- [00:45:00.670]we had a free enough press.
- [00:45:01.410]China was so big,
- [00:45:02.670]we gave it a go,
- [00:45:03.430]but yes, Chinese data
- [00:45:05.070]comes with a bit of a health warning.
- [00:45:06.330]And I think on our website,
- [00:45:07.210]it says that.
- [00:45:07.850]We can't entirely trust
- [00:45:08.830]the independence of Chinese media.
- [00:45:10.490]Okay, thank you.
- [00:45:13.210]Why don't we go ahead
- [00:45:14.050]with your conclusions then,
- [00:45:14.870]and we'll take more questions after that.
- [00:45:16.210]Great.
- [00:45:16.830]So to conclude,
- [00:45:17.910]uncertainty is incredibly high
- [00:45:19.510]right now due to COVID.
- [00:45:20.950]So coming back to Jill's point,
- [00:45:23.710]you know,
- [00:45:24.130]much like, you know,
- [00:45:25.950]it's kind of the equivalent
- [00:45:26.790]of someone like Michael Jackson
- [00:45:28.330]dying every day.
- [00:45:29.210]COVID has just pushed everything else,
- [00:45:30.850]much of it out of the news,
- [00:45:32.930]out of the policy process.
- [00:45:34.330]So COVID's kind of eclipsed it.
- [00:45:36.610]But before,
- [00:45:37.830]COVID trade uncertainty
- [00:45:38.990]was the major driver of uncertainty.
- [00:45:40.630]And like the sleeping giant parable,
- [00:45:42.530]you know, the giant wakes up again.
- [00:45:43.970]So I think trade uncertainty
- [00:45:46.010]is going to be back.
- [00:45:47.050]And if I were looking ahead
- [00:45:48.630]one year or two years from now,
- [00:45:50.210]this may be probably a bigger deal
- [00:45:52.750]two years now than COVID.
- [00:45:54.150]In fact, I saw an analysis
- [00:45:55.410]the other day looking at the damage
- [00:45:57.010]to the UK economy
- [00:45:58.450]from Brexit versus COVID
- [00:45:59.910]by Thomas Sampson
- [00:46:01.110]from the London School of Economics.
- [00:46:02.370]And he calculates,
- [00:46:03.850]in fact, using the government's
- [00:46:04.930]own forecast.
- [00:46:05.550]He didn't even do his own numbers.
- [00:46:06.670]He just goes to the government's
- [00:46:07.590]own forecast.
- [00:46:07.810]That in the short run,
- [00:46:09.370]COVID is much more damaging.
- [00:46:10.490]But 10 years out,
- [00:46:11.430]Brexit will have reduced
- [00:46:12.970]UK growth more than
- [00:46:14.230]COVID will have done.
- [00:46:15.030]And finally,
- [00:46:16.630]trade uncertainty shows up
- [00:46:18.290]in stock markets and newspapers,
- [00:46:19.490]Twitter and EIU reports.
- [00:46:21.090]And so I have other data
- [00:46:22.430]from surveys from firms,
- [00:46:23.950]from disagreement indices.
- [00:46:25.730]I won't go through it,
- [00:46:26.890]but I think it suggests,
- [00:46:28.070]above all else,
- [00:46:28.690]trade uncertainty is a major issue
- [00:46:30.130]for the US.
- [00:46:30.730]Why do we care?
- [00:46:32.250]Well, we worry that uncertainty
- [00:46:34.170]can harm growth.
- [00:46:35.470]You know, here's the Wall Street
- [00:46:37.790]Journal.
- [00:46:38.230]You know, it's I don't want to
- [00:46:41.050]pick particularly on the president,
- [00:46:42.190]but, you know, this is a piece from
- [00:46:43.450]the Wall Street Journal, which is,
- [00:46:45.010]if anything, leans Republican,
- [00:46:46.290]highlighting that trade uncertainty
- [00:46:48.610]is an issue.
- [00:46:49.410]And why is it an issue?
- [00:46:50.670]Just to kind of conclude the three
- [00:46:52.830]reasons, you know, this goes back
- [00:46:54.510]to decades of research.
- [00:46:55.630]The first is risk aversion.
- [00:46:56.790]This goes back to Keynes and Tobin.
- [00:46:58.390]I mean, you know, this goes back to
- [00:47:00.130]kind of almost money lending in the
- [00:47:01.590]temple.
- [00:47:01.890]I mean, 2000 years that the more
- [00:47:04.070]uncertain you are, the more expensive
- [00:47:05.750]it is to borrow and therefore, you
- [00:47:07.710]know,
- [00:47:07.770]the less firms tend to invest.
- [00:47:09.270]The second is more recent, not that
- [00:47:11.250]much more recent in the sense of,
- [00:47:12.510]you know, at least Ben Bernanke
- [00:47:14.150]in 1983 wrote his PhD thesis
- [00:47:17.110]on it, which is uncertainty makes
- [00:47:18.610]firms cautious about investing or
- [00:47:20.350]hiring if it's hard to change your
- [00:47:22.110]decision.
- [00:47:22.470]So this is called real options.
- [00:47:23.850]And the idea here is it hard to
- [00:47:25.630]invest and disinvest or hire and
- [00:47:27.250]fire and you're uncertain about it.
- [00:47:29.070]You don't want to go ahead
- [00:47:30.350]because uncertainty makes you
- [00:47:32.510]cautious.
- [00:47:32.870]And then finally, it dampens
- [00:47:35.810]the impact of policy.
- [00:47:37.750]So here the idea is uncertainty
- [00:47:39.650]because it makes firms cautious.
- [00:47:41.290]They're less likely to respond to
- [00:47:42.690]anything, including stimulus
- [00:47:43.990]policy.
- [00:47:44.550]So, you know, if ever there was a
- [00:47:47.550]need for stable and predictable
- [00:47:48.870]trade policies, now is the time.
- [00:47:51.470]We really need growth.
- [00:47:52.710]We need the U.S. to recover.
- [00:47:54.510]And it seems like if ever we need
- [00:47:56.290]at least some stability from
- [00:47:57.510]trade, given we have all this
- [00:47:58.650]instability from, you know, the
- [00:48:00.350]medical side and the fiscal side.
- [00:48:01.710]I'll end to say a lot of the
- [00:48:03.890]data, if you go to my website,
- [00:48:05.870]you can just find a lot of these
- [00:48:07.510]links.
- [00:48:07.730]I see it contain links to the
- [00:48:08.850]various data I mentioned.
- [00:48:10.210]At this point, I'm happy to stop
- [00:48:12.130]sharing and take questions.
- [00:48:13.670]Okay.
- [00:48:16.150]Thank you very much.
- [00:48:17.630]I'd like to pick up with kind of
- [00:48:20.950]an overview or really a
- [00:48:23.550]philosophical question about
- [00:48:25.030]what, you know, what we can, how
- [00:48:28.950]we can use this information and
- [00:48:30.750]data that you've just presented.
- [00:48:31.930]And that is really to say, let
- [00:48:36.170]me pull up that question here.
- [00:48:37.330]And that is, you know,
- [00:48:37.710]that is to say that there has
- [00:48:39.350]always been some level of
- [00:48:40.430]uncertainty throughout history.
- [00:48:42.330]So how does a business use this
- [00:48:44.210]knowledge in making business
- [00:48:45.450]decisions?
- [00:48:45.910]Does this mean that there are
- [00:48:46.950]more or less opportunities during
- [00:48:48.750]times of great uncertainty?
- [00:48:50.250]Yes, it's interesting.
- [00:48:52.470]Mostly people see uncertainty as
- [00:48:54.250]negative, which I think it is.
- [00:48:55.490]But if you're in Silicon, you
- [00:48:56.550]know, I live out in Stanford in
- [00:48:57.610]Silicon Valley.
- [00:48:58.070]It's probably, by the way,
- [00:48:59.630]it's slightly dark.
- [00:49:00.490]You know, if I turn on the
- [00:49:01.670]light, you can see because it's
- [00:49:03.390]like so, because the smog, I
- [00:49:05.370]mean, for people that aren't out
- [00:49:06.670]here.
- [00:49:06.930]I think it's probably
- [00:49:07.690]I think during we spoke last
- [00:49:08.970]week, it was like literally
- [00:49:09.730]orange skies.
- [00:49:10.610]You had to have lights on
- [00:49:11.790]throughout the day.
- [00:49:12.410]It's cold and dark because the
- [00:49:14.830]amount of smoke in the air.
- [00:49:15.990]But out in Silicon Valley, it is
- [00:49:19.970]a big issue for uncertainty seen
- [00:49:21.950]often for venture capitalists is
- [00:49:23.150]positive.
- [00:49:23.570]So if I'm a venture capitalist
- [00:49:25.470]and someone says I have a new
- [00:49:26.510]business idea, but it's really
- [00:49:27.690]uncertain, that's like even
- [00:49:28.710]better than I have a new
- [00:49:29.910]business idea.
- [00:49:30.510]And it's not uncertain in the
- [00:49:32.250]sense there's lots of upside.
- [00:49:33.230]Generally, though, it's seen as
- [00:49:35.110]more of a downside.
- [00:49:36.090]And the issue is, you know,
- [00:49:37.670]with uncertainty comes back to
- [00:49:39.170]particular that the first two
- [00:49:40.550]comments, it increases your cost
- [00:49:42.110]of finance.
- [00:49:42.610]So banks and investors want a
- [00:49:44.530]higher risk premium if it's more
- [00:49:45.710]uncertain.
- [00:49:46.050]And secondly, if it's expensive
- [00:49:48.450]to change your mind, like you
- [00:49:50.030]don't open up a new factory, a
- [00:49:51.730]new store, if you're very
- [00:49:52.750]uncertain, you tend to wait.
- [00:49:53.730]And the problem is, if everyone
- [00:49:55.050]in the economy waits, just
- [00:49:56.290]economic growth never happens.
- [00:49:57.630]So in terms of why it's useful
- [00:49:59.730]for businesses, I think the
- [00:50:00.790]question, particularly on supply
- [00:50:01.850]chains, is very relevant here.
- [00:50:03.130]When trade policy, you know, on
- [00:50:05.710]trade costs, from The Economist,
- [00:50:07.650]when trade policy uncertainty is
- [00:50:09.750]very high, I would be nervous,
- [00:50:12.010]more nervous about, A, starting
- [00:50:13.610]up new trading ventures, and B,
- [00:50:16.030]about having extended overseas
- [00:50:17.630]supply chains, because both of
- [00:50:18.950]them become significantly more
- [00:50:20.490]risky.
- [00:50:20.770]So, you know, it's a slightly
- [00:50:23.450]negative comment, but with high
- [00:50:25.070]trade policy uncertainty, I would
- [00:50:27.170]onshore and reduce supply chains.
- [00:50:28.870]Even if foreign, you know,
- [00:50:30.570]suppliers are more efficient and
- [00:50:32.550]cheaper, I think it makes sense
- [00:50:34.230]to onshore.
- [00:50:34.790]And my own view is free trade is
- [00:50:36.030]good.
- [00:50:36.310]It's good if Americans,
- [00:50:37.630]make the things.
- [00:50:38.130]We're great at making lots of
- [00:50:39.450]things.
- [00:50:39.670]We're just not great at making
- [00:50:40.690]everything.
- [00:50:41.170]You know, we're like, there are
- [00:50:42.850]some things that's better.
- [00:50:43.710]You know, the old thing about
- [00:50:44.610]the British make wool and the
- [00:50:45.830]Portuguese make port, it's still
- [00:50:47.130]true now.
- [00:50:47.570]The Americans are fantastic at
- [00:50:48.950]most stuff, but not everything.
- [00:50:50.530]But, you know, in the world of
- [00:50:52.330]trade uncertainty, trade
- [00:50:54.230]barriers, trade fights, we
- [00:50:55.970]probably want to return more to
- [00:50:57.410]making more stuff domestically
- [00:50:58.790]and trading less.
- [00:50:59.630]I mean, for a business, that's
- [00:51:01.250]probably the, you know, safest
- [00:51:02.530]course of action.
- [00:51:03.250]OK, here's another another one.
- [00:51:07.610]Are you puzzled at all by the
- [00:51:10.470]current response to all this
- [00:51:11.730]uncertainty?
- [00:51:12.170]Stock markets have rebounded.
- [00:51:14.130]Interest rates remain low,
- [00:51:15.550]extremely low.
- [00:51:16.690]And Chinese exports to the U.S.
- [00:51:19.050]have rebounded.
- [00:51:19.790]Is it possible that companies are
- [00:51:21.370]getting better at adapting to
- [00:51:22.830]uncertainty?
- [00:51:23.290]Yes.
- [00:51:26.110]You know, I saw I'm personally
- [00:51:27.610]in fact, there's something in the
- [00:51:29.030]Wall Street Journal.
- [00:51:29.730]I spoke to Wall Street Journal
- [00:51:30.910]reporter for some time about this.
- [00:51:33.130]So I'm on record of saying, yes,
- [00:51:35.710]I'm a bit puzzled.
- [00:51:36.430]And actually, I all my you know,
- [00:51:37.590]I'd have a lot of money,
- [00:51:38.470]but all my, you know,
- [00:51:40.150]five to nine plans and pension
- [00:51:42.730]is out of the market.
- [00:51:43.570]There are two good reasons
- [00:51:46.850]why the market's rebounded
- [00:51:48.090]and then come back to, you know,
- [00:51:49.230]what we're seeing in the economy.
- [00:51:49.990]Two good reasons is one is
- [00:51:51.810]the interest rates are incredibly low.
- [00:51:55.370]So it's not that the market's
- [00:51:56.590]offering fantastic returns.
- [00:51:57.930]It's like nothing else
- [00:51:58.890]is offering anything better.
- [00:51:59.830]I mean, literally interest rates
- [00:52:00.830]in the bank are close to zero.
- [00:52:02.170]So given inflation is roughly
- [00:52:03.810]two percent a year,
- [00:52:04.770]you're losing money
- [00:52:05.870]by sitting in the bank.
- [00:52:06.850]So.
- [00:52:07.570]You know, there's a view
- [00:52:08.450]that even though the stock market
- [00:52:09.470]goes sideways for the next year,
- [00:52:10.990]you're still better off
- [00:52:11.850]because you get some dividend payment.
- [00:52:13.090]And then the other reason, of course,
- [00:52:14.950]is the stock market,
- [00:52:15.990]as in the S&P 500,
- [00:52:17.070]is incredibly overweight high tech.
- [00:52:18.850]So high tech accounts
- [00:52:20.210]for around one third
- [00:52:21.370]of the value of the S&P 500.
- [00:52:22.830]There's only around five percent
- [00:52:24.510]of U.S. employment.
- [00:52:25.370]So as the kind of the mistake,
- [00:52:27.490]honestly, I made early on,
- [00:52:28.930]I was like the stock market
- [00:52:29.910]is over bullish.
- [00:52:30.630]Well, it is if you think
- [00:52:32.010]of the stock market
- [00:52:32.670]as representing the U.S.,
- [00:52:33.950]but it is not representing the U.S.
- [00:52:35.370]The stock market is representing
- [00:52:37.550]that have done better
- [00:52:38.450]than small firms
- [00:52:39.170]during the pandemic.
- [00:52:39.870]We see that clearly in the data
- [00:52:41.150]and particularly large high-tech firms
- [00:52:42.970]which have done incredibly well.
- [00:52:44.230]So the stock market
- [00:52:46.670]kind of reflects
- [00:52:48.170]what you might expect it to.
- [00:52:50.570]And then in terms
- [00:52:52.390]of the general economy,
- [00:52:53.550]you know, the general economy,
- [00:52:55.750]there has been a rebound.
- [00:52:58.030]The rebound has been driven.
- [00:52:59.430]I mean, not a full rebound.
- [00:53:00.890]So you have this square root,
- [00:53:01.950]say we're kind of flat,
- [00:53:02.870]a massive drop
- [00:53:03.750]and then a partial recovery.
- [00:53:04.810]The partial recovery
- [00:53:06.050]has been driven by,
- [00:53:07.030]you know,
- [00:53:08.050]honestly,
- [00:53:08.430]good fiscal and monetary policy.
- [00:53:10.030]There's been a lot of stimulus
- [00:53:11.110]and a lot of Fed money
- [00:53:12.170]pumped into the economy,
- [00:53:13.070]but we're nowhere near
- [00:53:14.030]the full rebound.
- [00:53:15.170]Some bits like
- [00:53:16.270]consumer expenditure
- [00:53:17.250]is totally up.
- [00:53:18.130]Other bits like
- [00:53:19.270]business investment
- [00:53:20.230]excluding computers
- [00:53:21.390]is collapsed.
- [00:53:22.130]Businesses are investing
- [00:53:23.250]a lot on computers
- [00:53:24.070]and that's part of the imports
- [00:53:25.270]as well as consumer durables.
- [00:53:26.510]So I can talk about
- [00:53:28.150]it's a kind of a weird,
- [00:53:29.490]it's like an alien landscape.
- [00:53:30.990]Honestly,
- [00:53:31.330]it's like for an economist
- [00:53:32.210]he landed on Mars.
- [00:53:33.310]I mean,
- [00:53:33.590]all the old relationships
- [00:53:35.030]are completely broken down.
- [00:53:36.550]So,
- [00:53:37.510]I think the view going forwards
- [00:53:40.030]is a pretty tepid recovery.
- [00:53:41.490]We've had a big drop,
- [00:53:42.710]partial recovery,
- [00:53:43.970]and now we're just going to
- [00:53:45.010]tepidly go forwards
- [00:53:46.010]until there's a maximum.
- [00:53:46.810]Okay.
- [00:53:49.470]And another follow-up question here
- [00:53:51.130]on trade policy and uncertainty.
- [00:53:53.570]As the recovery,
- [00:53:55.330]as recovery gets underway,
- [00:53:57.410]do you think countries
- [00:53:58.490]are going to be more protectionist
- [00:53:59.910]or opened up?
- [00:54:00.630]We witnessed some patterns
- [00:54:01.750]of protectionism
- [00:54:02.570]during the beginning of the pandemic.
- [00:54:03.810]So, do you think protectionism
- [00:54:05.650]would be the new trend
- [00:54:06.470]in international economics
- [00:54:07.490]and trade or not?
- [00:54:09.110]Probably, yes.
- [00:54:10.690]I mean, I think it's like,
- [00:54:11.690]I also, oddly enough,
- [00:54:12.650]do a lot of stuff
- [00:54:13.190]on working from home.
- [00:54:14.170]And protectionism
- [00:54:14.950]and working from home
- [00:54:15.850]have very two similar things.
- [00:54:17.350]They both went to extreme values
- [00:54:18.970]during the pandemic
- [00:54:19.810]and they're both revert a bit,
- [00:54:22.050]but not far from fully.
- [00:54:23.130]So, if you look at Smoot-Hawley,
- [00:54:24.830]if you look at the Great Depression,
- [00:54:26.190]the last time the world
- [00:54:27.190]was engulfed in protectionism
- [00:54:28.490]around the Great Depression,
- [00:54:29.670]it took a long time
- [00:54:31.310]for it to revert.
- [00:54:32.070]In fact, you know,
- [00:54:32.710]World War II, Bretton Woods,
- [00:54:33.930]WTO, et cetera.
- [00:54:35.350]So, my guess is
- [00:54:36.990]they're all going to be
- [00:54:37.470]has been a massive
- [00:54:38.490]protectionist move.
- [00:54:39.570]It's not just the pandemic,
- [00:54:41.370]it's also politics.
- [00:54:42.930]And I think politics,
- [00:54:43.950]protectionism is driven by,
- [00:54:45.430]in my own personal view,
- [00:54:46.150]is inequality.
- [00:54:46.770]You know,
- [00:54:48.970]economists and policymakers
- [00:54:50.710]are, you know,
- [00:54:51.950]as responsible as anyone
- [00:54:52.910]for the fact we've seen growth,
- [00:54:54.150]but it's been very unequally shared.
- [00:54:55.850]And not surprisingly,
- [00:54:56.610]people in parts of the country
- [00:54:58.670]that hasn't seen growth
- [00:54:59.590]are kind of angry
- [00:55:00.310]and aren't particularly
- [00:55:01.190]in favor of globalization.
- [00:55:02.390]So, I know it's better in the UK,
- [00:55:04.030]but if you're, you know,
- [00:55:05.190]rural parts of the UK,
- [00:55:06.250]the north of the UK
- [00:55:06.950]has been very low
- [00:55:07.450]and left behind.
- [00:55:07.930]They're angry
- [00:55:08.430]and they don't like it.
- [00:55:10.430]And so, not surprising,
- [00:55:11.250]they're against globalization.
- [00:55:12.190]And so, that's a permanent policy
- [00:55:14.010]change in the UK.
- [00:55:15.450]I mean, at least,
- [00:55:16.550]I mean, there's not going to be
- [00:55:17.250]another election there
- [00:55:18.010]for another four years, probably.
- [00:55:19.050]So, I don't think
- [00:55:20.830]we're going to go back to 2019,
- [00:55:22.610]certainly not 2015.
- [00:55:23.810]2015 was the high point
- [00:55:25.790]of globalization.
- [00:55:26.430]We're maybe going to go back
- [00:55:27.750]to like 1980,
- [00:55:28.570]which is sure more open
- [00:55:31.170]than we were in the 30s,
- [00:55:32.450]but we're nowhere near
- [00:55:33.270]as open as we were in 2015.
- [00:55:37.430]Following up on that one,
- [00:55:38.170]I think it's a good segue
- [00:55:38.930]into another question here,
- [00:55:40.330]whether you formally tested
- [00:55:41.510]some of this.
- [00:55:42.150]And so this question is,
- [00:55:43.410]have you tested
- [00:55:44.310]whether certain policies
- [00:55:45.690]typically follow bouts
- [00:55:47.270]of public uncertainty?
- [00:55:48.550]For example,
- [00:55:49.610]are protectionist policies
- [00:55:51.410]put in place to respond
- [00:55:52.750]to political interests
- [00:55:53.770]in time of uncertainty?
- [00:55:54.730]For example, tightening
- [00:55:56.310]of binational purchasing
- [00:55:58.870]requirements and the like.
- [00:56:00.130]It's a great concept.
- [00:56:03.310]In the US,
- [00:56:05.710]I'm only really aware of
- [00:56:07.410]two major tightening periods,
- [00:56:09.630]actually,
- [00:56:10.010]which is the 30s and now.
- [00:56:13.010]This accent gives me away.
- [00:56:15.110]I haven't looked at it
- [00:56:16.610]and I'm sure that people have.
- [00:56:19.330]I bet there's an academic article.
- [00:56:20.610]I'm sure if I went
- [00:56:21.150]and searched afterwards,
- [00:56:21.910]looking at recessions
- [00:56:23.390]and trade tightening,
- [00:56:24.350]and maybe someone actually knows.
- [00:56:25.650]If I had phoned a friend,
- [00:56:28.710]I would phone a friend right now,
- [00:56:29.870]my favorite trade economist.
- [00:56:31.030]My guess is you're probably right.
- [00:56:34.670]It's like the classic
- [00:56:37.390]thing when times are bad,
- [00:56:38.910]blame someone else.
- [00:56:39.970]There are good trade policies
- [00:56:42.950]and bad trade policies,
- [00:56:43.890]but there's also the political dropback
- [00:56:46.090]that if things are really bad,
- [00:56:47.090]you blame foreigners,
- [00:56:47.890]and that's easy to do.
- [00:56:48.890]My guess is recessions lead to...
- [00:56:52.590]We've seen it now,
- [00:56:53.530]and we've seen it in 1930,
- [00:56:54.950]the Smoot-Hawley.
- [00:56:55.710]In the 1930s,
- [00:56:56.550]there was a massive reduction
- [00:56:57.470]in global trade,
- [00:56:58.210]and that led to prolonging the recession.
- [00:57:00.770]I think downturns are not helpful
- [00:57:04.290]for free trade.
- [00:57:05.190]That's right.
- [00:57:07.370]Okay, we have time
- [00:57:08.850]for one more question here,
- [00:57:10.110]and this is a big, broad question.
- [00:57:12.010]What impact is the 2020
- [00:57:13.870]presidential election
- [00:57:14.970]having on uncertainty
- [00:57:16.090]and uncertainty reporting?
- [00:57:17.710]You know, a lot.
- [00:57:21.090]I've actually been doing a paper.
- [00:57:23.490]I was thinking about this this morning.
- [00:57:24.910]I need to put it out.
- [00:57:25.750]So I'll tell you what I find
- [00:57:27.650]and tell you what the market.
- [00:57:28.330]So first in the market,
- [00:57:29.370]so if you look at the markets,
- [00:57:30.790]you can look at the VIX,
- [00:57:31.670]the vol curve,
- [00:57:32.350]which looks at implied volatility,
- [00:57:33.930]and it's looking at basically
- [00:57:35.870]the market's expectation of volatility
- [00:57:37.350]in future,
- [00:57:38.050]and it surges around the election.
- [00:57:40.010]So the markets are,
- [00:57:41.870]and it's the biggest surge
- [00:57:43.430]around elections
- [00:57:44.070]since the VIX started trading,
- [00:57:45.890]since we had the VIX index
- [00:57:46.910]back to the 90s, 1990s.
- [00:57:48.730]So the markets see the 2020 election
- [00:57:50.870]as particularly uncertain
- [00:57:52.090]and pricing a lot of stock volatility.
- [00:57:53.650]I have,
- [00:57:55.010]I've looked at the EPU data,
- [00:57:56.750]the economic policy
- [00:57:57.570]and certain index data
- [00:57:58.390]I showed you for newspapers,
- [00:57:59.370]and we looked at across 20 countries
- [00:58:01.390]and particularly for the US going back,
- [00:58:02.910]we have historical newspaper data
- [00:58:04.250]back to 1900.
- [00:58:05.050]And it turns out
- [00:58:06.430]that,
- [00:58:07.330]that you get significant
- [00:58:08.510]as in large spikes
- [00:58:10.110]in policy uncertainties
- [00:58:11.590]according to newspapers
- [00:58:12.850]after elections
- [00:58:14.290]that are A, polarized
- [00:58:15.250]and B, close.
- [00:58:16.230]And the current election
- [00:58:17.430]meets both of those criteria.
- [00:58:18.890]It's more polarized
- [00:58:20.530]than I think any election
- [00:58:21.610]we know basically
- [00:58:22.890]in living memory
- [00:58:23.590]and it's also very close
- [00:58:24.850]at least based on betting odds.
- [00:58:26.070]So on those two,
- [00:58:28.370]I see an enormous spike
- [00:58:30.190]in uncertainty.
- [00:58:30.570]In fact,
- [00:58:30.930]that's the next concern
- [00:58:32.170]on the agenda
- [00:58:32.870]and the headlines.
- [00:58:34.330]If you're worried
- [00:58:35.350]about uncertainty,
- [00:58:36.030]the thing I'm focusing
- [00:58:37.270]my mind on,
- [00:58:37.990]you have like COVID.
- [00:58:39.050]We just recovered from trade.
- [00:58:40.870]It's gone quiet,
- [00:58:41.530]been obliterated by COVID.
- [00:58:42.750]But the next big fear
- [00:58:44.490]of the three great
- [00:58:45.430]uncertainty demons out there,
- [00:58:48.470]number three would be
- [00:58:49.350]the election.
- [00:58:49.910]Who knows what's going to happen?
- [00:58:51.890]The other thing I should point out
- [00:58:53.250]in closing
- [00:58:53.750]is what's often thought about
- [00:58:57.050]in terms of recessions
- [00:58:58.230]is what's called
- [00:58:59.190]the Anna Kareninin theory
- [00:59:00.450]of recessions,
- [00:59:01.170]which has that famous quote
- [00:59:03.210]in the opening of the book
- [00:59:04.410]saying it's something like
- [00:59:05.330]happy families are all the same,
- [00:59:06.570]unhappy families
- [00:59:07.210]are all, you know,
- [00:59:08.610]no unhappy family is the same.
- [00:59:10.370]They're all unhappy
- [00:59:11.050]in their own different ways.
- [00:59:11.950]And it's like that in recessions.
- [00:59:13.850]Every recession is caused
- [00:59:15.130]by something that's typically
- [00:59:16.050]hard to predict,
- [00:59:16.850]comes along.
- [00:59:17.910]If you could have predicted
- [00:59:18.930]he would have stopped
- [00:59:19.510]in the first place.
- [00:59:20.330]So, you know,
- [00:59:21.510]what will happen?
- [00:59:22.450]The next uncertainty shock
- [00:59:23.570]will probably be something
- [00:59:24.390]you will never see.
- [00:59:25.170]So the election could be it,
- [00:59:26.530]but you have equal likelihood
- [00:59:28.230]of it being some other weird event
- [00:59:29.790]that I just can't tell what it is.
- [00:59:30.950]We get invaded by Canada.
- [00:59:32.230]Who knows?
- [00:59:32.770]You know, I really,
- [00:59:33.730]I really can't tell you,
- [00:59:34.710]but something on the horizon
- [00:59:36.270]is probably what will
- [00:59:37.150]cause the spike.
- [00:59:37.790]I remember saying this
- [00:59:38.630]for the last four or five years
- [00:59:40.090]and suddenly the pandemic came along.
- [00:59:41.610]I never predicted a pandemic,
- [00:59:42.810]but your best bet
- [00:59:44.230]of a spike in uncertainty
- [00:59:45.230]is something from the left field.
- [00:59:46.250]Well, Nick, thank you so much
- [00:59:50.170]for this enlightening discussion today.
- [00:59:51.750]That's all the time we have.
- [00:59:52.870]And I'm sorry we couldn't get
- [00:59:53.890]through all of the questions,
- [00:59:54.890]but I appreciate
- [00:59:56.330]everyone's participation
- [00:59:57.170]and really appreciate
- [00:59:58.830]your presentation, Nick.
- [01:00:00.090]I want to thank
- [01:00:01.590]the Yadier Institute team
- [01:00:03.030]for their collaboration too on this.
- [01:00:04.510]John Began, Ed Ballestrieri,
- [01:00:07.090]Matt Schaefer, and JC Thoman.
- [01:00:08.110]Our next webinar
- [01:00:09.670]is this coming Wednesday,
- [01:00:10.770]September 16th,
- [01:00:12.030]on the topic of
- [01:00:12.610]Chinese industrial subsidies.
- [01:00:13.710]Again, thank you, Nick Bloom,
- [01:00:15.690]and thanks to everyone
- [01:00:16.630]for participating
- [01:00:17.350]and have a wonderful rest of your day.
- [01:00:18.910]Thanks for the great questions.
- [01:00:19.830]Thank you very much, Jill.
- [01:00:20.570]Thank you.
- [01:00:21.170]Thank you.
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