Economic Uncertainty: Metrics, Impacts, and Firm Strategies

Name: Ep76 “How Should You Deal with Uncertainty in Today's World?” with Nick Bloom
Uploaded: 2026-04-20T23:51:39+00:00
Duration: 33 min 50 s
Channel: Stanford Graduate School of Business
Description: Summary and key takeaways on Economic Uncertainty: Metrics, Impacts, and Firm Strategies, covering Defining Uncertainty Measures Economic uncertainty can be

Stanford Graduate School of Business

Apr 20, 2026

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33 min video

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2 min read

YouTube video ID: zB-v-HhjWaw

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Economic uncertainty can be captured in three broad ways.
GDP volatility tracks the historical stability of short‑term production but offers little insight into future risk.
The VIX translates option prices into a real‑time gauge of market‑implied volatility, providing a pure forward‑looking signal.
Text‑based indices scrape newspapers and analyst reports for keywords such as “uncertainty,” “policy,” and “economic,” turning media language into a quantitative metric.

The Current Divergence

For decades the three measures moved together, reinforcing each other’s signals. Recently, however, text‑based indices have surged while the VIX and survey‑based indicators hover near their long‑run averages. Analysts point to a “Trump effect” and the media maxim “if it bleeds, it reads” as drivers of this split. National outlets amplify political drama and sensational stories, inflating keyword counts, whereas local newspapers show a milder rise, suggesting that the national press is more attuned to international and political turbulence. The stock market’s sector bias—overweight in tech and finance, underweight in manufacturing—also dampens the market‑based volatility reading relative to the media‑driven spike.

Economic Consequences

High uncertainty activates the “option to wait” described by real‑options theory. Firms pause hiring, postpone R&D, and defer capital projects until the risk landscape clarifies. This behavior can trigger short, sharp recessions that rebound quickly, but persistent uncertainty erodes long‑term growth. The Brexit saga illustrates the lasting damage: prolonged doubt is estimated to shave about 6 % off UK GDP over a decade. As one commentator noted, “The stock market is a claim to a whole stream of future economic activity and profits,” underscoring how uncertainty reshapes expectations about future earnings.

Strategic Responses for Firms

To navigate a volatile environment, companies should embed flexibility into core operations. Leasing equipment, using contract labor, and favoring short‑term rentals over purchases reduce exposure to sudden shifts. Treating political developments as a core business input—rather than an external nuisance—helps align strategy with reality. Robust contingency planning, including scenario analysis and rapid decision‑making protocols, equips firms to act swiftly when volatility spikes. As a guest warned, “The business of business is business. Unfortunately, that is just no longer true. Politics is creeping into business.”

Outlook

Uncertainty is now projected to remain persistently high. The interplay of political instability, sensational media coverage, and the accelerating influence of AI‑generated news content suggests that text‑based measures will continue to outpace traditional market and survey metrics. Firms that prioritize operational agility, monitor political risk closely, and maintain flexible contingency frameworks will be best positioned to thrive amid enduring economic volatility.

Takeaways

Text‑based uncertainty indices have surged while traditional market (VIX) and survey measures remain near historical averages, indicating a new divergence in how uncertainty is captured.
High uncertainty triggers firms to exercise a real‑options “option to wait,” delaying hiring, R&D, and capital projects, which can depress long‑term GDP growth.
Political turbulence, sensationalist media coverage, and the rise of AI‑driven news amplification are identified as primary drivers of the recent spike in textual uncertainty signals.
The Brexit experience shows that prolonged uncertainty can inflict lasting structural damage, estimated at a 6 % reduction in UK GDP over a decade.
Companies can mitigate exposure by building operational flexibility, treating political developments as core business inputs, and maintaining robust contingency plans.

Frequently Asked Questions

Why have text‑based uncertainty measures diverged from market and survey metrics recently?

Text‑based uncertainty measures have diverged because national media have intensified coverage of political events and sensational stories, a phenomenon described as “if it bleeds, it reads.” This focus inflates keyword counts for “uncertainty” while market‑based indicators like the VIX, which reflect aggregate investor risk, and survey indices remain anchored to broader economic conditions.

How does high economic uncertainty affect firm investment decisions?

High economic uncertainty makes firms treat investment projects as real options, choosing to delay hiring, research, and capital spending until risks clear. This “option to wait” reduces short‑term outlays but can generate sharp, brief recessions followed by rapid rebounds, and if uncertainty persists, it erodes long‑term growth, as illustrated by the Brexit‑related GDP loss.

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Full Transcript YouTube

Welcome to the Lauder Institute at the
[music] University of Pennsylvania. I'm
Jules Van Binsburgen, director of the
institute and a finance professor at the
Wharton School. And I'm Jonathan Burke,
a finance professor at the Graduate
School of Business [music] at Stanford
University. This is the All Else Equal
podcast.
>> [music]
>> Welcome back everybody. Today we're
going to talk about uncertainty and
particularly we're going to talk about
multiple different ways in which you can
measure uncertainty. Those measures when
we look at them can actually differ from
each other quite a bit and we want to
understand from an expert how to
interpret the differences in these
different measurements. So let's start
by defining what the different ways in
in which we can talk about uncertainty.
The first one is when we think about
uncertainty about economic growth, we
can measure the volatility of say GDP
growth where GDP is the total production
of a country. So if we have an economy
that grows at about the same rate
continuously, we say that that is a low
volatility economy. If we're looking at
an economy that sometimes has huge booms
and grows by six, seven% and sometimes
has huge recessions and therefore
shrinks by multiple percentage points,
we say that that's a high volatility
economy. And so by just studying over
time how various economies do, we can
come up with uncertainty measures for
each economy. So Jules, I think we
should take one step back here and just
talk about why do we care about GDP
growth? And I think most economists
would say that that's fundamentally what
people worry about whether we're in
recession or we're in a boom cycle and
that the common good of people are best
measured by the rate of economic growth
as measured by GDP growth for sure. But
one thing that we also need to point out
is that if you say look at quarterly GDP
growth or even annual GDP growth, you
have a very short horizon in terms of
how you measure economic activity. Maybe
people say due to the AI revolution that
we're going through right now, they have
different questions in mind like not so
much about are we in a recession in the
next quarter, yes or no, but what is the
long-term growth rate of the economy
look like over the next 10 or 20 years.
And so if we are going to debate what
those numbers look like, these
short-term volatility measures might not
be the best thing to look at. And so one
volatility measure that I think is
particularly interesting that a lot of
people look at these days is what's
called the VIX. The VIX is essentially a
forward-looking measure of the
volatility on the aggregate stock
market. And because the stock market is
not just a claim to next year's profits
which are part of production or even the
next couple years, the stock market is a
claim to a whole stream of future
economic activity and profits. And for
that reason, the volatility in that
claim tells us something more about what
the long run volatility of the economy
looks like. And that metric, Jonathan,
actually varies a lot over time. If we
look at the average volatility that the
stock market has, it's about 18% per
year. But we've seen periods say during
COVID or during the financial crisis
where we see that volatility spike to as
high as 60 to 70%. But they're also very
long stretches of time where that
volatility is actually quite low. So as
low as say 10% or so. And Jules, let me
just take one step back here and
emphasize why another very important
reason why people care about volatility
in the stock market and care about the
VIX because you can get the measure in
real time. Right? The problem is it
takes time for economic data to come in.
So by the time you find out that GDP is
very volatile or has gone down up a lot,
you're already in the recession or
you're already in the boom. But because
the stock market is forward-looking, you
will get a reaction. The stock market,
if everybody thinks we're going to go
into recession, the stock prices drop
immediately. And so that volatility, the
stock market should reflect total
volatility in the economy. And what the
VIX index is is it uses option prices.
And what's great about option prices is
by cleverly combining options you can
get a measure of a pure measure of
volatility without worrying about means.
And so what the VIX is is that pure
measure of volatility. Now a third
measure of volatility and that is really
where our guest is going to have a lot
of expertise is that of course recently
we've seen a big revolution where text
is generally also considered to be data.
In the past, data was generally
considered to be things like numbers,
like growth rates and other things. But
due to the arrival of large language
models and AI, of course, we can now
also take text and quantify it and use
it as an informative source even about
things like uncertainty.
But Jules, of course, that text is a
real time measure as well, like the
stock market, because you can look at
what people are writing now about the
future. And so it's an alternative
measure of future volatility which is
kind of interesting very interesting.
And so when you look at newspaper
articles of major outlets like the
Economist or the Wall Street Journal or
the Financial Times, then you can see
from the word choices and the number of
times for example that journalists are
talking about uncertainty and uncertain
events, you can make a lot of inferences
about apparently what keeps people busy
in terms of what their level of
uncertainty is at a given moment in
time. And indeed you can even do that on
a daily basis. So you can just ask the
question, how often are these
uncertainty measures spiking in the
short term in the next couple days? We
can really use today's newspaper to
measure in real time what the amount of
uncertainty in the data looks like. But
Jonathan, one thing that has really
puzzled us, I think, and hopefully Nick
is going to give us a lot of insight on
this is that what can we take away from
the fact that say the VIX is not
elevated, but the newspaper measures are
hugely elevated and we're not in a
recession. So, if I have those three
pieces of information, what am I
supposed to do with that information? or
vice versa. What if the VIX is spiking?
But in the newspapers, we're not really
seeing a pickup in these uncertainty
measures. And I think that trying to
understand better where these
discrepancies come from will be very
informative for our listeners. So, first
of all, I think it's good for our
listeners to become familiar with the
uncertainty indices that Nick, our
guest, has built, how he has built them,
and what we can learn from it. and then
hopefully also how they can use these
uncertainty measures in their business
decision-making practices.
>> Okay, so I think this is a good time to
introduce our guest of course is a
return guest to the show, Professor Nick
Bloom, who is the William Herbly
Professor in the Department of Economics
at Stanford University. And I would say
the person who has pioneered this way of
thinking about uncertainty using
textbased methods to introduce a
different measure of uncertainty. Nick,
welcome to the show. It's great to have
you, Nick.
>> Thanks so much for having me back on
again.
>> Yeah. So today we're talking about a
different topic than last time and we're
talking about I think some really
important work that you've done that's
also been incredibly influential in
terms of framing the debate around the
importance of uncertainty and the
influence that it has on the decisions
of households and firms and maybe to
kick off the discussion can you tell us
a bit about these uncertainty indices
that you have developed what motivated
you to look at them this way and how do
you take informations from various
places to arrive at these aggregated
metrics
Great. So, you know, I started working
at Uncertainty during my PhD, which goes
back to the mid '9s. It's kind of aging
me a bit, but more than 30 years at this
point. And it was, I think, 2007208,
just before the financial crisis where
there's a lot of concern over political
uncertainty. So, at that point, it was
the Republicans attacking the Democrats
over political uncertainty. And Steve
Davis and I decided, well, how are we
going to measure this? It's not easy to
measure political uncertainty. There
were measures of financial uncertainty
like the VIX, you know, implied
volatility and other measures. And so we
started slowly which was scraping our
newspapers and this this thing just grew
and grew and grew. I'd say there's three
ways classically people now would
measure uncertainty and one of them is
what I'm going to talk about now which
is text. So you go and scrape for
example the leading US newspapers like
you know the Wall Street Journal, the
New York Times, the Dallas Morning News
etc. for the frequency of words like
uncertainty you can say are they near
policy words are they near economic
words etc or I have some other stuff
looking at things like the economist
intelligence unit monthly country report
so there's a kind of a textbased
literature which looks at uncertainty
there's the second one which is
financial markets which is probably
everyone's aware with does the stock
market bounce up and down a lot and then
the third is more classical just
surveying people asking them is
uncertainty higher or lower but I've
really focused recently on the tech
stuff
>> and so These measures can actually give
quite different answers. We'll go into
sort of the differences between
financial metrics and others. But if you
compare the last two, the surveys versus
the textbased stuff, do you find common
patterns or are there quite big
deviations in that? Yeah. So this is the
puzzle of the moment and I was talking
at the Fed and the New York Fed and the
Bank of England etc. So I just explain
the history why it's such a puzzle. So
until about seven or eight years ago,
all three of these measures moved really
closely together. So every time you saw
a lots of mentions of the word uncertain
in newspapers, the stock market was
bouncing up and down. And when you
survey business people, they'd say,
"We've no idea what's going on." In
fact, we have a daily measure called the
economic policy uncertainty index. And
there's the daily VIX. And those two
move really tightly together. In fact,
so tightly that Bloomberg, Fred, Haver,
etc. all carry our indices. And I know
that it's been used by a lot of hedge
funds because every time our scraping
broke would receive a ton of inbound
emails of people saying, you know, where
is your data? So that that sounded
great. And then what has happened in the
last few years, particularly in the last
two or three years, is they've really
diverged. So under Trump 2 in
particular, text measures of uncertainty
have just exploded. They've just
absolutely ripped up. And so now they're
like two three times the level of what
they were say in the 2010s or the 2000s.
Whereas market measures uh say the the
VIX implied volatility or the move index
and implied vol bond prices or surveys
are kind of average. So you have text
saying uncertainty is a 10 out of 10 and
then you have markets and surveys saying
it's about a five out of 10 and it's no
more than normal and it's a conundrum as
to which one is right and which one is
wrong or maybe they're talking about
different things.
So what do you think we must have an
hypothesis what's causing this
difference?
>> So I have two views. One is we scrape a
lot of different types of text but it's
primarily newspapers things like the
economist intelligence unit, IMF, World
Economic Outlook, etc. One view is the
people that write that stuff are just
obsessed with Trump and they talk a lot
about Trump. They talk a lot about
uncertainty. In British English it could
be called the chattering classes.
They're kind of, you know, college
educated folks like us. probably most of
your listeners they are you know whether
you say they have the what is it called
the Trump derangement syndrome whatever
you know those folks call it but they're
very Trump focused so one view is it's a
mistake uncertainty really isn't that
high it's just that the media tends to
cover him a lot the other view is no
there is genuine real uncertainty out
there you think of you know the changes
in the US political system the wars
issue of immigration the weakening of
NATO etc the change in trading
arrangements these are real things but
they're longer run and they're not that
well picked up by markets and they're
not that well picked up by service of
firms and my sense is it's somewhere in
between. One indication to tell you it's
somewhere in between is we have actually
two daily economic policy uncertainty
indices. One is using the 10 leading
newspapers which are the ones you've
heard of which would be the New York
Times, the Wall Street Journal etc. That
has absolutely exploded. The other one
uses about 2,000 local US newspapers. So
these are almost all papers you've never
heard of. They'd be like, I don't know,
you know, the uh Oklahoma Daily Beagle
or you just weird kind of local
newspapers. That thing has not gone up
nearly as much. Why? Because it's much
more focused on kind of local business
stuff and it's less focused on
international affairs and what's going
on in Washington. So I think uncertainty
if I was to put a number on it is a
seven out of 10 but it is not epically
high like some of the headline
mainstream newspapers claim but it's not
as low as the market seem to imply based
on limited volatility
>> but Nick I mean what could be more
forwardlooking than the stock market?
Well, there's some issues with the
market. Look, I'm a big believer. I'm an
economist and you know, like you guys,
you know, market is always right. The
issue with the stock market is it's a
overweight in certain sectors. So, it
tends to be very overweight in tech. It
tends to be overweight in finance. It's
kind of underweight in manufacturing
actually, agriculture, retail etc. And
B, it's focused really on one number
which is earnings. And you know, to the
extent to which effectively long run
valuations and earnings aren't
uncertain, but there may be other things
that are uncertain. say politics if you
know businesses remain profitable but
say a dictatorship was to come in that
wouldn't typically show up that much in
stock markets but it would show up in in
the newspaper. So the other thing you
notice about markets is they tend to be
very sensitive to bad news in terms of
uncertainty. So anyone in finance knows
this you know it's part of the skew that
basically bad news is associated with
high volatility. So in [snorts] my PhD,
I looked back at all the big spikes
involved and every one of them when you
looked in the market, you go back into
the history books and you'd find an
event. For example, I didn't know about
Kent State, the uh student uprising in
the early '7s and you know, you find
there's a I went to read business week
and I said one of the biggest threats to
the fabric of society is the protest
against the Vietnam War, etc. You know,
the assassination of JFK, the Cuban
missile crisis, all these things
generated big spikes in vault. What
doesn't show up is things like the fall
of the Berlin Wall. So the markets were
like flat through that because it's good
news and it's kind of longer run but
that generated tremendous volatility. So
they kind of seem to focus on the
negatives and less the positives but for
the negatives they're good for picking
up volatility. That's right. So Nick, I
have this saying the greatest piece of
English literature ever written is
chicken little. I don't know. I was not
taught that at school. Shakespeare I
did. I wish I was given chicken little.
That might been easier. [laughter]
Okay. So, let me define where Chicken
Little is. It's this little chicken that
walks around telling everybody the sky
is falling and he gets all the other
animals to follow him and get into a
paranoid state that the sky is falling,
but of course the sky doesn't fall. So,
isn't that maybe an explanation of
what's going on that the newspapers
exploit that human failing that people
tend to get worked up about things that
are not so bad? So, that's totally
right. So that you know there's a saying
in the media called if it bleeds it
reads and it's completely true
particularly in English language media
that you tend to cover bad news stories.
Having said that look if a lot of
business folks around the US are reading
this media and panicking and getting
stressed out that's going to have real
outcomes as of now March April 2026
hiring rates and labor market turnover
looks kind of bad. So in the US labor
markets the rates of hiring are down to
like a 10-year low if you take out the
2020 brief drop. Now one view is of
course is AI. So people are kind of
blaming on AI but I think the other
things going on is businesses generally
are somewhat nervous about what's going
on. Now some of it is AI uncertainty but
I think some of it is like the Iran war
energy price uncertainty other types of
uncertainty. So it has a real effect.
What matters ultimately is what's in the
mind of decision makers in a sense
rather than what's probably the ground
truth. So we wrote this paper about
these local newspapers where the only
thing we measured was not so much
uncertainty and the use of the words
uncertainty but just the positivity and
the negativity on the way both economic
news and regable news were being
reported. And one of the most shocking
things that I found from that
measurement was that since 1970 we've
been on a one big downward decline on
the negativity of reporting. meaning at
the end of the sample, it starts in 1850
or something like that. And so it's
almost 200 years of data. It's sort of
stationary and mean reverting until
about 1970. And then in 1970, we start
this dive down that is just
unprecedented. And in 2020, I think the
news was the most negatively reported it
has ever been on average since 1850.
Wow. And so so this does really make me
wonder to what extent the capitalist
model for journalism where bad news
sells and as their profit margins get
squeezed and they're trying to compete
with each other whether the incentive to
become increasingly negative is just the
outcome of that competitive process. No,
it wasn't. I think it was all
newspapers, not just the local ones,
including the larger ones that you
mentioned. But I was quite struck by the
fact that you found such a difference
between these two sets of newspapers.
Although I think that overall also if we
start to use more recent metrics and
outlets for information, negativity is
pretty large everywhere, both online as
well as in printed media, wouldn't you
say?
>> Yeah. I mean, newspapers clearly have to
compete. You know, I talked to a lot of
journalists and one of the things
they're aware is that their stories also
have this afterlife online. So now they
know that, you know, they go on to
Twitter or LinkedIn or Instagram. And so
the more shocking it is and shock is
normally easier to make on the negative
than the positive side, the more it
tends to circulate around. So that's
kind of one of the reasons we got these
two different indices. Certainly the
Wall Street Journal I think is still
doing fine. of Financial Times, probably
the New York Times, a few of the kind of
banner newspapers, the big famous ones
are still profitable. I'm aware that as
soon as you go step outside the top four
or maybe even two or three actually,
they're facing, you know, major losses.
All the Washington Post is very
lossmaking. And so, yes, that could
impact what they're reporting. I should
say we have another project because of
this that I worked on. So, with the IMF,
we looked at the Economist Intelligence
Unit's monthly country reports. So just
to explain the EIU produces these 30page
reports once a month on around 140
countries around the world. What do they
do? They have like you know take Ghana
they'll have somebody out in Ghana
that's covering politics and economics.
They write it out. They have an
editorial process and going to format it
and it gets published and it's aimed at
multinationals, private equity folks,
investors. It's not really a media
thing. It's aimed at people that just
want to know what's going on on the
ground and the truth in Ghana. If you
look at that, that index tracks the
newspapers pretty well for measures of
uncertainty. And I don't think the EU
has different issues actually, but I
don't think it has the issue of trying
to sensationalize it because his readers
aren't interested in that. So, it does
look like weirdly text is obsessed with
uncertainty in 2026, whereas markets are
kind of shrugging it off. And it is a
big divergence. And I've been asked a
lot by, you know, folks in the market,
what is going on? Is uncertainty higher?
Is it not? And we have two indicators
that co-moved together for 30 40 years
and have now split apart in the last 18
months. And it personally I find it hard
to know which is right. I think the
truth is somewhere in the middle
actually. So one other explanation which
you may like is of course that there's a
reason for why the stock market and
financial markets are responding the way
that they are which is what a senior
portfolio manager at Vanguard pointed
out to me recently. Think about
Argentina for example. As soon as
Argentina got in trouble, the United
States had no problem stepping in and
creating the stability that that
financial market needed. And so if there
is, for a long time, we talked about
what's called the Greenspan put, which
was essentially the central bank
stepping in and making sure that markets
wouldn't become too volatile because we
would just adjust policy to make sure
that the downside was protected. If
markets have the impression that Trump
will just step in with government
intervention if necessary on whatever
topic, then maybe that could be a
suppressor of volatility in stock
markets relative to what is truly going
on politically and in the world with the
geopolitical risks that we're observing.
>> That is a great point. So the phrase
that's become famous is this taco or
Trump always chickens out. But in a
sense he's often doing that
strategically because he comes on with a
policy. The policy doesn't seem to be
working and he reverses. And in a sense
it's good that he reverses because the
last thing you want is to double down
with a bad policy. But the newspapers of
course maybe don't report the reversal
and panic when the policy starts. But
the markets can see that reversal
coming. It's a little bit like what's
happening in the Iran war right now with
gas prices going up. You can see that
he's becoming more nervous about the war
and you know his moves towards peace. So
you're absolutely right. That is another
view. If you have policy makers
including Trump and the US president and
the Fed, they're stepping in when things
are bad and the markets can see it but
the media can't then in that sense the
markets are probably right.
>> Yeah. And so I think that brings us Nick
to an very important other part of your
research which is measuring uncertainty
is one thing but then how does that
translate in the data to how we see
households and firms how they behave and
how they respond to uncertainty and I
think you've done some very important
work documenting that particularly also
for labor markets uncertainty is not a
good thing right
>> yes so I can tell you the stylized facts
which is when uncertainty goes up you
see a drop in hiring you particularly
see a drop in investment investment's
much more sensitive and in particular
long run investment. You know, think of
R&D or massive capital projects. Why is
that? You know, you've talked about it
before on the show, but you can think
about it as real options. So, I'm a
business. I'm thinking about hiring a
bunch of folks, maybe opening a new
imagine I'm a retail business. I'm safe
for opening a new store. If I'm
uncertain, I think, well, look, I might
as well wait cuz, you know, it's risky
to open it and I could easily find
myself opening this brand new store,
sinking $10 million in and regretting
it. And so I just pause. And of course
if everyone in the economy pauses,
interest is not just businesses. Christy
Roma and Janet Ely had a famous piece
showing how consumer durable expenditure
by households also falls when
uncertainty is high. So effectively
everyone just gets cautious and that
leads to a slowdown. It leads to a
slowdown particularly in long focused
activity which is most obviously
business investment. So in some sense an
unexpected shock to uncertainty itself
could cause a recession if you will.
>> Yeah. I mean I'm very happy you asked me
this because this is my PhD thesis. It
feels like I'm back in my job market
talk you know 25 years ago but I had a
paper called the impact of uncertainty
shocks which turned out I didn't know at
the time or not early on anyway was very
similar to something Ben Bernani
actually had done 20 years before back
in the 80s but yes exactly as you say
when uncertainty goes up it can generate
its own short recession they tend to be
relatively short sharp because what
happens uncertainty goes up everyone
pauses businesses think now is not a
good time to hire. Now is not a good
time to invest. Consumers saying, "Let's
not buy that new car. Let's not move
house." And so the economy tanks. When
uncertainty passes, there's all this
pent-up demand and it bounces back very
fast. So classically, it generates sharp
drops and rebounds. Interesting. It look
a lot like the kind of thing we saw in
the COVID pandemic, although we know
that was driven primarily by the
lockdowns, but it generates that kind of
short drop in recovery. I mean this is a
classic real options description of the
economy right when the option to wait
goes up in variance so when you increase
uncertainty you increase the value of
your option to wait so people wait
exactly right one other kind of example
that's actually quite useful is there
can be damage from persistent
uncertainty so I'll give you a current
version of that which is Brexit so we
have a paper recently come out looking
at the impact of Brexit I was actually
able to vote in that yeah I should be
clear I voted against Brexit I wanted
the UK to remain in the European Union
but I've been involved in a big group of
folks examining that and what you see in
the data is initially there was no
impact of Brexit on the economy at all
so the vote happened in June 2016 and
the UK economy did fine in 2016 2017
2018 and year by year it slowly is
actually starting to diverge from the
rest of Europe from North America and
after 10 years yeah I won't rego through
the entire paper but it looks like
Brexit has reduced UK GDP by something
like 6%. And partly it's breaking away
from the trading block and you know
making it harder to immigrate but a lot
of it is just the immense uncertainty of
the process. So anyone that's knows what
happened with Brexit you're aware there
was five prime ministers that went
through that there was lettuce gate
there's all the you know the votes in
parliament the changes of mind basically
for businesses this was almost a decade
of prolonged uncertainty and that also
can generate very long run damage. So
Nick, let's for a moment assume that the
textbased uncertainty is accurately
reflecting uncertainty in the economy.
What do you think besides Trump are the
other major forces that's causing that
uncertainty? I mean the two big factors,
one will be politics and I shouldn't
blame it entirely on Trump. This is a
broader global phenomena. I mean
highlight Brexit and there's a lot of
populist parties in Europe. politics of
I think honestly driven in part by
social media of moving out the edges and
it's generating more political
instability. So one bucket would be
politics. I think the other is AI. So
you know we all at least Jonathan and I
live in Silicon Valley. I don't know if
listeners know we're weirdly next door
neighbors although we're recording this
in different locations [laughter]
but AI is just everything. Every time I
talk to any firm any CHRO you know exec
employee. I just had lunch with three
former students. Same thing AI dominates
the discussion. No one really knows
where it's heading. So I think the
second bucket is around AI and we have
seen in my lifetime many technologies be
introduced like you know the internet,
the personal computer, the cell phone
etc. But AI and various metrics I don't
want to bore people with now but it does
look potentially genuinely different. So
those are the two big drivers I think is
politics and AI. So talking about that
dispersion in the effect of it, one
thing that that I would really like to
hear your thoughts on is the
geographical dispersion, right? So
clearly uncertainty has different
effects in different parts of the world.
And you know, we are both originally
from Europe and you know I'm worried
about Europe and where it's going also
in terms of its economic activity, the
growth rates that we're forecasting, the
demographic changes that are happening,
but also I think the regulatory
uncertainty that is happening in that
continent. So what are your thoughts on
the influence of this type of
uncertainty on the European growth
prospects and is there something that
Europe could do to improve on that?
>> You know the best way that policy makers
can help out is to try and reduce
uncertainty by having stable policy
processes. So one of the obvious ones is
independent central banks. If you can
predict that the central bank is going
to set interest rates that will match
some target, for example, if the Fed is
the equal weight on inflation,
unemployment, it makes that part of the
economy more predictable. If you can
predict the federal government's going
to try and roughly balance the budget,
makes it more predictable. If you
predict that policies are going to be
made by, you know, Congress rather than
the presidential whim, that makes it
more predictable. So, one thing policy
makers can do is remove themselves as a
source of uncertainty. I remember when I
used to be in the UK, we used to
complain that the what was called the
chancellor would give up what was called
budget lollipops. So that's kind of
British English for saying once a year
he'd have to make this announcement to
parliament about taxes and spending and
he'd like to mention a couple of
headline grabbing things that people
will get very excited about and one of
them I remember was called winter warmer
which was you know pensioners would get
I think £50 to spend a bit more on the
heating and then newspapers loved it but
of course the process of standing up
once a year and make throwing out these
lollipops generated a lot of volatility.
So I think the most important thing
politicians can do in a sense is tie
their hands, sit back and do things like
independent central banks and stable
budget policy because that helps remove
themselves as one part of it. Now of
course you still get technology and wars
and other stuff you can't control but at
least control what you can. It's kind of
like the serenity prayer for
politicians. Accept what you can fix and
then try and fix that. Now, now of
course the counterargument to that is
that sometimes it's necessary to shake
things up in the short term to be able
to get better outcomes in the long term.
So sometimes generating short-term
uncertainty is a necessary thing to get
to a better long-term outcome. Right. So
what one thing that I did think was
interesting about what you said is that
that generally the recessions associated
with the spikes of uncertainty are
actually quite short as long as that
uncertainty doesn't last too long. It's
something that does seem to mean revert
and doesn't seem to have that much
long-term effect. And then you gave the
example of Brexit that was an example of
more long-term uncertainty. If you think
about the forces today, is your
prediction that these are long-term
uncertainty forces or do you think that
these are short-term uncertainty forces?
I think the political and AI are
generating long run uncertainty. So
politics
and my suspicion is that social media
has you know fragmented the media and
has generated an incentive for
politicians to move towards more extreme
positions. As a result we have you know
in the US for example Camala Harris
versus Donald Trump were much more
extreme than some of the earlier
politicians and you know Trump has got
into power has been quite radical in
what he's done that generates much more
turbulence. We see that in Europe I
think that is a permanent factor. It's
not so much about individuals because
it's happening in many countries. So
that I see is more permanent. The other
angle on AI, I also see the you know AI
the rate of acceleration is picking up
is getting faster and faster. So in both
cases I think uncertainty is now you
know it's going to be persistently high.
So I don't see this as a short run
thing. So it looks a bit more like
Brexit in a sense. Firms cost of capital
their thresholds has risen because they
add on a bigger risk premium and there's
just lower investment, lower R&D, lower
hiring.
>> So Nick, what do you think firms should
do about uncertainty?
I think there are three things they can
do. One thing is you should try and
become more flexible. So as in rent
rather than buy lease rather than you
know purchase. So what do I mean by
that? You can rent equipment. Now of
course it's more expensive than buying
it. You can lease workers. You can have
them on shorter rather than longer run
contracts. But for that higher price you
get some flexibility and right now as in
in 2026 that flexibility is particularly
valuable. Second thing is I would just
pay more attention to politics. So
there's that old Stigler saying, the
business of business is business.
Unfortunately, that is just no longer
true. Politics is creeping into business
and so probably pay lobbyists if you're
a big firm. Certainly be aware of what's
going on. It's a valuable thing. It
gives you a bit of future vision. And
the third thing is have some sense of
contingency planning. So it's
interesting. We look at the pandemic.
There are some firms that are
contingency plans. They didn't look like
the pandemic. They look like you know
internet outages and terrorist attacks
but those plans were somewhat useful and
made them more fleet of foot. So you
know paying for flexibility uh looking
into politics and having contingency
plans are three things that exec can do
out there here and now.
>> I mean of course the flexibility that's
a zero sum game. You can buy flexibility
but somebody else has to take it on. So
there's a price for that flexibility.
>> Yes and no. So take AI. So imagine AI in
an industry is going to you know boost
50 firms and kill 50. If they're all 100
is set up to be flexible and they can
return their capital quickly that
probably industry is net better off. So
I think in that sense there's a lot of
volatility that's micro and you just
don't want you know you don't want your
capital bolted into the ground in
financial structures that are hard to
reverse and physical structures
literally that are hard to reverse. It's
that kind of thing. And certainly for an
individual business, you know, in a
sense in an individual business, I don't
mind if other people make bad mistakes.
I just, you know, I don't want to make a
bad mistake myself.
>> I agree. Okay. Well, Nick, it's been a
great episode and lot to think about.
>> Thanks so much for having me on again
and um yeah, I love the show as you will
know.
>> Thanks for listening to All Else Equal
Podcast. Please leave us a review at
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Stanford Leadership Forum 2026: Geoeconomic Power and Economic Security

Stanford Graduate School of Business

Apr 30, 2026

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