 So John on behalf of the ECB and its executive board It's a great pleasure to have you with us here today and the floor is yours Well, thank you very much. Let me just see if I can Load up the slides. Thank you very much Luke and everybody for for it for inviting me I'm really pleased to be able to I say be back at the ECB. I'm not really back at the ECB I am a virtually back at the ECB during these pandemic times But you know great thing about the pandemic Zoom is that lots of people can join that could be in a typical ECB room So I hope you got something out of this. So I'm going to make an argument in this in the in the presentation So, you know, I think we know we all agree as Luke said that we face an unprecedented growth challenge Coming out of the pandemic as we hope we are But what the pandemic has revealed is like a lot of existing weaknesses in Politics and the economy not just in Europe, but also in other parts of of the world Now Europe the Eurozone had many problems going into the crisis And as I show you one of the you know problems that has been low productivity growth and also relatively weak labor market And my view is that we should be thinking about a policy framework, which should be unashamedly around Regenerating growth so around you know growth which is Both equitable and environmentally sustainable. I can hear a little beeping going on in the background with email Now, I'm gonna just check it's not my email Which is not if anybody has the email on I can hear a lot of pinging. So if you would mute yourself, that'd be great Okay, so how do we get to better growth? Well, you know, the key things are about innovation pushing the frontier and Diffusing those innovations will quickly around the economy and when I think about those new technologies Obviously, there are things like hard technologies digital technologies But I'm also going to argue. I think that some of the what you might call the softer technologies things like management and organizational practices Are also extremely important in terms of getting to sustainable productivity growth And I think there's like policy interventions we can do in both of these these erics So I'm gonna argue that we actually know a lot about what to do in terms of the kinds of policies Which could be successful and what we need to do is to kind of join up these Innovation policies into a new Marshall plan One which has something both for the short run and in the short run as we recover from the pandemic. We need to balance protection Obviously, you know, we need to make sure that we don't lose too much human capital assets and Financial capital assets by having too much destruction, but we also need a lot of reallocation So we also need to accept the fact there are gonna be some firms or some industries Which are not going to return some jobs are not going to return and we have to think about ways We can effectively facilitate the reallocation of resources into those new industries and those need new firms and new jobs So that's a kind of short medium run thing in the medium longer run We need to the only way we're going to really get back to sustainable growth to innovation And so I think we can think about putting these policies together around missions Especially around climate change, but also around health and potentially defense in order to join up some of these innovation policies together So my view is that you know vaccines have given us an opportunity what we need our some urgency for policy to actually make these growth plans happen So I'll talk about the challenge. I'll talk a bit about defending growth I'll talk about understanding growth and then I'll give you the bones of a kind of growth plan So, you know, we know about this picture. This is just GDP growth Since 2008, you know, we see the financial crisis back in 2008 2009 But we also see in both the Euro area and the EU the kind of huge hit our economies have taken due to the the Pandemic and the policies like the lockdown policies which are actually company that now there was some bounce back towards the end of last year But we know we're now in a third wave as you can see from these are the kind of Covid cases 100,000 and you can see that, you know, there was there was the you know, the first wave second wave third way You can see that Europe is now obviously, you know, taking a big increase of the number of Covid cases and no vaccines are going to help But you know, the rollout's been slow So this is also going to cause a hit to the economy which we're going to see in the numbers as they as they come out So big challenge a big challenge not just in terms of GDP But a challenge in terms of jobs. So this is looking at 2020 versus 2019 Across major economies, we've seen big increases of unemployment wherever we look Bigger than some countries and others, but clearly increases unemployment everywhere due to the pandemic But I think the most important point is to realize that these the problem of slow growth and particular slow productivity growth predates the pandemic So if you look at EU and Euro area productivity growth, you can see that that was actually slow even coming into the Pride the pandemic period and has been slowing down for a number of years So this is you know, when we think about how we recover we got to think not just about the immediate problem of dealing with the Aftermarket pandemic, but this longer run problem of having slow productivity growth So this is not just a European problem. So this Let's think about productivity growth at the frontier. So you think of this is the US TFP growth So, you know, the US is the frontier of many many industries. So since the Second World War, we've had kind of full distinct periods So in the kind of 20 years after the Second World War, we had this kind of golden age Where TFP growth was going healthily along at something like two percent points a year Then we had the oil shocks and we kind of crashed back down to about half a percentage points a year of TFP growth You know, and this was the era, you know, the 20 year period where Bob Solar was saying you could see computers everywhere apart the productivity numbers and then in the third period We actually then started to see an impact on on productivity This is a positively miracle period where productivity TFP growth he could jump up to what it had been again You know on the back of the internet a lot of this was in IT producing and IT using industries And you know at that point many people thought that you know, it was kind of job over But in fact since 2004 since the mid 2000s TFP growth has fallen back To what it was in after the oil shocks. In fact, you know, even even worse And if by the way, this is not just the financial crisis This very slow TFP growth you see even if you just looked at the post financial crisis years So, you know from the sense of what's happening at the kind of frontier productivity growth This is a real problem was there's been this, you know, very significant Slowdown of productivity growth, which has happened over the last 15 years So, you know, you might think if given I've an audience of economists, you know I you know, I may not even need this slide but in fact when I talk about this to many people including many policy makers People, you know, there's a lot of pushback against them to some growth And it is now one important fact and we should lose track of this is that overall growth of the size of the economy It's not really important for welfare What matters much more is kind of GDP per person or national income per person and You know what drives that is productivity So the growth of output per input or GDP per hour is really important because you know increasing GDP just by Increasing the fraction of people working or increasing hours those can be valuable We're not reducing the high unemployment is the problem as I said But there's a limit to how much improvement you can get from just improving capacity utilization eventually want to improve capacity itself and In the long run, this really is a question of how you improve productivity Indeed, you know, if you look at wage growth, which is the kind of key thing we care about Over the long run, this does generally follow productivity growth. So, you know, not perfectly and You know, I've written and many other people have written on the share of the Economic apply going to labor and how that's changed But in the long run it tends to be the wage growth follows productivity growth So productivity growth really is key and why is it key because it increases the size of the economic plan Which gives us choices, you know, we can choose as a society to spend that on public goods I count them education or on more consumption and more leisure or environmental improvements or redistribution So I think the real problem that we face is having an era of slow productivity growth And therefore low pay growth has been a major cause of populist problems And you know, we see from my own country and in other countries the rise of populist I think is very much linked to having slow real wage growth over time. So like in the United States, for example If you're a high school graduate, your real wages, the real mean wages are more or less the same as they were Not lower than they were 40 years ago. And so it's unsurprising that people are so angry if the Outcomes are so poor in terms of their wages And I had I got time I'd go into more details on this. So, you know, the view that Capitalists get all the benefits of growth and the workers, you know, is not true if you look in many in many countries that Although the labor share has fallen, it's still the case that countries with faster productivity growth have generally faster wage growth Faster growth doesn't necessarily mean more inequality, you know, many many very successful parts of the world Scandinavian countries are below inequality and also have relatively high productivity Is growth inevitably bad for the environment? Yes, growth poses challenges, but properly measured growth where you take into account the depletion of natural capital as well as physical capital You know, if we thought about sustainable growth properly that it actually You know is is compatible with environmental growth And if we think about how to deal with the problems of climate change that I'll come back to The you know, we're not going to solve the problems of climate change just through taxes and regulation We're going to have to have revolution in green technologies both in the generation of them and also the use of them my colleague LSE Lorde Richard Layard has argued a lot the growth doesn't make us happier. Well, you know It's true. I would say that you know the way to look at this is that you know Growth doesn't guarantee that you're going to be happy But it certainly reduces the degree of misery that you have and I think if you do look at some around the world There is us there is a relationship even actually a high high income between measures of life satisfaction Levels of happiness. Now, that's not always linear, but there is a kind of relationship that the most strong attack I think on on on the emphasis of growth is that the view that there's actually nothing we could do to improve the growth rate That many of our economic models take, you know, to be growth is completely exogenous and You know this kind of pessimism if you like around our ability to affect the effect the rates of growth is in some ways that there may be the new normal We know Bob, Bob Gordon has argued that, you know, the great innovations of the past like the the Sanitation and the toilet system are, you know, we're never going to be able to replicate those with We have and you know, my view is that this is likely argument to traditional economics and what the growth there And I think the evidence is generally that there are things that can be done to stimulate innovation and productivity growth And one piece of evidence on that would be the UK experience actually for about a hundred years between 1880 and 1980 the UK kind of fell behind in terms of GDP cap per capita and productivity That's pears and America, Germany and France But for the 30 years leading up to the global financial crisis It kind of turned its position around and caught up and overtook many of those countries And I think you know what happened in 1979 1980 was there was a change in the economic model There was a under Mrs. Thatcher under Tony Blair. There was a greater emphasis on Trying to make markets more competitive to make labor markets more flexible to Reduce subsidies and lame duck industries Under say especially the Brown Blair years to invest more in the growth of human capital and higher education and I think those policies seem to make a difference and I so I think that you know That's a more much more optimistic view of what we can do that since 2008 the UK position is definitely weakened a lot more But the fact that the UK's experience in many other countries it suggests policy really does matter and really can make a difference So, how should we understand growth in order to figure out ways and ways of improving it? So as I mentioned earlier, I mean growth is fundamentally a story of technological change Not an accumulation of more people or more capital So if we again, I apologize for using many US examples here. I mean spent a lot of time in the US over the last decade but you know This you can get similar kind of things for European data You look at US output per hour growth since the World War two of about two and a half percentage points Then about one point one percent capital deepening put four percent is labor composition including human capital and two percent is from the Kind of solo residual for my former as my former colleague Bob solo put it out And we see this in many countries and many industries in many areas are really the fundamental thing is actually to do with with productivity Now it's long we recognize that developing countries can grow quickly through diffusion or catch up and if you if we think about, you know, the European Union certainly when you know the Eastern European countries ex-soviet countries joined we saw a lot of You know productivity grow through this kind of catch up, but for advanced economies in Western Europe, you know Frontier innovation has to be key You know, does it there's limits towards the kind of catch up model? So there has to be a strong emphasis on frontier innovation But nevertheless, there is still a lot of room for improvement without frontier growth So both of the faster diffusion of technologies But also and this harks back this reallocation points I made earlier towards reducing misallocation Improving the degree to which the economy Reallocates output from less productive to more productive firms. So, you know, why is this? misallocation or allocation important for this huge productivity differences across firms and You know, these differences have actually grown in larger over time. I have a My Jackson Holder dressed a couple of years ago documented this We've seen this actually all over the world that the kind of productivity differences have really large and have got expanded over time And this does suggest there is an issue of kind of increased Misallocation may be a greater difficulty of trying to get more activity towards the more One of the two fundamental sources of growth or on the one hand, we have technology The kind of hard technologies on the other hand, we have management and organizational practices. So, you know, I Shouldn't need it should need much convincing for a room for a room for many of economists But technology is critical. So if we think about the history of What's happened since the takeoff of growth since the late 18th century First we had the kind of an industrial revolution around steam power at the end of the 18th century And then at the end of the 19th century, they kind of, you know, amazing in a night in actually 1879 Three major inventions around luminosity around mobility and around communication Which actually led to, you know, a very large increase of productivity growth Which lasted for, you know, for many, many, many decades Then, you know, more recently, this was the kind of third wave of the third industrial revolution around digital innovation in the Internet That helped power the growth of productivity growth that we saw from the earlier graph where we had the kind of mid-1960s to mid-2000s change And many people think we're now living through a potential fourth industrial revolution around AI and robotics and gene therapy So these are all the kind of, you know, clearly important sets of innovations which help leading growth But I want to argue that if we think about growth, it's not simply about these hard technologies And that management practices are actually an also important driver of growth So on the one hand, there have been, in my view, actual innovations in the form of management Things from Taylor's scientific management to Ford's mass production And even the Smith's PIN factory back there, which harks to some of these To more recent things like the choice of the manufacturing system So I think these are genuinely new ideas which have enabled us to increase productivity But also, if we think about some of the other innovations, the technological innovations I mentioned earlier For example, you know, I think of Paul Davies' version of electricity It took many decades before the intervention of electricity fed through the productivity numbers And this was partly because of the need to make managerial and organisational changes To make best use of those innovations So we had to develop 24-hour production of the factory system in order to make great use of electricity My own work, looking at computers, suggests that if you look at the impact of information technology A lot depends on the kind of management quality of which the organisation is based in I spent a year of my life working in the National Health Service And there was a multi-billion pound program there, which basically failed And the part of that, I think, was just due to extreme managerial failures And maybe one of the reasons that we haven't seen artificial intelligence Having such big effects of productivity is that we're still learning the best way to kind of use it Many firms spend huge amounts of money, so relatively little effect So we've often thought that management matters a lot, of course But the problem has been it's extremely difficult to measure Management of that, Chad Syverson in his JEL article said No potential driving factor of productivity has seen a higher ratio of speculation to empirical study And here's a picture of the, you know, when we used to catch planes This is the San Francisco Bookshop, which I'd often go to with working with Nick Blum at Stanford And you can see lots of case studies here about famous managers And some very successful firms And, you know, I've always been interested in management, but you know, I became a sceptical I started working on this issue with many managers like McKinsey I was one McKinsey consultant, I remember a presentation of his book And he was presenting it in the early 2000s and saying that he was working with this amazing company Which had these very dynamic managerial practices They were things which were enabling the company to be super successful And other companies should be imitating their kind of weightless type of managerial practices And as he was talking, it turned out this company was called Enron And this was at the time when the CEO of Enron was being dragged off in chains By the US government for accounting for all the shareholder frauds In fact, so much so that many of the shareholders, the workers said The Enron symbol should be changed from what you see there to something which is more appropriate Over how they treated their shareholders and workers So, you know, the point of this is to say that, you know, it's very hard to extrapolate from case studies Despite the usefulness of a teacher And as a result of this, over the last 15 years or so I've been working a lot with colleagues like Nick and Stanford and Raphaela, Southern and Harvard To try and measure management practices in a more robust and internationally comparable way So, if you're interested in this Google World Management Survey You can download all our data That we make available online for people The way that we try and collect data, you know, we've done this in different ways over the years But we have this kind of three-prong methodology That we developed a set of 18 questions which we think are related to basic productivity measures So, you know, collection of data, how you use that data to set targets How you use those targets and don't use those targets to intensify your people In terms of pay, promotions, retentions and hiring So, these were worked out from, you know, lots of discussions with people in the industry And the way to think about this is given what you're producing, how could you produce them more efficiently So, we delivered this survey, it's a kind of 45-minute telephone interview We started off with the manufacturing plant managers and now we've actually expanded this To just about every other sector of the economy, like healthcare, education, retail and so on We try to get relatively unbiased responses We do kind of, we have different interviewers interviewing the same company And answering different people to try and avoid bias from giving answers, as you'd expect We also have, you know, official endorsement for reputable institutions Like the Bundesbank and the Bank of England And it's run by 200 kind of MBA types Who are, you know, it's hard to work with MBAs I used to teach MBAs a lot, but I'll tell you what, they get the job done Because they're very persistent in getting people through on the phone So, anyway, so we have, you know, from this data, it's very rich We do many things with it, but, you know, one of the things that we do is just to kind of Calculate a simple management score to enable us to look across different countries And, you know, what you see when you do that in terms of this kind of index and managerial quality You kind of see what you might expect So, you know, the most productive countries, like the United States, are very high up As you go down, you get kind of Western European countries Like, you know, Britain, France and so on As you go further down, you get emerging economies like Turkey and China And the African and Latin American countries are kind of at the bottom of the pack So this lines up quite closely with measures of the productivity Capita that you can see from this graph Now, from a macroeconomic point of view, maybe the ECB is what you mainly care about As a microeconomist at heart, I actually care a lot about the variation of this within countries And, you know, this is a very startling So what this does is it takes all the firms from every country And within each country looks at the distribution So, you know, a kind of a score of about three is average A score of four or five is a high score A score of one or two is very low So you can see a kind of a bell curve type of shape as you might expect You know, but you see a lot of these very bad new managers If there was just a scoring between one and two They're basically not really collecting data on the process of what's going on They're not communicating this at all to the kind of senior managers or the workers They're not promoting people purely based on Tenure or connections rather than on ability and merit They're not dealing on the performance So it's amazing as an economist why you see these firms existing But they do exist And there's a lot of them And there's a lot of them in just about every country you look at But the second thing to look at, I apologize to Italians in the audience They're not picking Italy as an example of a kind of, you know, ECB country If you compare the US to Italy Yes, Italy has a lower score than the US But it's not like every American firm has very high management scores And every Italian firm has low scores There's a lot of heterogeneity And one big difference between the United States Italy is the lower tail There's a lot thicker lower tail than Italy than the US So these really badly managed firms They seem to be selected at a much less much slower rate In Italy than America Which again suggests a role for misallocation You know, you can If you look into these, many of these are small family firms Who seem to be able to survive a much longer Italy than they do in the United States So these management scores are strongly correlated with measures of productivity Of profitability, of innovation, of trade And there's lots of evidence now from RCTs that this is a kind of, you know Not just a correlation, there's also a causal relationship So if you look at how important management is for productivity It accounts for about 30% on average of TFP gaps in the United States Across our different countries Even more so if it comes like Italy It accounts for about 50% of the difference And of this third, about a third of that is just reallocation So a third of the reason, these orange bars The fraction of TFP you explain About a third of those orange bars is because the countries like Italy Are a lot less effective at giving greater outputs To the better managed firms So that process of misallocation Appears to be much stronger in some say Some European countries, developing countries Than it is say in the United States or Sweden or the UK Actually what I should just as a sidebar I should say one fun thing about Doing the radical econometric methodology called talking to people Is that you find out a lot of things you weren't expecting So for example the You know we asked in one of our Italian firms So you know do you have Who owns you and the world production manager was very honest And said we are owned by the mafia Which are very nervous interviewers And I think that's in the other category Or I guess I could put you down as Italian multinational Which is how this is recorded Having lived in the United States for a while As you can see the management scores are highly productivity is high Not everything is great I had a daughter in public school And you know we were asking one interviewer Asking them whether you know how many production sites Do you have abroad see whether a multinational The manager in Indiana said well we have one in Texas Which some people say that's correct Because Texas is a different country But I think on the map that's not quite so correct Okay so so management I've argued Matters for growth and productivity It also matters you know but can we can you affect it Other kind of things that drive management Well there are some very systematic things So human capital if you look at the fraction of people With college degrees and the management scores Is a very strong correlation Both for managers and for non managers In the relationship between having more More human capital high management scores Another important factor is information So you know at the end of the management server We asked an open question about how well People thought they were managed on a scale of one to ten Most people thought they were really well managed So you know the same way if you asked whether you're You know whether you're a good driver Most people think they're way above average But they're unfortunately over optimistic Well that may not be unsurprising Maybe it's still the case that the relative score Happens matters Turns out it doesn't But you know people if you if you correlate The self-scored management with the actual Measure of profits or productivity There's no relationship And you know what we take from this Is that there is a lot of poor information So you know many managers think they're super well Managed and they're not And you know many firms Especially small and medium sized enterprises Just haven't been exposed to good quality Management practices So that means that you know just like any other Kind of technology if you like That poor information tractions are a reason For the slow spread of better management practices And what one way to improve that is in multinationals So if you look at multinationals And what this graph does is it compares The management schools of domestic firms in red To foreign multinationals in black And you can see that these foreign multinationals No matter which country they're in Even when they're in countries Where the management schools relatively low Are able to get very high quality management practices And the lesson from this that we take Is that the kind of what multinationals do Is they spread best practice Not just in the kind of traditional hard technologies But also in terms of managerial know-how In terms of engineering techniques And so being open to FDI Open to allowing foreign direct investment Is one of the best ways of actually spreading Better practices and better productivity In some recent work we've tried to you know Look at more of the causal impacts Of this type of information shocks If you like from the multinationals So we adopted this kind of million dollar plant Approach of Greenstone et al Where this is in the United States We look at places where multinationals Multinationals plants entered a local county And compared that to the runner up county So the county where the multinationals Thinking of it may locate in its plant So Toyota publishes information on It thinks of either going to Huntsville Or Charlottesburg Eventually goes to Huntsville So we can compare the counties where Huntsville went To the counties where Charlottesville went And when you do that you see that the incumbent plants Are not the multinational itself But the plants in the same county Benefit it from productivity spillovers From having these multinationals located there And we particularly have our management practice scores And we can show this is after the entrance To the multinational For the other plants in the same county Relative to the runner up counties The plants which were close to the multinational Had a significant increase of the management practice In the productivity And interestingly what this lower figure does It shows you that the plants which benefited the most Were the plants where managers were likely to move Between the multinational and the local plants So the spillovers seemed to be operating Kind of through a labor market effect Where the information the managers had Of the better management practice Got spread to the other kind of establishments In the same area So information seems really important Competition seems very important If you look at the amount of reported competitors Or some other measures of competition Stronger competitions associated with better management practices Governance is also extremely important So if we look at the breakdown That management scores By different types of ownership and governance patterns We find a very consistent pattern across our work That the dispersia holders The private equity firm seems to be the best managed If you're a family owned firm With a professional manager in You also do pretty well The very low scoring firms Are kind of family owned firms Which have a family CEO So this is particularly bad If it's like your elder son or elder's grandson Is like so in the firm So if you want to ruin a firm Give it to your older son Is the kind of short motto here Governance matters And many countries have lots of incentives To subsidize family firms With a tax system With other mechanisms Our kind of work suggests that's not a good idea So governance is extremely important In terms of management and productivity Okay So I hope that's given you some arguments How we should think about the drivers of growth But what can we do going forward To get more growth What kind of things should we do So in terms of thinking about a growth plan I think we should Obviously we should think about Short-run Clubs of things And longer-run types of things And what we have to do is link these together In an evidenced way To try and come up with a plan for growth So if you're interested in some of the details The things I'm going to talk to you This I'll make the slide pack available You know, there's this kind of book I did called the LSE Growth Commission There's some recent policy reports As I thought I did the Hamilton Foundation recently But I'm going to give you an overview Of the kind of principles I think are important for a growth plan So in the short-run I think that, you know, one of the I think the mistakes we realized From the previous financial crisis Is a kind of premature move to austerity Prolonging depressed demand Is something we want to avoid Yes, we built up very large deficits Due to the pandemic But it would be a real mistake to try and, you know Reduce the whole of that deficit too quickly Before the economy has a chance to recover I mean, in Britain, my own country We saw the cost of that In terms of the big cuts For infrastructure spending And public investment that were made in it In the immediate years Following the recovery from the great recession Which prolonged it Much more than would have been the case As part of the problem of very low productivity in the UK The general principle is to try and Balance protection and reallocation So this is a hard thing to do But, you know, yes, we have to Do things to protect existing workers But, you know, we have to increasingly Facilitate reallocation of jobs into new firms So as we wind down Hopefully many of the programs that we've had To, in order to support firms You know, there's the UK examples of The way subsidy scheme and the loan schemes To big businesses and small businesses These need to be wound down and away Which helps to facilitate Redistribution but also doesn't do it too quickly And cause, you know, a massive wave of bankruptcies So I think there's many ways to do that I think we have to Own up to the fact we're going to need serious debt restructuring Not, you know, large fractions of these This the investment here is going to Is not going to be paid back So there's many ways we could think about Doing that So I think we could think creatively About debt for public equity swaps In order to, you know, Give the government some of the upside potential of growth But we're also going to have to think about Just writing off some of the debts of these firms as well And there's a kind of, you know, a set of Important questions about ways in which we could do that That's very nice work by Thomas Philippon and Olivier Blanchard The ways of designing programs to do that And a really important thing is to kind of Combine this with growth for startups as well So, you know, too often we think about Just, you know, protecting existing firms You also have to think about Getting the environment And the set of policy levers right For encouraging startups of growth With the next wave of new innovations And the investments are going to come from Okay, so there's a set of short run things Now it's going to become the more long run Things to think about how we get This inclusive sustainable growth So one thing which is really important To think about is institutional architecture So, you know, many of the ideas that we have In terms of increasing productivity Face political constraints And one of the big political constraints Is kind of what I call Policy attention deficit disorder But with, you know, rapid turnover of political leaders And civil servants and often prime ministers In the UK, for example That leads to a lot of policy uncertainty And this can be very damaging For long-term investments And things like infrastructure Transport, energy and things like Human capital and things like innovation So we have to think a lot of ways This will be country-specific You know, in the UK, for example, We recommend an infrastructure commission An infrastructure bank In order to try and deal with this And those are innovations which are being adopted And part of the idea of this Is to add some extra grit In the policy mill So, you know, many policy makers Find it very difficult to resist the temptation To cut infrastructure When you need to make budget cuts Or to do things which are political expedients So having institutions Which have expert advice Which are a bit of a distance from policy makers Indeed, like the ECB itself As, you know, we think of this as a monetary policy But this is actually true Across a lot of the different parts of the policy spectrum So thinking creatively about institutions is important We need structural policies To build flexible markets Competition policy Especially with the kind of growth Of superstar firms and megastorms Making them mega firms in the digital area But also we have a general increase of concentration That we have to think about The European Commission and the DG Comp Has got very, you know, the digital markets unit The services are actually important Innovations in this regard We have to think about how we complete The single market Especially in services We need reforms of labour market regulation I think labour markets work better The third plank of this is human capital So there's a lot of opportunities For training and not just for worker retraining But also managerial training Especially for smaller, medium-sized enterprises So I emphasised the structural policies That we can do to improve management Like improving competition Improving governance Being open to FDI And so on But there's also ways in which We can think about a modern industrial policy Which can have training programmes And ways of coordinating, getting local public goods To improve different sectors and regions As well as reforming universities But let me finish with what I think is The most important reason around innovation policy So there is a wide range of policies That are used for innovation around the world And in a way, the key thing is to focus On, you know, looking at the evidence Over what works in terms of policy So we tried to pull this together In a paper that I did recently With, in the field of economic perspectives With Heidi Williams and Nick Bloom Where we tried to look at all the evidence Around different types of innovation policies And put them together in a kind of policymaker toolkit Looking at criteria like the quality Of the empirical evidence And how conclusive it was one way or the other How quickly we get results So the aim of this was to say That if a policymaker came to you And asked you, you know, I have a, you know I have a billion euros to spend How should I spend that innovation? You know, one of the criteria May be how slowly or quickly we can get results That's what we looked into And we also looked into quality A lot of the time, right, you're wrongly When policymakers come and ask about, you know Innovation policies, they want to know What the likely effect is on the quality And I think that's a legitimate thing to do So I don't want to go through all this I'm going to talk, you know The way that we summarize this Was to look at different policies Look at the evidence Look at the benefit-cost ratio Look at the timeframe Looking at the effect on the quality So then we just mentioned a couple of these So one is on taxes, R&D tax credits We have very good evidence there I'd say that R&D tax credits can be effective This is one of the areas where There's, you know, a kind of a relatively quick win And in terms of increasing R&D And where well-designed tax credits can actually work Direct government grants There are less evidence on it But we're building up more knowledge And I think at this point We have a number of pretty good Regression discontinuity designs Where we have evidence that's in the health area Energy area, defence area We actually can actually get crowd-in Of direct government grants Again, if well-designed Well-targeted Which there can be more than tax incentives To increase R&D And I think, you know, that's a I don't think we should think about The tax policy And the direct subsidy policy As things which we have to go Over one or the other Combining these, especially when we can Target the direct policies Around other kind of missions Like around climate change Are really, can be really useful And a problem with both of the Tax and grant policies Is that they're both subsidising demand And if the supply side is relatively Inelastic And we might think that's true Of, say, R&D workers And all that you will get From subsidising the demand side Is higher prices rather than the quantity So for a kind of R&D person Like myself That might be great Because our scientific ways go up But that's not good for the taxpayer Because it doesn't increase the volume Of R&D So in terms of Acting on the supply side Really that's about increasing The supply of human capital To be more effective That can both directly increase innovation And also indirectly By reducing the equilibrium Cost of R&D This will also actually induce more Activity And also potentially reduce inequality as well So I think these can be really effective policies So what can we do on the supply side Increasing the STEM workforce Deciding science, technology Engineering and maths University reform Skilled immigration is a total no-brainer So a lot of these policies Human capital is a long-term policy Which they might take a long time to get through But having a much more liberal policy Towards bringing in high quality talents Through the immigration is really That politics are often harder But the economics are really clear The fourth thing I also want to mention Is what I sometimes Will have called in other words The lost Einstein effect And this is You know, this starts off with the realisation This is going to work I've done with Rad's chatty That, you know We lose a lot of potential inventors A lot of people who could have become inventors Who could have become entrepreneurs Or innovators Who we lose in our societies Because of the under-representation Of many groups Women, minorities Kids and low-income families Who could have been in the events of Paul But are not Because they haven't been exposed Or given the opportunities To expand their talents So here's one example This is from US data But what we did in this paper Which came out in the QJ last year With Raj and co-authors Is that we got all the inventors in the US So everybody was on a patent document Since 1996 And we tracked back To look at the way through Matching this to de-identified IRS data What the income of the parents were So what this graph does It lines up the percentile of the income distribution Your parents were in From the top 1% to the bottom 1% And looks at the fraction of everybody In those percentiles Who grew up to become an inventor So you can see a very strong positive relationship So if you're born in the top The bottom 50% Your innovation rate was 0.8% Was if you were born in the top 1% Your innovation rate was 10 times higher So, you know There is a very strong gradient Of course, when we first presented this Many people said, wow That's just because, you know If your parents are rich They're cleverer And if they're cleverer The kids are going to be cleverer They're all the more likely to be inventors So what we could do Is we matched in data on test scores Of maths that these kids got When they were very young Like at age 7 or age 8 And we showed that that could That could The vast majority of this relationship Was not explained by measures Of ability, maths, English Other kinds of measures At a young age So most of this is actually We argue in this paper Is due to the fact that Many of these kids from low-income households Just weren't given the opportunities The educational opportunities The exposure to innovation Which could have enabled them If they had those opportunities To become the inventors of the future So this is the lost Einstein Or lost Marie Curie type of effect And, you know, unlocking We calculated that unlocking this hidden talent Could potentially quadruple the innovation Generating the United States And it's an example, you think of Educational interventions Or interventions and mentoring programs You know, this is a thing Which would both help growth in the long run But also help equity And social justice as well And many non-profits Are taking up these ideas So try and do them And I should finally mention Competition and trade policy Being open to trade I think another way of getting more innovation So, you know, one of the problems With this innovation talker And so I like the innovation talking approach One of the problems with it Is it doesn't take all the equilibrium Interactions into account So, you know, combining this With other kind of ways to model this In a more coherent way Is kind of what we're doing with the research And I also think that, you know It's a way, you know It's a bit of an economists way We're always thinking incremental cost benefit And I, you know, I've made the argument And I became persuaded A real way to push these type of arguments forward Is to combine many of these most successful policies In terms of a package of policies Around the missions we face So we face major missions around climate change Around health, around defense Put these together In a kind of coherent plan Like a grand challenge type of fund And, you know, in the United States I've put forward this proposal To increase federal R&D spending To about, to about $100 billion a year The Biden infrastructure bill has about $500 billion So it's a little bit less than I asked for But still, you know, over, you know The money was over a 10-year period There was over eight-year periods So, you know, maybe it's not so bad So, you know, I hope the infrastructure bill goes through Because this could be a way of actually, I think, Stimulating a lot more innovation And other people have also argued for, you know Similar, similar increases in Europe We're already, you know, we have, you know Various things which are happening in Europe To try and also increase that innovation spending So, you know, just to wrap up, you know Is this politically feasible or not? You know, the world has had a particular Severe productivity growth problem After the global financial crisis You know, we've had, you know, events Which are causing major damage Covid and Brexit No, well, both things which loom large But one of the things that we can Learn about from history is that When we have these major shocks They can be times Where we can have radical change So, if you think about what happened After World War II It was a moment in which Many of the economic models got reset And the institutions got built And I think there is a, across many parts Of different political parties There is a consensus That there is this need for a larger Investment innovation And I think, and we've seen this During the Covid pandemic There can be an important role for the state In helping to rebuild the real economy So, I think we're at the point In which there is a desire for this change We can learn a lot From economic work and social science About what policies are working And what don't work at its time Right now to move from worse to action To create the kind of sustainable Equitable growth we're going to need Over the next few decades to Restore our prosperity Thanks very much Thank you, John Okay, I'm going to share a few questions First question is on misallocation Which you Measured with differences in productivity So the question is whether Such differences in productivity may also Relate to where kind of a winner Takes all a market So not necessarily misallocation And if so, basically, you know What is the role of market power In these relationships And if you could say something About the debate that we have here About are we missing something By not having super firms Because you talk quite negatively About super firms But some others say Well, it's a great mess here in Europe So what should you take Physically on sort of Petition policy, I guess That's the broader question Those are all great questions And it's things I've been actively working on So stepping back a little bit So there have been These big changes to the business landscape Across the world And one of the things that we've seen We do see actually in Europe As we do in the United States Increases of industrial concentration Which have occurred On average across a wide range of industries Partly that's because of the digital industries We see that very directly But we also see that in many other Many other industries as well And that seems to have gone hand in hand With that's an increasing difference in size But you see increasing differences So we see increasing differences In markups and growth In accurate markups Now, is this all a bad thing? You know, I personally think A lot of the reason for that Is exactly because we are moving to more Will it take all type of economy? And you see that very directly In the digital type of sectors Because of platform effects You also see that in non-digital sectors Because the fixed cost of Walmart Buying a massive ICT logistic system Is just very high And a small store can't do that So I think part of this is due to Kind of changes that we've seen in technology And most of this growth of large firms Is due to that But I think the problem is However we've got there Because we have these Large number of these very powerful firms They have the capability in many times The incentive to do things Which are against the interests Of consumers and workers So I think that even though The main reason that these firms Have become successful Isn't because they've been Doing illegal anti-competitive things I mean there is some of that going on But that's not the predominant reason There is a risk as the society Becomes more and more will it take all That this is going to have Some negative consequences So I do think we have to think about Changing the way we do competition policy In order to deal with that So for one example of that Would be to say that Too much of competition policy Is kind of backward looking So when you look at the merger We say what's your market share Is it not too big Then we let it go through It has to be forward looking So you know Many of the firms which get taken over By you know think about Facebook, Instagram Are small platforms Yet if they were allowed to survive They could have become competitors In the future So we have to really look about Look at future competition And you know I think More and more shift the burden of proof Away from the large companies Taking over these new platforms Put the burden of proof on Making them show if they're doing a takeover This is not likely to cause problems So I think there has to be a hold on John Sherelder is some very nice work That I've been discussing with him He's doing as far as detail in the quality review On the types of reforms Which need to be made The commissioners doing some of this work And so there is activity going on But I think you know Even if you're optimistic About the reasons we got here You should be I think Proactive in trying to make sure That these firms are not abusing The kind of position of competition In terms of Europe I do think we need to think of How we can make our markets work better To enable this reallocation to take place I think that has a lot to do with Having to improve the kind of functioning Of product markets and labor markets And financial markets So I think you know We shouldn't be afraid to allow Greater reallocation to take place Thank you The two questions on management practices The one is So you're calling for You're advocating inwards FDI So should we also in Europe Embrace FDI from China Is one question And the other question is You said that in terms of family firms The worst thing to do is to pass them on To the next generation And here in Germany of course we're You know about to enter a phase Where a lot of family firms So actually pass down into the next generation And a lot of the Patriarchs are complaining That the next generation doesn't want to take over Is that actually a good thing? Yes So yeah these are very hikers So yeah China is of course There's a lot of controversy over Chinese FDI There's questions now being debated over Should there be additional Scrutiny of deals Not just from China actually But from any kind of foreign There's now Let's not be under any illusions China is a strategic competitor You know China is doing all that Is a Communist dictatorship Is doing a lot of bad things And we have to be careful From a defence point of view Of the degree to which technology gets To China and can be against our interests So that we have to look at these In a kind of you know with a Realistic framework But I think that I would I mean two things One you know for friendly countries I would take a quite a liberal approach So you know United States And Japan and South Korea and so on So you know I worry that you know This China Worries may then spill over Into making it harder To allow foreign acquisitions To some other countries Which actually can be beneficial And I you know Although I know I would circumscribe The degree to which When we look at foreign acquisitions And take over this We don't use like defence reasons As a reason for you know For being overly protectionist And we have a history of that in Europe So I do think we should be very careful about Overly restricting the ability Of companies to come into Europe Even though we have to be Realistic about China And other strategic competitors In terms of the you know So I yeah I people The family firms are always complaining And I have to say for any family Firm members in the audience I I often give speeches With family firm federations You know there are a lot of good family firms You know I'm talking about the means There's a variation around However you know If you thought about all the people Who could be the best person to run your firm It may be your elder son But there may be other people Who could also be Pretty good at running the firm You know Warren Buffett says If you were choosing the German Olympic 100 meters team Would you your policy rule be I'm going to select the elder son Of the first new one at 21 years ago Probably not you know So I would I would say that we you know You know from a kind of business point of view I would certainly consider many other things In the new succession plan For policy points of view I think you know It's better to have a level playing field So what I would I'm against is as exists in many countries Lots of tax breaks to encourage family owned firms Such as exemptions Mass exemptions of inheritance tax So I don't think we should be doing things Which are country factors Germany is quite interesting actually Because the Middle Stones of Germany Has a tradition actually Of much more so than say in France or Germany Of bringing in outsiders to run their firms So the ownership stays in the family But the the managing director or the CEO Is actually a professional from outside the family And as I showed you That's actually a pretty good model The problem is it's when you know You know when you as a rule As a factor rule You just assume that the best person to run the firm Is going to be the family Thanks There's also a question about government grants Which are advocated to get to the R&D Go away So recently the European Commission Floated the idea that Europe should Develop a sizable microchips industry for instance So more generally how much of that transformation Into the digital space should be government led? Right that's that's a I mean there's a role for government Certainly And I mean like in climate So climate Think about climate change There's a clear mission of green technologies You know even without all the other market failures That we know for innovation Like you know Spillo was knowledge You'd want to do something Health and pandemics You want to do something Defense clearly you want to do something Microchips digital I you know I can I can see there are some roles for government At some places Especially at the more basic science Like events For sure When you then get into the question of you know How much should you be Subsidizing the production of semiconductor chips Because there I start getting more nervous Because I you know you've got to think about What are the market failures you're trying to address So there may be And I don't know enough about So the particular Particular industries But there is a clear market failure That you've identified and you want to Deal with But you know I think that you would You would want to be very careful about Saying you're going to go all in For say the production of the next generation Of semiconductor chips I mean for one thing The many other countries doing the same And for another you'd want to see exactly You know where that market value is going to work And how the policies are going to be You know joined up to make that work I think as a general principle When we're thinking of you know How you allocate the subsidies Part of it is There's a strategic element But part of it is that you want to have the The agency which is delivering the money To be have you know almost maximum Political shelter from the government Because the worst thing is if it's basically Politicians are heavily involved In giving out money because they're You're very opening yourself up to rents Rent seeking type of behavior So what you want to do A bit like the infrastructure commission I kind of discussed briefly is that You want to set up institutions Which have a lot of independence from governments That you know were by The government can set the overall agenda The overall target and leave it Like the ECB To you know people know what they're doing To kind of make the decisions Rather than having you know Having governments involved all the time So there may be a case of parts of the digital sphere Especially in the basic research end I think in terms of the more production side You know you have to think about that On the case by case basis I haven't seen a Totally compelling argue with that yet But I haven't looked into it in detail Well thanks John We've run out of time But maybe I can ask a last question The speech coming up which is I mean you talked about the importance Of breaking pessimism So how do we rally people I mean you propose a number of topics Like climate Well maybe in Europe that speaks to a lot of people Defense maybe less so to some people How do we go about Yeah so Well you know this is sort of Political psychology is not Necessarily Especially with Brax's Maybe so depressed I'm not sure I might be the right person to ask You know I know those of you who don't know I was a big opponent of Brax's edit Yeah so I think that There is a moment we're living from now And it can go you know it can go both ways You know it could lead to great depression You know not just economically But also psychologically Given the pandemic But I think it could also be a moment Where we realize There's an opportunity to really Change the game And the ability to you know As we saw off the Second World War The ability to say okay Now we have to rebuild ourselves You know I decided to take this huge hit How are we going to rebuild ourselves Let's think about what the radical things are To change ourselves Climate change is a great rallying thing We like you know in Europe That we want to be leaders To take climate leadership So combine that desire to be leaders in climate With also the Great depth that we have at High human capital A lot of strong research and development And a lot of possibilities for innovation And put those together So I think that might be why That kind of mission of climate change Maybe environmental things more general Is it might be why galvanizing A lot of young people To find this as an exciting new program Of the future So I think that would be one of I mean the defense is like There is the fear factor I mean that goes you know I'm you know as I said I'm Less you know keen on that But it is a real factor So you know the fear of China And the fear of the kind of western Liberal democratic model being in abeyance Should also galvanize people saying Well you know how do we want Emerging and developed economies To make the case that they should Be more open and have a liberal Democracies like Europe and America Rather than the Chinese model And you know that that means We're in competition with China To do that and China is a fact So that is also a galvanizing force Would be a galvanizing force And you know it could lead to It could lead to oh there's nothing we can do But I'm more I am Of course it's the optimistic That you know we have the knowledge Of how to create growth We have the prepared for advantage In this in Europe And maybe with climate change We have the opportunity to build A pandemic to really make Making changes So you know let's let's try And change this as an opportunity Well great thanks for Unnamed this optimistic note John so thanks on behalf of All of us there are many more questions But we will share the slides Yeah do share them and send me emails And I'm very happy to to to Respond to the questions that people have Okay well the best now and bye Bye