The death of Paul Geroski deprives us of one of the authors of one of the most interesting books on macroeconomics written in recent years. I refer to Coping with Recession, a study of the 1990-91 recession, which he co-authored with Paul Gregg.
They showed that:
Performance differences between firms increase markedly in recessions. While mean profitability is procyclical, the variance in profitability across firms at any time rises sharply in cyclical downturns.
They found that just 10% of companies accounted for 83% of the gross fall in profits in the 1989-91 recession, with 20% accounting for 92% of the gross fall. The worst-hit 10% of firms also accounted for 85% of the gross fall in employment. (Looks a bit like a Pareto distribution, doesn't it?)
40% of firms saw their profits rise in the recession, and half raised employment.
This has (at least) two interesting implications.
1. It could lend credence to Fischer Black's view that recessions are due to mismatches between tastes and technology, rather than to downturns in aggregate demand. Black's view suggests a minority of firms - those with the worst mismatches - would suffer in recession. The aggregate demand view, on the other hand, is less easy to reconcile with the skewed distribution of firm performance . (I'd welcome a Keynesian-type rebuttal here).
2. It suggests there should be scope to insure ourselves against recessions. Insurance works if people are in different situations, with a minority suffering whilst others thrive. This is just what happens. This deepens the puzzle of why Robert Shiller's proposals for macro markets have not caught on.
What's more, found Geroski and Gregg, it's "very hard" to predict which firms will suffer in a recession. Pre-recession profits and sales were only weak predictors of suffering. And many firms in badly affected industries thrive whilst other firms in growing sectors suffer.
This should be a reminder to stock-pickers not to be too confident about their abilities.
They also cast doubt on the view that recessions can boost long-term growth by weeding out lame ducks or by stimulating efficiency:
Save for those firms who fail, it seems hard to see any permanent effects of recession.
It would be a good tribute to Professor Geroski, as well as a good way to improve thinking about the economy, if people would read or re-read this fine book.