FEATURE — Summer 2008

Professor Glenn MacDonald thinks the federal government’s efforts to limit a recession’s economic impact, such as through individual rebates, will not prove beneficial and are, in fact, wasteful.
Economic Evolution

An expansive researcher, Professor Glenn MacDonald weighs in on big business questions, ranging from recessions and the role of new technology, to investor protection and economic growth in developing countries.

By Rick Skwiot

Glenn MacDonald believes recessions are a natural feature of economic evolution, and federal government attempts to soften them “idiotic.” He also can show developing nations how to attract more investment capital and has an informed word or two to say about innovation, game theory, industrial organization, executive compensation, and myriad other economic and business topics.

The self-described “itinerant researcher” and “closet growth and fluctuations guy” is described by colleagues at the Olin Business School as an inspirational leader helping to advance the School into the uppermost ranks of international research institutions.

“We’re asking big, difficult questions and seeking answers,” says MacDonald, the John M. Olin Distinguished Professor of Economics and Strategy, “for recessions, economic growth in developing countries, and the role of innovation.”

But for MacDonald, finding answers to knotty business and economic problems is not a mere academic exercise. He has been applying that knowledge hands-on, working with the likes of Monsanto, General Motors, IBM, Xerox, and other leading corporations for 15 years.

Recession’s upside

The Canadian-born economist sees recent recessions as driven by technological developments. “It takes time to learn how to use new technology,” MacDonald says, which may entail retooling, reorganizing, and retraining. “When a good opportunity comes along, we have to reallocate resources. But it takes time.”

During that time of “technology shock,” production may fall and trigger a recession. But thanks to the new technology, the ultimate outcome will be increased productivity and growth—a good thing.

“It’s part of the innovation process,” MacDonald says, suggesting an academic analogy: “Think of a poor graduate student. You can lament that poverty, or you can see someone who is soon going to be able to earn a significant income.”

MacDonald himself laments recent federal government efforts, such as individual rebates, to limit recession’s economic impact.

“The government has lost contact with reality. The economy, with 300 million people, is very complex. Government manipulation is not going to have any beneficial impact,” he says, calling the rebates wasteful.

“I ask, ‘Does a rebate mean more national debt or higher taxes for me? Or will it take money from some other necessary activity, like defense?’” MacDonald says. “Instead, the government needs to do two things: keep monetary growth stable and provide a predictable tax and regulatory environment.”

In other words, let markets run their course instead of trying to manipulate business cycles.

“Growth is so much more important than fluctuations,” MacDonald says. “Recessions are part of innovation and growth, and per capita income in the United States has been going up 3 percent annually.”

One particular aspect of recent recessions—their “jobless recovery”—which puzzled many, compelled MacDonald to study and explain the phenomenon.

“Historically, employment mirrored GDP (gross domestic product) growth. It might lag by one quarter, but it was almost instantaneous,” he says. “But with the 1991 and the 2001 recessions, there was a long period in which employment continued in decline.”

His research suggested that the reasons lie in the uneven diffusion of the new technology across sectors of the economy and the time needed for workers to learn and accept the new technology’s impact.

“New technology takes time to spread. Insurance, real estate, and finance were growing like crazy thanks to information processing, but other sectors—such as manufacturing, which continued to shrink—were not affected as much,” MacDonald says. “But workers are smart. When technology hits, people are looking to move into another part of the economy, but they aren’t going to join that part of the economy until they are sure.”

Once enough sector growth occurs to make the switch attractive, they’ll be pulled into that part of the economy, MacDonald says. But that takes time—and produces the jobless recovery.

Research that’s both broad and deep

According to Glenn MacDonald, “Growth is so much more important than fluctuations.”

But his work on recessions represents only a fraction of his significant contributions, according to colleague and fellow economist Barton Hamilton, the Robert Brookings Smith Distinguished Professor of Entrepreneurship.

“Most academics tend to be narrow,” Hamilton says. “Glenn is unusual in that his research is very broad; he makes significant contributions in economics and business strategy, labor economics and industrial organization.”

Further, Hamilton says that MacDonald’s breadth does not suggest he wades only in shallow research waters. “He does deep work in a number of areas,” Hamilton says. “In these days of specialization, he’s a throwback to 30 or 40 years ago.”

Hamilton knew of MacDonald and his work even before MacDonald came to Washington University in 2001 from the W.E. Simon School of Business at the University of Rochester. “His work influenced my work on entrepreneurship,” Hamilton says.

MacDonald readily admits to being fickle about research interests and getting a seven-year-itch that, he says, keeps his work vital and energized.

“People call me ‘itinerant’—moving from economics to game theory to innovation or growth. But I stay interested by changing every six or seven years,” MacDonald says. “As a result, I’m still as productive now as when I was a rookie.”

Protecting investors in developing nations

MacDonald’s recent research into investor protection and economic growth holds potentially important implications for developing nations. Investor protection, MacDonald says, “influences the way people make investments, the amount of capital, and the growth of the economy. In developing nations, investors are often worried about being ripped off.”

He cites the stymied growth in the former Soviet Union. “The lack of investor protection hurt growth as the expected capital inflows did not materialize.”

Countries with the greatest need for capital infusion, he says, are the ones often least likely to get it. “Developing countries with poorer investor protection and a need for durable goods, like tractors, take a double hit,” MacDonald says. “The capital producing part of the economy is always particularly volatile, so weak investor protection means capital doesn’t go where it might have the greatest impact.”

Improving investor protection promotes growth by making investment attractive. But in economies with restriction on foreign investment, increasing domestic investment can drive up interest rates and offset the positive effect of improved investor protection.

This is not a big problem in open economies, he contends, where capital flows into the country from outside. But many developing nations do not have open economies.

“The secondary effect could lead to negative growth in a closed economy, such as India or South Korea,” two nations he has studied. “With severe capital market limitations,” MacDonald says, “there’s no way for capital to flow into the countries.”

His study, in fact, shows stronger economic growth for developing countries with fewer restrictions on international capital flows.

Helping build a stronger business school

Along with his accomplishments as an economist and business researcher, MacDonald also has played an important role in the rise of the Olin Business School among top international schools.

“Glenn’s greatest contribution is helping to develop institutional glue,” says Ronald R. King, senior associate dean and the Myron Northrop Professor of Accounting, “that is, to develop a culture of excellence that is integrated within Olin and across the University.”

Hamilton concurs. “Glenn expects a lot of himself and has incredibly high standards for teaching, research, and service. He inspires the rest of us to improve our game to meet those standards,” he says.

King says three attributes contribute to MacDonald’s success: his passion, optimism, and attentiveness.

“He has boundless energy for his research, teaching, and service commitments,” King says. “Second, while he is always professional, he has an exceptionally upbeat attitude. Third is his ability to listen. He respects the opinions of others—even when respectfully disagreeing.”

At Olin, MacDonald teaches doctoral, M.B.A., and undergraduate courses on microeconomic theory, game theory, market competition and value appropriation, and more.

His editorial work also suggests the wide scope of his expertise, serving as editor of the Journal of Labor Economics for 10 years and currently as associate editor for Management Science.

Rick Skwiot is a freelance writer based in St. Louis.