Innovation and the Financial Crisis
By Michael Mandel, PhDChief Economist, BusinessWeek
Mass Technology Leadership CouncilFebruary 25, 2009
Real wage gains were nonexistent
• Median earnings (2007 dollars) – College graduate, BA only
» 1997: $51779» 2007: $53437» 3.2% increase over ten years
– Young college graduate (25-34), BA only» 1997: $44657» 2007: $45358» 1.6% increase over ten years
Real stock market gains were nonexistent
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This period compares unfavorably to the Great
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1997-2009 1927-39
We kept spending and borrowing, and the rest of the world kept lending us money.
Accumulated Trade Deficit Since 1980 (as % of GDP)
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Why?
• The U.S. was supposed to be the most innovative economy (Google! Apple! Biotech! Google!)
• It was okay to move production overseas, because we would invent new stuff.
• It was okay to borrow, because we would invent new stuff
• It was okay to lend us money, because we would invent new stuff.
But leading tech sectors have struggled.
• Weak performance of infotech stocks
• Weak performance of pharma stocks
• Mediocre performance of biotech stocks
Since 1997, infotech and pharma stocks are flat,
after adjusting for inflation
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drug companies info tech companies
Technology shortfall!
• The Internet alone is not enough.
• Our existing technology and business-know flowed to the developing world.
• We did not create sufficient new products and services to pay for imports.
• Dependence on financial innovation instead of real innovation.
• We’ve seen the consequences
• There’s only so long you can wait for the next big thing.
• In my 2004 book Rational Exuberance, I argued that if the pace of innovation slows,
“it will become a lot harder to service all the debt that companies and people took on during the 1990s. Housing prices will slump and perhaps even plummet.”
• Financial crisis = Adjusting to a world with
slower expected innovation
• $4 trillion in excess debt goes bad and needs to be written down
• Nationalization of banks, repudiation of debt.
• Collapse of trade bubble.
How Long Will It Last?
• Without innovation, it’s a slow slog.
• It takes a long time to dig ourselves out of a $4 trillion hole just through savings.
• Consumer demand will stay soft for years.
• That’s why economists are increasingly gloomy.
But innovation is the wild card.
• It can surprise on the upside, as well as the downside.
• New products and services boost both demand and supply.
• Innovation creates jobs, spurs growth
• The essential missing ingredient.
What are the odds?
• Innovation is fundamentally unpredictable, but some areas are more mature.
• Infotech: Ripe; communications, social media, cloud computing, news/entertainment?
• Biotech—Ripe; more than 25 years since the first biotech drug
• Energy—still lagging.
Does the financial crisis impede innovation?
• Hard to say. Funding is more difficult, but resources are cheaper.
• During the so-called ‘boom,’ housing sucked up all the financing because it was supposed to be so low-risk. Hah.
The outlook: My best guess
• I’m going to go with medium-term optimism.
• Over the next year, the economy will be sustained by education, healthcare, and other government programs.
• Over 3-5 years we will see innovation-driven growth.
• I would not be surprised to see another boom.
Resources
My blog
http://www.businessweek.com/the_thread/economicsunbound/
My intro textbook (just released!):
Economics: The Basics
My weekly video podcasts:
http://www.businessweek.com/mediacenter/podcasts/
mandel_on_economics/current.html