Innovation and the Financial Crisis

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Mandel, Chief Economist at Business Week explains how the last decade's "gains" have been illusory and how innovation is key to real GDP growth.

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Innovation and the Financial Crisis

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

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