mandel mtlc innovation us lost decade
TRANSCRIPT
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Innovation and the Financial Crisis
By Michael Mandel, PhDChief Economist, BusinessWeek
Mass Technology Leadership CouncilFebruary 25, 2009
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The financial crisis is the symptom, not the cause
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Looking back, the Internet Decade (1997-2007) was much weaker than we
realized.
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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
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Real stock market gains were nonexistent
S&P 500, adjusted for inflation
00.20.40.60.8
11.21.41.6
Dec
-97
Dec
-98
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Dec
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Dec
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Dec-
97=1
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This period compares unfavorably to the Great
Depression
S&P 500, adjusted for inflation
0
0.5
1
1.5
2
Dec
-97
Dec
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97=1
1997-2009 1927-39
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We kept spending and borrowing, and the rest of the world kept lending us money.
Accumulated Trade Deficit Since 1980 (as % of GDP)
0%
10%
20%
30%
40%
50%
60%
1980 1984 1988 1992 1996 2000 2004 2008
perc
ent
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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.
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But leading tech sectors have struggled.• Weak performance of infotech stocks• Weak performance of pharma stocks• Mediocre performance of biotech stocks
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Since 1997, infotech and pharma stocks are flat,
after adjusting for inflation
Infotech and pharmaceutical stocks, adjusted for inflation
0
0.5
1
1.5
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3.5
Sep
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sept
-07=
1
drug companies info tech companies
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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.
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• 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.”
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• 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.
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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.
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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.
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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.
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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.
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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.
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Faith in the future
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ResourcesMy bloghttp://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