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Innovation and the Financial Crisis By Michael Mandel, PhD Chief Economist, BusinessWeek Mass Technology Leadership Council February 25, 2009.

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Presentation on theme: "Innovation and the Financial Crisis By Michael Mandel, PhD Chief Economist, BusinessWeek Mass Technology Leadership Council February 25, 2009."— Presentation transcript:

1 Innovation and the Financial Crisis By Michael Mandel, PhD Chief Economist, BusinessWeek Mass Technology Leadership Council February 25, 2009

2 The financial crisis is the symptom, not the cause

3 Looking back, the Internet Decade (1997- 2007) was much weaker than we realized.

4 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

5 Real stock market gains were nonexistent

6 This period compares unfavorably to the Great Depression

7 We kept spending and borrowing, and the rest of the world kept lending us money.

8 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.

9 But leading tech sectors have struggled. Weak performance of infotech stocks Weak performance of pharma stocks Mediocre performance of biotech stocks

10 Since 1997, infotech and pharma stocks are flat, after adjusting for inflation

11 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.

12 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.”

13 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.

14 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.

15 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.

16 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.

17 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.

18 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.

19 Faith in the future

20 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_econ omics/current.html


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