2. THE ECONOMIC OUTLOOK: Where are we now? Where are we going?
Dan Sichel
Professor of Economics
Wellesley College
Middlesex Bank Economic Outlook Breakfast
October 30, 2014

3. Overview Where is the U.S. and Massachusetts economy today?
Getting on track though still challenges
What are the longer run prospects?
Reasons to be optimistic
How will those trends shape the Massachusetts economy?

4. It’s been a tough time
Great Recession just getting into rear-view mirror

5. It’s been a tough time
Great Recession just getting into rear-view mirror
Market turmoil (S&P 500)

6. It’s been a tough time
Great Recession just getting into rear-view mirror
Market turmoil
Concerns about Europe

7. It’s been a tough time
When will the Federal Reserve raise interest rates?

8. Yet, Economy Getting Back on Track
Employment recovering in U.S. and Mass.

9. Unemployment Rate Down

10. House Prices Recovering

11. But, Challenges Remain
Housing recovering but below prior pace

12. Challenges Remain
Inflation-adjusted wages continue to grow slowly

13. Challenges Remain Job losses were in higher-wage industries
Job gains in lower-wage industries

14. Longer-Term Outlook Many see glass as half empty
Pessimistic narrative has taken hold

15. The Pessimistic Narrative
“The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014.
“The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014.
“After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

16. The Pessimistic Narrative
“The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014.
“The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014.
“After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

17. The Pessimistic Narrative
“The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014.
“The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014.
“After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

18. Pessimistic Narrative Has Different Versions
My focus today:
Faltering innovation will not overcome headwinds.

19. The Pessimistic Narrative
Faltering innovation
Headwinds:
Slower growth in labor force
Education
Immigration
Fiscal challenges
Cuts in research and development

20. If Pessimistic Narrative is Right, Future is Gloomy
Slow improvements in living standards
Challenging climate for business, finance, politics, and expansion of opportunity

21. Recent Data Support Pessimistic Case
New Normal?
Note. Nonfarm business sector.

22. How Big a Deal are New Innovations? (3rd industrial revolution)
Information and communication technologies
Machine intelligence
Advanced robotics
Big data
Massive connectivity
And, in many other fields, like bio-tech

23. Gains from new technologies largely over.
The Debate
Gains from new technologies largely over.
Big gains still to come.

24. As Big as Earlier Industrial Revolutions?
1st Industrial Revolution
(mid 1700s to mid 1800s
Steam engine, railroads
Mechanization, specialization

25. As Big as Earlier Industrial Revolutions?
2nd Industrial Revolution
(mid 1800s to late 1960s)
Electricity, gas engines, cars, air travel
Telegraph, telephones, radio, television
Indoor plumbing, appliances
Chemicals

26. 3rd as Big as Earlier Industrial Revolutions?
Pessimists: No, much smaller
Optimists: Definitely more benefits to come

27. Forecasting technology is tough!
“It’s tough to make predictions, especially about the future.” Yogi Berra

28. Forecasting technology is tough!
“It’s tough to make predictions, especially about the future.” Yogi Berra
“640 kilobytes ought to be enough for anyone.” Bill Gates, in defense of the first floppy disks

29. Forecasting technology is tough!
“It’s tough to make predictions, especially about the future.” Yogi Berra
“640 kilobytes ought to be enough for anyone.” Bill Gates, in defense of the first floppy disks
“I think there is a world market for maybe five computers.” Thomas Watson, President of IBM, 1943.

30. That said, Reasons to be Optimistic
Underlying technologies continue to advance at spectacular pace

31. That said, Reasons to be Optimistic
Delayed gains typical for past innovations

32. Why Delay in Gains from New Technologies?
Large transition costs
Electricity
Computers
Driverless cars

33. Why Delay in Gains from New Technologies?
Large transition costs
Electricity
Computers
Driverless cars

34. Why Delay in Gains from New Technologies?
Large transition costs
Electricity
Computers
Driverless cars

35. Potential for Large Gains Still Ahead
Technologies improving rapidly
Long lags
Potential for large future gains

36. Health care
Electronic health records
Big-data diagnoses

37. Education
Online learning
MOOCs
Blended teaching
Other models

38. Software
Uber
Zipcar
Facebook
Twitter

39. Robotics and Machine Learning

40. But, Headwinds Slowing labor force growth Education Immigration
Fiscal challenges
Research and development

41. Will U.S. meet these challenges?
All but labor force are fixable.
Easy to be cynical
Yet, historically, U.S. has met great challenges in the past

42. Pessimism typical following economic stress
John Maynard Keynes, 1930: “We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterized the nineteenth century is over….”

43. Will MetroWest Economy Improve in Coming Year?
Significantly
Same
Slightly

44. Likely areas for gains in Massachusetts in areas with innovation
Software, robotics, and machine learning
Health care and related science
Education
Financial services

45. Conclusion
Massachusetts and U.S. economy getting back on track.
Despite pessimistic narrative that has taken hold …
Reasons for optimism about longer-run outlook, though hurdles to overcome.

46. Questions?