Gearing Up for Another Tech Boom
BusinessWeek Chief Economist Michael Mandel has written a new book entitled Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think (due out May 11 from Harper-Collins). In this book, Mandel's third, he explores the promise and perils of tech-driven economic growth, and he prescribes stronger federal policies as a way to foster a resurgence (see BW, 5/17/04, "In Praise of Heady Growth" for an excerpt).
Mandel recently spoke with BusinessWeek Online News Editor Beth Belton about the themes of Rational Exuberance. Here are edited excerpts from their conversation:
Q: What's the book about? A:
Q: What's the book about?
A:It's about the prospects for technology-driven growth in the U.S. -- whether the boom that happened in the '90s was an isolated event or whether we can do it again.
What the book says is that there are enough new technologies, enough people working around the world on research and development, and a strong enough financial system in the U.S. to fund the new technologies, that there's a good chance we'll get another tech-driven boom. In terms of looking forward to economic prospects, this is a very optimistic book.
Q: The fallout from that boom was pretty damaging. What's the potential downside? A:
Q: The fallout from that boom was pretty damaging. What's the potential downside?
A:The dark clouds may come in two forms. One is that it turns out technology-driven growth is very turbulent. As we saw in the '90s: People lose their jobs, they have to adjust to a lot of change. So there's a lot more opposition to tech-driven growth than one might expect.
The other problem is that economists, who you might think would love the idea of fast growth, are not very comfortable with technology. It's a real blind spot in the profession. Economists are more comfortable talking about thing like tax rates, budget deficits, or monetary policy. They're much less comfortable talking about technology. They tend to ignore it or dismiss it, which is especially funny because very good economic research shows that over the long run, technology is the major driving force behind economic growth.
Q: Aren't politicians in the same boat? A:
Q: Aren't politicians in the same boat?
A:In the book I discuss the relationship between growth, technology, financial markets, and politics. What I point out is that politicians do a lot of wrangling over budget deficits, but they pay far too little attention to technology.
In the current Presidential campaign, neither Democratic candidate John Kerry nor President George W. Bush has a well-developed innovation policy. I've addressed this book to people who want to know and are concerned about where the economy is going in the future, but also to policymakers who want to understand what a real growth policy would look like.
Q: What would it look like? A:
Q: What would it look like?
A:There needs to be better funding for R&D, better funding for education of scientists and engineers, and a general firming up of the innovation infrastructure. But even that's not sufficient. You have to maintain political support for technological change. You have to help people understand that when technological change comes, it'll be fair, transparent, and that they'll have some measure of security.
Q: Do you outline specific policy proposals? A:
Q: Do you outline specific policy proposals?
A:One of the things I suggest, which would be easy to implement, is going to income averaging for determining how much taxes workers owe. We could allow income averaging, say over three years. The benefit would be that if somebody loses their job, or is out of work due to technological changes, they could average their income over several years and end up getting a big tax refund in a year when they really need it.
Q: What might such a policy do to the budget deficit in the short term? A:
Q: What might such a policy do to the budget deficit in the short term?
A:It turns out that budget deficits are far less important than economists let on. So long as the deficit doesn't explode out of control, it has far less impact on the rate of growth than whether we get technological change. And a January, 2004, report from the Brookings Institution think tank in Washington entitled "Restoring Fiscal Sanity" points out that expanding the nation's debt by $5.3 trillion would cut about a percentage point off gross domestic product over the next 10 years. That's 0.1% a year, which is almost a rounding error.
Yet while we're debating this issue, we're squeezing out a much more important debate on technology and innovation. As a country, we would be much better served by spending more of our political debating time on thinking about technology innovation and what we can to do to improve it.
Q: What about the argument that government has no place helping the private sector -- as long as there's political stability, strong capital markets, and the rule of law? A:
Q: What about the argument that government has no place helping the private sector -- as long as there's political stability, strong capital markets, and the rule of law?
A:I disagree. There's so much of the innovative process, like basic research, that has a very high level of uncertainty. And we need government help making sure we're educating scientists and engineers. The private sector can't do that.
The other part is maintaining political support for technology and innovation, because without it a lot of things can slow down. Consider things such as stem-cell research, environmental regulation, telecom deregulation. Any time you have a new technology, it's the role of the government to decide whether or how it'll be regulated.
And then there's maintaining support of workers for new technology. The idea of a safety net, such as income insurance, plays a large role in innovation. That's why I think the motto has to be "growth plus security" in order to get exuberant growth, which I define as growth that's driven by technological change as opposed to capital accumulation alone.
Q: Any sense on the timing of the next tech boom? A:
Q: Any sense on the timing of the next tech boom?
A:It's very hard to predict when a tech breakthrough will occur. Certainly over the next decade we should see one, given the amount of things percolating out there.
Q: How do you address globalization and the controversy over outsourcing? A:
Q: How do you address globalization and the controversy over outsourcing?
A:The major problem in the job markets is a lack of technology breakthroughs, which generate new industries, new jobs, just like they did in the '90s.
In some sense, we're in a bit of a trough. Because the information-technology sector is still recovering from the bust, it's not generating a lot of new jobs. When you don't have breakthroughs, companies boost productivity by cutting jobs.
Q: About that tech bubble bursting, was it avoidable? A:
Q: About that tech bubble bursting, was it avoidable?
A:You have to take the boom and the bust together in terms of thinking about total pain for the economy. In fact, household wealth is back above boom levels and at an all-time peak. Consumption has been rising. The stock market has been rising.
In the end, we really didn't give back many of the gains of the boom. We gave back some, but wages are up, profits are high. I think most people would do it again.
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