Storytelling In The News: #146

Rational exuberance and the story of the US economy

May 11, 2004

In a new book, Rational Exuberance, Michael Mandel argues that many economists pay too little attention to tech-driven expansion and that there is every reason to adopt a positive story for the future of the US economy.

The U.S. economy grew by 4.9% in the past year, the biggest gain since 1984. The Standard & Poor's 500-stock index is up by 20% over the same stretch, while household wealth has surpassed its 2000 peak. And Americans have plenty of buying power -- consumer spending per person is up by 9% since 2000.

Nevertheless, as the election season heats up, economists and politicians on both the left and the right are raising dire warnings about future prospects for the U.S. economy. Topping the list of reasons for distress: huge budget deficits, ballooning estimates of the future cost of Medicare and other entitlements, the flight of good jobs to India and China, and the burden of increased military activity abroad and security measures at home.

Ultimately, we are faced with the question of whether to adopt a positive or negative story about our economic destiny. Can the good times of the 1990s -- with its low unemployment, fast wage growth, and soaring stock market -- be repeated? Or was that era just a flash in the pan, the product of an out-of-control bubble mentality? Will we soar or struggle?

Most economists are pessimists, but Mandel is an optimist.

Mandel argues that the ability of Americans to thrive during the next 10, 20, or even 30 years does not depend on the budget deficit or the potential exodus of a few hundred thousand jobs to other countries. Rather, our economic future is inextricably linked to our ability to come up with more technological breakthroughs that equal the Internet in magnitude. Such large-scale innovations drive growth, create new jobs and industries, push up living standards for both rich and poor, and open up whole new vistas of possibilities. This is what he calls "exuberant growth."

Mandel argues that it is rational to be optimistic about the next decade and the future beyond if we are willing to commit ourselves to innovation-driven, exuberant growth. All the ingredients are in place. He sees plenty of potential technological breakthroughs simmering beneath the surface. To name just a few: wireless and broadband connectivity that could potentially revolutionize everyday life, solar power that could compete with conventional energy sources, biotech advances that actually cut health-care costs, nanotechnology -- building useful objects atom-by-atom -- that changes the nature of manufacturing and actually makes it cost-effective to produce things in the U.S. again, and space travel that is commercially viable.

Economists are future pessimists

The economics profession, for the most part, underestimates the importance of technological change.

Alan Blinder, Princeton economist and former vice-chairman of the Federal Reserve:

"The notion that we are spending far too small a share of GDP on innovation is not really very plausible." (2003)*

Martin Feldstein, Harvard economist and current president of the American Economics Assn.:

"Even if the technical changes in information technology had not occurred, the pressures to raise profits and reduce costs would have led to a greater increase in productivity in the U.S." (2003)

Paul Krugman, Princeton economist and New York Times columnist:

"Technology is not a magic elixir. The Internet, mobile phones, and all those things are exciting and important, but those who count on them to solve all their problems are likely to be disappointed." (2000)

N. Gregory Mankiw, Harvard economist and current chairman of the Council of Economic Advisers:

"While the productivity speed-up is a fortuitous development, its importance should not be overstated." (2002)

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