Moderator: Michael Mandel is the chief economist of BusinessWeek magazine and he is very much a forward thinker. In the pages of BusinessWeek in the 1990s, Michael was among the first writers and economists to identify the emergence of a new economy. And, then, he was equally prescient in predicting when the boom would go bust with his book in the year 2000 called The Coming Internet Depression.
He has a new book out now -- and, by the way, his books will be in the back of the room later, if you'd like him to sign it and you can purchase them, also. The book is called Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better than You Think. And, in it, Michael outlines what to expect from technology, growth and profits moving forward. So, please welcome Michael Mandel. [applause]
Michael Mandel: This is going to be a very different talk. I will not use any acronyms. I will not use the term "management space" or "vendor space" or "ecosystem." If I talk about space, what I mean is outer space, which maybe makes me seem a little bit like an alien in this environment, but that's okay.
I'm going to talk this morning where we've been, where we're going, and what the obstacles are. Here's the place where we want to start: Economic growth is driven by new technologies and its applications, always and in all places. So that we know that periods of rapid innovation are also periods of strong growth, we have new jobs and new industries.
Historically, half of productivity growth comes from new technology. It doesn't have very much to do with budget deficits. It doesn't have very much to do with tax rates. It doesn't have very much to do with a lot of the things that you hear the presidential candidates arguing about. At the end of the day, if you want real growth, you have to have new technologies and you have to have the will to use them.
This is a very important point. It really helps you think about what's happening in the economy now and the link between the economy and technology. When you have slow growth in technology, when you have a lack of innovation, then you have slow growth in the economy.
So that you go back to the 1970s, the microprocessor was invented in the early part of the 1970s; the first one was 1971, I think. But it really wasn't economically significant. Part of the reason why the 1970s was such a weak decade economically was because we had a technological drought and there was actually a lot that was written about that at that point.
Then, of course, we have the 1990s, when we had the internet, very exciting. Comes in, drives the stock market up, drives wages up, drives the job market, drives profits, does all sorts of terrific things. It's not a coincidence that you have a new technology in an era of an economic boom.
Then, of course, we have the bust. Now, this is actually a very important point. You have a boom and you have a bust. Are we better or worse off after this ten-year period is over? What's the answer?
Audience comment: Better.
Michael Mandel: Better. We're better on almost every single indicator. Compared to 1994, the stock market is up 150%. Compared to 1994, unemployment is actually lower. Compared to ten years ago, what's the size of tech spending compared to ten years ago? Business tech spending? Does anybody have any idea?
Female Speaker: Huge ...
Michael Mandel: It's more than double the size that it was ten years ago. So I sit in the audience and I listen to people ask, "What's happened to tech spending?" The answer is that, if you believe the government's figures (and I tend to believe the government's figures) that business spending on software and communication equipment and computers is just below the peak of the boom. That is to say that we've made back pretty much all of the losses from the bust. So here's the question: Why doesn't it feel like it?
Why doesn't it feel like it? And the answer is, is that when it comes to information technology, we are right now in an era of slow innovation. Not rapid innovation, but slow innovation.
That is to say, the 1990s is what an era of rapid innovation feels like where you have a very compelling set of new technology that comes out and forces people to adopt them. What we're in right now is a period where peopleare producing new products which are incremental gains from the ones that existed beforehand, incremental gains.
You pile a lot of incremental gains on top of each other, you can get someplace. It's not that these things are not real. But they are not explosive gains; they are not the gains that generate new businesses. They're not the innovations that generate new jobs. They're not the innovations that generate excitement. They're not the innovations that generate another boom in the economy.
But I'm going to look forward and ask the question, which is: Are we going to see slow and steady growth in the tech sector, in tech spending or are we at the beginning of another boom-and-bust cycle? This really determines what kind of -- it determines both the nature of what's going to happen in the tech sector, but also what's going to happen in the economy.
What I call slow and steady growth would be about 7 or 8% increase in spending per year, which is still faster than the overall economy, but not really very impressive and it doesn't generate a lot of excitement. It doesn't generate a lot of demand for new and sweeping applications. It doesn't generate a lot of jobs. When you've got this kind of slow growth, when you've got companies rolling out new products that are incremental gains, what you get is you get a lot of outsourcing.
It's easy to outsource when things are not changing very fast. You're looking to cut costs, you're looking to shift jobs into places where they're cheaper and you can do that because the pace of technological change is not very quick. And that's really where we are at this moment.
So think of this -- this period is not a trough in terms of spending, it's a trough in terms of the pace of innovation.
The alternative is what I call "exuberant growth," which is driven by new technologies. And what I mean by "new technologies" is not necessarily web services, but new technologies are things that are quantum leaps beyond what we'd had before. The internet was such a technology. You go back, you see airplanes, you see television and so forth; these are all quantum leaps for exuberant growth.
If we have a new technological breakthrough, what you see is you get fast growth, you get a lot of new jobs. You get the boom we had in the 1990s.
I've made part of my career on making crazy forecasts that turned out to be true. In the middle of the 1990s, I talked about the new economy and I was beaten up by a lot of economists at that point and it turned out to be true. In 2000, I talked about the tech bust and I was beaten up by a lot of people who were in technology who said, "No, it couldn't possibly go bust."
But I'm going to go out on a limb now and make another forecast and say that, over the next five to ten years, that the U.S. will have another technology-driven boom. Like, in many ways, the one that we had in the 1990s. Technological revolutions, they generally come in waves, they don't come with a single big innovation. The internet is one thing, but we're going to get -- we are going to get further big jumps.
But there are two problems here. One problem is that, surprisingly, there's an awful lot of people these days who are uncomfortable with rapid technological change. For example, a lot of executives, corporate executives are kind of burnt out on change. They say, "Well, give me some cost savings. Don't give me big ideas, give me cost savings".
But there's also a lot of discomfort in the electorate, among politicians, among economists, surprisingly, with technological change. You can listen endlessly to what economists say about the economy without hearing a single whisper that what you need is another round of technological change. They talk about the budget deficits, etc., etc., but technology is off their radar screen.
And I'm not going to say very much about this now. I should just say, in the book lists some people, economists that I identify as enemies of growth, including several famous ones like Milton Friedman, Paul Krugman and Greg Mankiw, who's George Bush's chief economist.
This is something which is true on the Democrat and Republican side. And if you don't believe me, listen to Kerry and Bush's speeches and see how much they talk about new technology. And the answer is: Very little.
But equally important, when we're looking forward -- and this is where it's possible that I get into trouble here. We are not sure, at this point, I'm not sure, what is going to be the new technology that drives the next boom. It is true, technology is unpredictable.
I'm going to tell a very funny story, which -- when you hear it, you'll understand the point. Cisco. Cisco is, obviously, one of the great companies of our era. It's a great company if you work there. It was a great company if you were an investor in it (as long as you weren't an investor in 2000).
Cisco went public in early 1990. If I was to pick up the pages of BusinessWeek, Fortune, Forbes, The Wall Street Journal, The New York Times, the San Jose Mercury News, San Francisco Chronicle, any of the major publications in 1999 up to about two months before Cisco went public, do you know what I would have read about Cisco? Nothing. Zero. Zero.
This company, which was making a profit, which was shipping products, did not show up on the radar screen at all. This is very important. The lesson here -- and, incidentally, neither did eBay, before it went public. The lesson right here actually is that there's a lot of things going on beneath the surface that you don't see right now.
So if we went ahead and we looked at what's going to be the technology that drives the next boom. Let me say, first, what it's not going to be. And it will not be enterprise software; I'm sorry, but it's true. For exactly the reason that the fellow mentioned before, which is that most of the gains have come out of the enterprise software. Yes, you can get more and more gains; we haven't exhausted the gains. But we've -- we're into the slow and cautious growth period. You don't get the free lunch here; you have to fight for every inch. So that's not going to drive the boom.
Now, what could drive the boom?
Well, if you look in the information technology sphere, one thing that could drive the boom is telecom, wireless, all the associated technologies. Because the thing is, it's almost reached the point of ubiquity. It's almost reached the point where you can start to see connections between things, where you can do things that you couldn't do before.
It may turn out that we turn the next corner, despite the struggles that telecom companies have had. It may turn out that we turned the next corner and it turns out that the unwired world really is the next big thing. I give that, in terms of odds, roughly a 20% chance.
Now, alternatively, the next big thing could come out of outside of information technology, in another area, and this is where I'm coming off the tracks here for what this conference is about, but what the hell. I'm going to do it, anyhow. And I'm going to give two possibilities and then I'm actually going to open this up for questions.
One possibility is biotech. If you think about timing, the first microprocessor was 1971. By the 1980s, companies were spending a lot on information technology, but not getting a payoff; that was the productivity paradox time. The big payoff to information technology in the microprocessor didn't come 'til the mid-90s, roughly 25 years.
Biotech is about ten years behind information technology; the first biotech drug was 1982. By that timing, I would expect that the real gains from biotech in term of medical care, in terms of medical costs is going to start coming towards the end of the decade. If we get to the point where biotech starts actually cutting healthcare costs rather than increasing it, we will have a tremendous boom there that will rival the size of the internet, because healthcare is a much bigger part of the economy than information technology ever was.
The other thing -- and I actually talk about a bunch of different technologies in the book, but I'm going to give one more one. The other possibility is energy.
Let me just make a point that may or may not be obvious to you. What we are using today is we are using energy technologies that are old. Old. Old. Okay? The internal combustion engine was invented, when?
Male Speaker: 1890s?
Michael Mandel: 1860s. And it looked roughly the same as the one we have now. Electricity, the first commercial electric power plant was the 1880s. Petroleum is an industry that basically dates from the 1920s. Gas turbines was the 1950s. Nuclear -- you know, I hesitate to mention nuclear. Nuclear is an example of the great failed technology of our time; it should have been the big energy breakthrough, but it turned out not to be.
We, as a society, are incredibly ripe for a new energy technology to come through, whether or not it turns out that solar becomes economic -- becomes an economical competitor. And part of the reason why I mention the Cisco example is that there's a bunch of companies out there, small little companies that are working on solar technologies that could be much cheaper. I have no idea which one of them are going to work, but they could. Or fuel cells or something else, but, right now, at this point, this country, this economy is incredibly ripe for one and, if we get one, it will trigger off a boom of humongous proportions.
So I'm going to sum up right here before I take questions.
I am a glass-is-more-than-half-full guy these days. I think that the future of the U.S. economy is very bright. I think the future of the technology sector is very bright. The real question is: Are we going to see the slow and steady growth, is it a more mature industry, or are we going to see a return back to the boom-and-bust days? And it really depends on whether or not we get another round of breakthroughs.
So let me stop here and take questions. And I will take questions on almost anything. Yes?
Male Speaker: A couple of things. One is: When you characterize a government or Bush and Kerry not really talking about technology, on one level, isn't that good news? That maybe government shouldn't be talking about ...
Michael Mandel: Let me answer that question right away. Energy R&D, government-funded energy R&D has collapsed over the last ten years. Collapsed. And Bush's latest budget --I take a very nonpartisan negative view on this because Clinton actually did this, too--Bush's latest budget actually calls for a cut in the real value of government-funded R&D over the next five years.
The way that the world works is that the government has to fund two things. It has to fund the front of the R&D process and it has to fund science and engineering education and it's abdicated both of these responsibilities.
So what I would actually like to see from politicians is partly more money, but I actually want to just see more attention devoted rhetorically to innovation as a driving force. More attention devoted rhetorically, more speeches done on the role of technology and change in this society. Because, frankly, the biggest thing that I'm scared about is people going into their shell, like the corporate executives did in the last couple of years and say, "You know, I want something safe. I'd rather take the safe ROI and move my stuff over to India and China rather than doing something a little bit riskier."
Male Speaker: Appreciate you mentioning other areas outside of core IT, biotech, energy and so on because I have to remind myself that I have a very internet focus, but, nevertheless, I'm interested in one area that you didn't mention. I have a belief that the startup of e commerce B-to-C, shopping online, transacting online, we haven't even scratched the surface of that yet. And I also believe that enabling technologies for all countries and all citizens is just around the corner so that this can really take off.
Michael Mandel: You know, I'm going to make a statement and I really, really, really believe this, okay? Which is that technology is unpredictable. Nothing in this world tells me that that is not true.
In fact, the only -- the biggest surprise of the last 25 years is how long Moore's law lasted. Nothing else has ever lasted that long when it comes to technology.
So you could, in fact, be true. It could, in fact, turn out that the shift to e-commerce and the enabling technologies around the world could be the next big boom. That, in fact, the dot-coms were on the right track; they were just too early. That may, in fact, turn out to be true.
I kind of view the end of the 1990s as a referendum on that question. And that what we learned was that e commerce was much more about logistics, moving things around than it was about information. And I would actually say that the economics of that are only going to change when you have a new energy technology that changes the economics of transportation. My view: I could be wrong on that. I mean, I'll go -- start with the unpredictability.
Female Speaker: Where do you come down on the comparative advantage argument for outsourcing?
Michael Mandel: Here's the thing. We always have outsourcing. The outsourcing is always flowing out. This is what I think about the U.S. comparative advantage versus China and follow me on this.
In terms of cost of capital, we have no competitive advantage. China's running big surpluses; they've got lots of free money at this point. In terms of educated workers, there's been this amazing ramp-up in China and India, actually, of educated workers where, ten years ago, the U.S. really stood out; it's not true any more.
Where the U.S. shines still is in two areas. One is in innovation and the other is in its financial system and the ability of its financial system to both fund innovation and also survive the ups and downs of financial markets. On the innovation side, it's very easy to outsource when you're not having innovation. When you're having more rapid innovation, it becomes much more difficult. You're creating new stuff; you need to have it close by.
In terms of the financial markets, China is going through a boom period. Everything looks easy in a boom period, always. What China does not have, it does not have a functioning financial system. It also does not have a political system which has been tested in its ability to deal with the downside of a financial system collapse, okay? A bust.
The real strength of the U.S. actually comes through the latest boom-and-bust cycle. We came through this pretty easy. The stock market kept functioning, the loan -- the mortgage market kept functioning; even the junk bond market kept functioning. The only thing that closed down, really, was the VC market and the IPOs; everything else kept functioning.
Some point over the next five years and maybe sooner than that, what will happen in China is that they will go through -- they will overheat and go through a financial bust. When you go through a financial bust, you need the government to step in to fix things. The problem is, is that China still has a Communist government. We forget this. It's true. And they have a commitment to continue to fund the state-owned banks and the state-owned businesses.
I think that, when this comes, it is going to provoke an enormous political and economic crisis in China. It will become much less attractive as a place for outsourcing. This problem, this outsourcing fear is -- you know, five years from now, the question we're going to be asked is some variant of "Who lost China?" or "Who let it get that bad?" Right?
This may sound silly, but this is the place where I was with the U.S. at the end of 1999 -- beginning of 2000 and I was talking about the coming bust and nobody really wanted to hear it. Everybody likes to project straight-line projections out into the future. This is one that you can take to the bank: They are overheated. They are overextended. They are putting up buildings, they are making loans for which there is no possibility there will be any payback.
They have a political system which is completely untested in doing what is necessary to do when you get into financial trouble. You have to shore up the financial system and you have to close down the stuff that's losing money. That's what we did at the end of the '80s with the S&L crisis. That's what Japan did not do in the 1990s and they got stuck in a long, long stagnation.
And if you remember back -- I'm cursed with a long memory -- at the end of the 1980s, we were talking about the Japanese threat the same way that we talk about outsourcing now. And that they were going to eat our lunch forever. Well, the strength of the Japanese economy, the manufacturing sector, has never disappeared. What gave them problems was their financial sector and the ability of their political sector to make the hard decisions.
China's got that problem. India has that problem. We don't have that problem. As much as we badmouth, as much as badmouth Washington and the political system and everything else, there's one thing that the U.S. has figured out how to do is we've figured out how to run a capitalist financial system through booms and busts without anything more than a little crockery being broken. And if you think that that's a small thing, you just look back at the history of capitalist societies and you realize that not only is not the small thing, but it's a really big thing.
If there's two things that you need to do to run an economy right, one is you foster technology innovation and the other is, when financial systems get into trouble, you run 'em in a way that the world doesn't collapse.
Male Speaker: In the early 1990s, the Cold War ended and we went into a period of boom. A few years ago, there was another war started and we went into a period of bust.
Michael Mandel: Very interesting question. Historically speaking, peripheral wars don't have very much of an effect on the economy. I'm not talking about terrorists attack the U.S. The fact is, is that part of the reason why we've been able to sustain fighting the Iraq war the way we have without allies is because the economy is much, much bigger than anybody ever expected it to be at this point because of the boom.
Peripheral wars, wars fought elsewhere, even one as nasty as this one, I think, are not really all that much of an issue. Remember, the Vietnam War coincided with an area of very great economic vigor.
Any more questions? Anybody wants to argue with me about enterprise software? No, I don't think so.
Let me just do a closing remark. Periods of rapid technological change, it gets much more confusing, but there's a lot more good opportunities, if you're awake and alert for them. And, since I think that we're moving into another period of rapid technological change, a period of rational exuberance, I would advise you to all stay alert.