Slow-growth world

Posted by: Michael Mandel on October 17

From my story this week:

The bursting of the credit bubble suggests that the U.S. and global economies have a growth problem as well as a debt problem. According to the official numbers, economic growth in the U.S. has averaged 2.7% over the past 10 years. But by BusinessWeek’s calculation, U.S. consumers have run up about $3 trillion in excess borrowing and spending over the same period—consumption that was not justified by income growth. Without that boost, which translated into new homes, cars, furniture, clothing, and the like, U.S. economic growth would have come in considerably lower. The global boom, too, was artificially fueled by out-of-control borrowing by consumers and businesses.


Can the U.S. and global economies get off the slow-growth track? Yes, but it won’t be easy. One key is that U.S. companies have to pay more attention to sustaining productivity growth and innovation at home rather than resorting to outsourcing as their main source of cost savings. That would boost wages and incomes for U.S. workers and reduce the need for the U.S. to take on huge debts to pay for foreign-made goods.

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Reader Comments


October 17, 2008 01:21 PM


No more need to be said....


October 17, 2008 01:56 PM

So Michael, are you giving up on your thesis from your 2004 book? Is the future no longer 'better than you think'?

Is technology overrated?


October 17, 2008 02:54 PM


I would like to add...

Very interesting and clearly written article and post here on the blog, but, honestly, don't you think this sounds a little bit like the discover of hot water??
I mean, many many people have been talking for years about the unsustainable level of consumption and borrowing unrelated to real income growth and somewhat misleading productivity numbers.
And we are not talking about only in the media, financial industry, academia and the "educated class" in general.
I remember very well a casual discussion I had one Saturday morning several years ago with my car repair mechanic during my service, he was talking to me about the house of cards of overborrowing and "where the good jobs are to sustain such spending"....he said, I still can recall the exact words, "someone is going to fold at some point and the entire thing will come down"...
But when someone tried to raise some red flags, the permabulls and many know-it-all-everything-is-sunny economists dismissed such worries as lunatic and/or ignorant, apparently "we didn't get it" and the US could go on like this forever, "we think, let them sweat" attitude, the "dark matter" of the economy.....I think it changed color at the is the "brown matter" nowdays.....


You said in your article:

"When the U.S. government undertakes fiscal stimulus measures, as it inevitably will, the money should be directed toward funding infrastructure, education, and innovation rather than consumer spending:

So you agree with me ,as I posted on your blog long time ago, that sending checks to people in the mail to spend it on mostly imported goods is futile (or even make the problem worse) and, at the most, can be a palliative in the very short term.

Mike Mandel

October 17, 2008 04:24 PM


My main thesis over the years has been technologically-driven growth brings high returns and high variability. So my three books had the title:

The High-Risk Society (1996)
The Coming Internet Depression (2000)
Rational Exuberance (2004)

The mistake I made with the last book--which I didn't make with the previous two--was to understate the risk. In this case, the returns from biotech and nanotech were delayed longer than expected.

I am going to make a long post, hopefully within the next couple of days, restating my basic thesis in the current context.


October 17, 2008 07:47 PM

I became a fan of yours after reading 'The Coming Internet Depression'. I was amazed at how many details of what you wrote came through.

That is why I was delighted both when you started this blog and wrote the 2004 book.

However, when the 2001-03 Internet depression ended a bit quicker than some had expected, mostly through over-stimulus, there was a lingering suspicion that the second half of the correction was merely deferred.

It appears that is what we are seeing now.

I still think that the technology-driven gains thesis is valid, and has been happening, but that most of the benefits are accruing to emerging markets, simply because they were so much further behind and technology made wage arbitrage easy. US college grad wages have been flat since 2000, but in India and China, the same group has seen a 100% real wage gain in 8 years.

Also, world GDP is still going to grow at 3% a year, down from 5% a year. So there is still 3% *growth* in this recession.

So at a full WW level, the growth you were talking about IS happening. I think the only point you missed is that the gains would serve to narrow the gap between poorer countries and OECD countries, for a decade or two at least.

So I think you were certainly right on a WW level, you just overestimated how much of the WW growth would happen in the US.

Thus, I think the US will have slow GDP growth until China's GDP per capita becomes about half that of the OECD average (via both GDP growth and currency appreciation). This will take until 2015-2017.

So US wages won't rise until then. This is bad news for pampered Americans, but is ultimately good news for humanity as a whole (and for America post-2017).

For countries poorer than China, they will still be poor in 2017, but the ratio of rich-to-poor won't be as lopsided as China will be on the other side. China will join the US and EU in outsourcing to, say, Bangladesh and Ethiopia.

Mike Reardon

October 18, 2008 01:56 AM

Housing was inflated as a series of orderly waves, even the extra refinancing that went with this housings wealth effect was not totally outside the heated activity of the whole economy over this same time period. But everyone has left the rest of the economy safely on the sidelines and not really acknowledging leveraged corporate debt instruments outside housing. In this discussion everything outside housing and consumer debt has been taken off the table in this event. It is all missing the whole other economy that contributed to these economy’s issues.

Yes housing was not sustainable without wage support and was fueled by speculation and bad lending practices but it is not the single issue that caused the worldwide credit crunch in financial institutions. And consumers debt beyond reason may now be a fact but the real issue is the trillions in over leveraged corporate debt instruments unregulated beyond the ability to settle with the present change in events. They are offering a solutions to try and re-leverage the financial markets but its still supposed to be one centered in housing.

Housing foreclosures should be suspended with an orderly administrative solution for every single home and not be the big spend. Housing is not the problem now and it will only be a smaller part of the solution going forward.

You can add hedge funds plundered by profit returns to investors and fund managers and excess corporate profits without generating true competition. Those returns found even greater returns outside domestic reinvestment. Bringing full blame into focus means not limiting this discussion to housing and consumer debt only, it needs to have the whole body of debt that will not pass a transparency test. That needs to be de-leveraged in an orderly manner.


October 20, 2008 10:55 AM

I can't help but think how wrong you are here and how much you have forgotten since taking your first economics class.
Sure, buying American made sounds like a good idea in theory, but I think that most well-educated people know that this is not the way to get the most utility. It's better for company's to export to get cheaper labor, it's better for consumers to get cheaper goods. What is missing here is that the US hasn't created jobs to fill the voids created by globalization. I can think of a really easy way to do that- start an overhaul of our infrastructure, our energy companies, our education.
Sorry but stopping globalization isn't going to stop all the problems of our economy-- listed here:
Frankly, I expected more from your on this issue.


October 20, 2008 02:14 PM


Mike Mandell did suggest in his article major re-investments in infrastructure, energy, etc...

The following is taken from page #4

"The other half of the equation: When the U.S. government undertakes fiscal stimulus measures, as it inevitably will, the money should be directed toward funding infrastructure, education, and innovation rather than consumer spending. Politically, maintaining a focus on investment and innovation in the U.S. may be almost as difficult as China opening up its service sector to international competition."

I think you should read it.

David Saphier

October 20, 2008 02:24 PM

I fully agree with your conclusion that the growth from 2002 to 2008 was based on debt and increased leverage. This is why I believe a return to the levels the stock market saw in October 2002 makes some sort of intuitive sense (and the recent lows are not far away.) (I wrote about his on my new blog The Market Bebop, on 10/10/2008.)

As you know we have also had a huge bubble in commodities. The interesting thing about commodities is that demand (consumption) can more or less be measured. The question I have, is what is the relationship between demand, GDP and price? Oil is the mostly obvious commodity to examine. How much does oil demand change with each 1% change in worldwide growth? And, how does that change in demand reflect in price (what is the beta or multiplier?) I think that would make an interesting story and provide some measure of speculation in the market.

Mike Mandel

October 20, 2008 03:41 PM

Hi Graham

I think that globalization hasn't worked out the way we expected. The theory doesn't actually guarantee that the U.S. is better off from the entry of China into the global market. In fact, it's pretty easy to construct hypothetical examples where our welfare falls. To put it a different way, theory suggests that the world's welfare goes up--but it doesn't guarantee that U.S. welfare goes up.


October 20, 2008 06:17 PM

"but it doesn't guarantee that U.S. welfare goes up. "

Indeed. In fact, the US is lucky that wages are still staying flat, and are not actually falling.

It is inevitable that worldwide wages have to converge for most knowledge-based professions. Even if there is not full parity, the 10X deltas that existed at the start of the decade were impossible to sustain.

So US college-grad wages will be flat at least until China's per-capita GDP is about half that of the OECD average. That is, until 2015-17.

Only professions that truly have a WW shortage will see rising wages.


October 20, 2008 06:21 PM

Technology was always going to be more useful in helping poorer regions catch up, rather than help wealthy countries get wealthier.

If a poor villager in India goes from having no telephone at all, to having a cell-phone, that is a larger jump in living standards than for an American to go from an iPhone 1.0 to an iPhone 2.0.

In other words, America needs big innovations to cause even small gains in wealth, while India and China can use small innovations to generate big gains, at this point.

This will continue until the wage-delta of knowledge-based workers somewhat converges worldwide.


October 20, 2008 11:46 PM

This does raise the question of whether protectionism may in fact be an adaptive mechanism allowing time for adjustments and accommodations to be made rather than an irrational reaction and obstacle to progress.

Brandon W

October 21, 2008 07:32 AM

" theory suggests that the world's welfare goes up--but it doesn't guarantee that U.S. welfare goes up."

Huh... whatever happened to a "rising tide lifts all boats"? Or was that just a convenient slogan, all along?


October 21, 2008 01:57 PM

World GDP growth is still around 3% a year even in this recession. By 2010, it will be back to 4.5% a year.

US corporate earnings will benefit from this, even if US GDP lags.

Mike Reardon

October 21, 2008 09:11 PM

Don’t dis globalization if your nation has not had a supportive tax policies to uphold domestic infrastructure investment. When you have globalization doing what it does, you need a industrial tax policy that directs investment into domestic infrastructure projects. Military Defense has remained firmly in place for the last 70 years supported by government investment and a supportive tax policy.

With supply side tax policy you get totally open reinvestment and spending without supporting any specific tax objective. The market sets any best returns for the money freed by a Supply Side tax cut. Gaining a housing bubble economy does not have to be a direct step from a supply side tax cut, but if state and local tax advantages also move investment that way, then a natural event does occurs.

Sustainable business investments and alterative energy are not going to come into place by themselves. They will need federal spending directed at a specific project and tax advantages as backstops for participation. Probability also tax offsets that are transferable for investments, a industrial policy that makes it work over other options.

I have edited all political names calling.

Alexander Shlepakov

October 24, 2008 11:17 AM

I see the Fed cutting rates to 4% by the end of the year. I worry that an economic rebound now raises the risks of a harder landing later, as the Fed overreacts to higher inflation by raising rates, ignoring the bomb shell that's still ready to explode as weakness in the housing market saps the willingness and capacity of U.S. households to borrow. Alexander Shlepakov

Joe Cushing

October 25, 2008 11:45 PM

Grahm and Mike,

Although the pay numbers might not show it in the past few years, I think the U.S. is better off from globalization. We are producing more today than at any time in history yet we are also importing more. Where is all this stuff going? Also there are immeasurable benefits to advancing society. How do you measure the benefits of new inventions, like an interactive blog that allows readers to converse with the author? What if the people who invented all this internet technology were busy working in factories that made socks or toys. Would we have the internet?

In the long run, wages will go up. We can't have productivity improvements for ever without increasing the standard of living. We are just in a transitional phase--a phase that is in its autumn. Already, it is cheaper to make some stuff in America than in China--stuff that was cheaper to make in China before.

Our economy does face great regulatory risk, however. That is the only negative I see going forward. It is a big one though.

Joe P.

October 27, 2008 05:09 PM

While the theory behind the derivatives market looked good on paper, it fell apart when exposed to stresses of the real world.

Same goes for globalization. On paper the theory looks good, but in practice it does not deliver what it promises.
Time for a re-think.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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