David Ignatius has an insightful column in Sunday’s Washington Post – Life in the Rehab Economy. He talked about the slower rate of growth we can expect in the future as we move away the over-leveraged debt based consumption boom of the bubble:
It’s an economy in rehab, you might say, working off the excesses and imbalances that created the crash of 2008. Savings rates will remain high, as people try to protect themselves and their families from another market collapse; the chronic trade imbalances of the past several decades will ease, as Americans reduce their consumption of everything, including foreign imports. It’s a post-binge economy, cautious and careful — with a lower tolerance for risk and correspondingly lower rewards.
He also talks about downside such a risk-averse economy:
The danger with this comfortable, slow-growth world was that it didn’t adequately reward innovation and risk-taking. And that’s the worry I have about our rehab economy. Without big incentives, will innovators come up with the world-changing ideas, and will capital markets be resilient enough to finance them?
It’s a good rule never to bet against America, and in the long run it’s a certainty that America will innovate, grow and prosper. But over the next few years, America is likely to have stubbornly high unemployment, rising interest rates and disappointing investment returns in many sectors.
I keep reminding myself that the rehab economy is good for us: Higher saving, less debt, lower imports, less risky financial behavior. But we should be honest about the drawbacks of this new paradigm and, where possible, ameliorate them.
I’m not sure I see the decline of an over-leveraged economy as an era of less innovation, however. In part, I disagree that we need “big incentives” such as we saw in recent years — which in any event came in the form of the huge payouts to the financial sector not to business innovators. After all, Bill Gates didn’t need an over inflated housing market to become a multi-billionaire. “Big incentives” can lead to bubbles — dot-com, housing, etc. What we need are steady incentives – such as those that took a company like Washington DC based Blackboard from an idea of a couple of guys about education software in 1997 to one with over $300 million in revenues — even through the dot-com bubble.
Second, I disagree because the culture has changed. Innovation is much more imbedded in company’s operating procedures. The chance of returning to the day’s of the “man in the gray flannel suit” as Ignatius mentions are rather slim.
Still, his warning about ensuring that innovation continues is timely. We need an innovation policy in this country. In December, we published an outline of such a policy with our Working Paper Crafting an Obama Innovation Policy. The recommendations of the paper still hold.
Chief among them was to re-establish the President’s Council on Innovation and Competitiveness (PCIC). PCIC was created by Section 1006 of the America COMPETES Act of 2007 as a mechanism to “develop a comprehensive agenda for strengthening the innovation and competitiveness capabilities of the Federal Government, State governments, academia, and the private sector in the United States.” The statutory Chair of the Council is the Secretary of Commerce and is made up of the heads of 16 departments and agencies (a nonexclusive list). However, the Council has never met. The Bush Administration relegated this responsibility to the Committee on Technology (CoT) of the National Science and Technology Committee (NSTC) in Office of Science and Technology Policy (OSTP) – which established it as a Subcommittee. Essentially, the issue of innovation and competitiveness was relegated to a subcommittee of a committee of a committee.
The Obama Administration should raise the issue of innovation and competitiveness back up to the Cabinet level where it belongs. That would an important first step in ensuring that the post-bubble economy is truly an Innovation Economy.