THE ECONOMIC OUTLOOK: Where are we now? Where are we going? Dan Sichel Professor of Economics Wellesley College Middlesex Bank Economic Outlook Breakfast October 30, 2014

Overview Where is the U.S. and Massachusetts economy today? Getting on track though still challenges What are the longer run prospects? Reasons to be optimistic How will those trends shape the Massachusetts economy?

It’s been a tough time Great Recession just getting into rear-view mirror

It’s been a tough time Great Recession just getting into rear-view mirror Market turmoil (S&P 500)

It’s been a tough time Great Recession just getting into rear-view mirror Market turmoil Concerns about Europe

It’s been a tough time When will the Federal Reserve raise interest rates?

Yet, Economy Getting Back on Track Employment recovering in U.S. and Mass.

Unemployment Rate Down

House Prices Recovering

But, Challenges Remain Housing recovering but below prior pace

Challenges Remain Inflation-adjusted wages continue to grow slowly

Challenges Remain Job losses were in higher-wage industries Job gains in lower-wage industries

Longer-Term Outlook Many see glass as half empty Pessimistic narrative has taken hold

The Pessimistic Narrative “The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014. “The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014. “After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

The Pessimistic Narrative “The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014. “The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014. “After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

The Pessimistic Narrative “The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life …” Financial Times, Oct 26, 2014. “The digital revolution has yet to fulfill its promise of higher productivity and better jobs.” Economist, Oct 4, 2014. “After Great Recession, Americans are unhappy, worried, and pessimistic.” Rutgers University study, Aug 28, 2014.

Pessimistic Narrative Has Different Versions My focus today: Faltering innovation will not overcome headwinds.

The Pessimistic Narrative Faltering innovation Headwinds: Slower growth in labor force Education Immigration Fiscal challenges Cuts in research and development

If Pessimistic Narrative is Right, Future is Gloomy Slow improvements in living standards Challenging climate for business, finance, politics, and expansion of opportunity

Recent Data Support Pessimistic Case New Normal? Note. Nonfarm business sector.

How Big a Deal are New Innovations? (3rd industrial revolution) Information and communication technologies Machine intelligence Advanced robotics Big data Massive connectivity And, in many other fields, like bio-tech

Gains from new technologies largely over. The Debate Gains from new technologies largely over. Big gains still to come.

As Big as Earlier Industrial Revolutions? 1st Industrial Revolution (mid 1700s to mid 1800s Steam engine, railroads Mechanization, specialization

As Big as Earlier Industrial Revolutions? 2nd Industrial Revolution (mid 1800s to late 1960s) Electricity, gas engines, cars, air travel Telegraph, telephones, radio, television Indoor plumbing, appliances Chemicals

3rd as Big as Earlier Industrial Revolutions? Pessimists: No, much smaller Optimists: Definitely more benefits to come

Forecasting technology is tough! “It’s tough to make predictions, especially about the future.” Yogi Berra

Forecasting technology is tough! “It’s tough to make predictions, especially about the future.” Yogi Berra “640 kilobytes ought to be enough for anyone.” Bill Gates, in defense of the first floppy disks

Forecasting technology is tough! “It’s tough to make predictions, especially about the future.” Yogi Berra “640 kilobytes ought to be enough for anyone.” Bill Gates, in defense of the first floppy disks “I think there is a world market for maybe five computers.” Thomas Watson, President of IBM, 1943.

That said, Reasons to be Optimistic Underlying technologies continue to advance at spectacular pace

That said, Reasons to be Optimistic Delayed gains typical for past innovations

Why Delay in Gains from New Technologies? Large transition costs Electricity Computers Driverless cars

Why Delay in Gains from New Technologies? Large transition costs Electricity Computers Driverless cars

Why Delay in Gains from New Technologies? Large transition costs Electricity Computers Driverless cars

Potential for Large Gains Still Ahead Technologies improving rapidly Long lags Potential for large future gains

Health care Electronic health records Big-data diagnoses

Education Online learning MOOCs Blended teaching Other models

Software Uber Zipcar Facebook Twitter

Robotics and Machine Learning

But, Headwinds Slowing labor force growth Education Immigration Fiscal challenges Research and development

Will U.S. meet these challenges? All but labor force are fixable. Easy to be cynical Yet, historically, U.S. has met great challenges in the past

Pessimism typical following economic stress John Maynard Keynes, 1930: “We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterized the nineteenth century is over….”

Will MetroWest Economy Improve in Coming Year? Significantly Same Slightly

Likely areas for gains in Massachusetts in areas with innovation Software, robotics, and machine learning Health care and related science Education Financial services

Conclusion Massachusetts and U.S. economy getting back on track. Despite pessimistic narrative that has taken hold … Reasons for optimism about longer-run outlook, though hurdles to overcome.

Questions?