WHAT'S THE EASIEST INNOVATIVE REVOLUTION TO FORCE?:

The US Economic Crisis -- Three Growth Scenarios:
The US financial crisis is a symptom, not a cause, of global problems. (Michael Mandel, 11/03/08, Der Spiegel)

The global boom of the past 10 years has been driven by three flows. First, multinational companies shipped technological knowledge and business know-how to countries such as China, India, and elsewhere in order to set up supply chains there. This "dark matter" is not picked up anywhere on the economic data, but it was absolutely essential for juicing up global growth. In return for this flow of knowledge, the industrialized world -- and especially the US -- got back a river of cheap goods and services. Finally, to pay for these imports, the US borrowed a steady stream of money from the rest of the world -- roughly $5 trillion worth since 2000.

But here's the question no one really worried about: How did this money get into the country? The federal government borrowed about $1.5 trillion directly from overseas. But most of the borrowing -- perhaps $3.5 trillion to $4 trillion worth -- flowed through Wall Street in the form of corporate bonds, equities, and exotic securities. Wall Street firms were the major intermediary between the rest of the world and US consumers. For example, firms would package subprime mortgages into a complex security and then sell big chunks to overseas buyers.

This flow of money, an essential part of the global boom, explains why Wall Street was so prosperous in recent years --and why it failed so suddenly. Bankers, hedge fund managers, and other Wall Street types would take their piece of the foreign money as it came into the US. They grew rich that way. But when it became clear that US consumers could no longer afford to carry the loans, the financial flows froze up, threatening the global boom.

Thus, the financial crisis is a symptom, not a cause. At root, this is a crisis of the entire global economy as it has developed over the past 10 years. [...]

The third scenario's innovative growth calls for the trade deficit to shrink because the U.S. produces more innovative goods and services at home and exports them. In the 1990s, in fact, economists projected that exports of high-tech products would rise in step with the expansion of trade. The problems in recent years have come because exports fell short of forecasts, not because imports rose too high. No one anticipated that production of advanced electronics and pharmaceuticals -- the crown jewels of American innovation -- would be so quickly moved offshore, undercutting US exports.

The innovative growth scenario benefits both the US and the rest of the world, because it gives the US something to sell. In order for it to happen, the enormous sums of research money already spent in areas such as biotech and nanotech have to start paying off in a big way. That means a breakthrough on the order of the semiconductor revolution -- say, bioengineered bacteria that munch cellulose and efficiently turn out ethanol. In addition, at least part of the associated production has to be kept in the US, rather than shipped overseas.

This third scenario won't be easy to achieve. But that's the one we should be aiming for. It gives us the best chance of a happy ending.

Which is why we need to crank gas taxes high enough to make new energy sources economically feasible.

Posted by Orrin Judd at November 3, 2008 7:20 AM