I still find many people who instinctively recoil when I talk about the innovation short fall as a prime cause of today’s economic problems. But see this interview with hedge-fund billionaire Peter Theil (hat tip to Arnold Kling)
My orthogonal take is that the whole thing happened because there was not enough technological innovation. It was not really the fault of the borrowers or the lenders; the problem was that everybody had tremendous expectations that the country was going to be a much wealthier place in 2010 than it was in 1995, and in fact there’s been a lot less progress. The future is fundamentally about technology in an advanced country — it’s about technological progress. So a credit crisis happens when the technological progress is not as good as people expected. That’s not the standard account of the last decades, but that’s the way I would outline it.
People were expecting house prices to go up 8 percent a year. That would be quite possible in a society where the GDP was growing tremendously and where there were tremendous gains in efficiency and technological innovation. But we’re not having that much innovation and, because of that, the housing bubble was unrealistic. It’s also possible that the housing bubble was very deeply linked to the tech bubble. The tech bubble was about extrapolating technological gains; it turned out that the gains didn’t materialize as quickly, or at all, and then people went back to housing and back to credit to get the 8 percent returns. But housing and credit still depend on an underlying society that is progressing, and that sort of progress was not actually happening. So, if the tech bubble was fake, then the housing bubble would almost certainly have to be fake. The real root of the problem is always technology.
Compare that to my 2009 cover story in BusinessWeek, Innovation Interrupted:
While Wall Street’s mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad.
See also my recent policy pieces for the Progressive Policy Institute, which link the innovation shortfall to the persistent job weakness (for example, here)
Added: I see that Tyler Cowen is about to come out with a minibook on the innovation shortfall, entitled The Great Stagnation. I didn’t know the book was coming–but the fact that Tyler dedicates the book to me won’t stop me from writing a positive review.