Customer Reviews

Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think

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In September of 2000, Mandel released his first book "The Coming Internet Depression." Then, he stated that the Dot.com stocks were going to take a beating. In fact, the NASDAQ had already imploded in the first quarter of 2000. Mandel thought this event would have dire economic consequences for decades. However, we never experienced a "Depression." Instead we experienced the mildest recession on record. In other words, Mandel's judgment at the time was way too "Depressed." This time around, Mandel's judgment is way too "Exuberant."

Much of what Mandel says is correct. The U.S. economy remains the World's powerhouse of innovation. Our society is better at developing and implementing innovations. This is due to our being accepting of risk, our flexible labor markets, our entrepreneurship climate, and our capital markets for financing innovation being unparalleled. So far, Mandel is right.

He continues his case along the "New Economy" theory, whereby our unprecedented level of innovation will have long lived benefit including superior labor productivity and economic growth for decades to come. This is correct, and is a truism by now. This theory is seventy years old, as first stated by Joseph Schumpeter, an Austrian economist who passed away in 1950. His brilliant concept was "creative destruction." This is where new technologies displace jobs, but replaces these by higher value added ones. Mandel also believes that our economic sustainable economic growth rate is much higher than we have historically thought. Well, Alan Greenspan has said the same thing for years, and has actually implemented his vision with his lacks monetary policy. Thus, in terms of technology and economic growth much of what Mandel says is true. But, there is no new material here.

So, where does Mandel go astray? Mandel's analysis has overlooked the combination of demographic forces (the aging of the Baby boomers) and their staggering related fiscal costs (Social Security and Medicare). If you think of the Federal Government as an insurance company with predictable claims liabilities; this insurer is insolvent. The retirement benefit claims (Social Security and Medicare benefits) the elderly have against this insurer way exceed its premium earned (social security taxes) and its reserves (Social Security trust fund). This gap on a net present value basis, as disclosed in the Social Security and Medicare trustees' reports, amounts to $72 trillion!

What are the implications of this $72 trillion? It means that a huge portion of capital will be necessary to support Social Security and Medicare benefits of U.S. citizen. This will cause:
a) A dwindling of capital available for more productive use such as financing R&D;
b)A huge rise in demand for money, which will increase its cost (rates). Thus, rates will go up. This will slow the rate of investment, capital formation, labor productivity, and economic growth.
c)An increase in the Government debt level to potentially unsustainable level.

This is a huge issue Mandel has underestimated. The concept that technological innovation can bail us out of this fiscal crisis is utopic. Every serious economist of either side of the aisle knows that. Mandel, instead chooses to criticize them all for being pessimistic. By doing so, he looses all credibility.

For excellent fiscal analysis, I recommend Laurence Kotlikoff's "The Coming Generational Storm" and Robert Stowe England "Global Aging and Financial Markets" and "The Fiscal Challenge of an Aging Industrial World." Also, Robert Rubin "In an Uncertain World" and Paul Krugman's "The Great Unraveling" are also very interesting on economic and fiscal issues. Joseph Stiglitz "The Roaring Nineties" is a good piece of economics revisionism. Finally, Roger Alcaly's "The New Economy" is a better analysis on the history and prospect of technological innovation.

This is a book where I agree with the main premise, but dislike many of the conclusions as well as the delivery. The main premise is that the periods of great technological change are times of great economic growth, which is something that is very hard to disagree with. From this, the author argues that all policies should favor the development of new technologies and takes a few shots at the people he thinks are opposed to such policies. Unfortunately, his arguments are shallow and unclear.
First and foremost, he neglects history. The onset of the industrial revolution was an era of great technological advancement and led to a dramatic increase in wealth. However, we cannot forget many of the consequences of this advancement. In England, it led to rapid loss of their forests and in the industrial regions, the air was so dirty from the smokestacks that people could barely see. I remember reading of an instance where a lengthy weather pattern that kept the pollution in an English city led to thousands of deaths. There is also a classic case in the United States where a river was so polluted that it actually caught fire. Therefore, some of those he classifies as enemies of growth are asking the very important questions that need to be asked concerning the consequences of technological improvements.
Mandel also derides those who preach against MASSIVE federal budget deficits. He quotes former secretary of commerce Peter Peterson, who said in 2003 "When such deficits are incurred in order to fund a rising transfer from young to old, they also constitute an injustice against further generations." Mandel's next sentence is "This is the language of morality, rather than economics. From this perspective, taking on debt is wrong because it reflects profligacy and wastefulness, and shows that the government is out of control." It is immoral to saddle the next generation with an enormous debt, so Mandel's statement is inappropriate in that area. I have listened to Pete Peterson argue against massive budget deficits for two decades and his point has always been in opposition to massive deficits that require large expenditures for interest payments and take capital away from the free markets, where it would be the most efficiently utilized.
Mandel then does a little bashing of former Senator William Proxmire, who regularly gave out Golden Fleece Awards for what he considered outrageous government spending. The classic example of the $600 toilet seat is mentioned. Mandel then states, "Unfortunately, this antiwaste, antidebt mind-set is inimical to innovation, which inevitably requires going down a lot of different dead-end roads before finding success. . . From the perspective of a deficit hawk, exuberant growth is intensely disturbing." This is simply not true, rapid economic growth does not disturb the deficit hawks, in fact they welcome it. What disturbs them is the unarguable fact that government spending is inherently wasteful. Mandel seems to believe that the only way new technologies develop is by throwing enormous amounts of money at them. The dot-com bubble and burst shows that this is nonsense. The Internet companies that survived the implosion were almost exclusively those that spent well within their means and were fairly conservative in their business plans. Also, many of the new technologies that are so highly praised in the book were developed on minimal budgets.
This book is little more than a collection of arguments in favor of massive federal budget deficits, cloaked in a nebulous mantra of "exuberant growth." I found very few of the arguments convincing, in many cases they deal with peoples beliefs taken out of context and inaccurately. To sum them up, his point is that if we are courageous enough to accept the right amount of debt, then enough new technologies will be developed to grow the economy into surplus. Mandel presents no conclusive evidence in support of this thesis, and extraordinary claims require extraordinary evidence. I was also unimpressed with the subtitle of the book, as quite frankly he silences no one and while many people will raise legitimate concerns, few are really enemies of economic growth.

The author anticipates his naysayers. He is, after all, urging a kind of attitude towards rapid and continued growth that goes beyond current expectations, models, and infrastructure. He sees the boom and bubble of the nineties as a good thing and something more than something that burst from corruption and accounting malfeasance.

He comes up with an idea he calls a pulsating market. Mandel thinks we out to embrace the booms and their busts and thinks that the downside can be minimized while more of the upside can be captured on a permanent basis. He spends much of the book talking about areas for economic expansion that might provide opportunities for innovation and rapid economic growth. These include bio-medical, space, energy, telecom, and nanotechnology. I say, GOOD LUCK!

I cannot buy into the author's premise that the possibility of a new boom means that all we need to do is correct our attitude to make it so. The real world is not a sick Tinkerbell waiting for us to believe. Yes, there is a component of attitude and mass psychology. But there is more to the story than he really explains in the book. The railroads did speed the continental expansion, but a great many people lost a great deal of money (and a few made fortunes).

However, I do agree with him that government is used by those who benefit from the current infrastructure in order to suppress change and competition. Politicians and interested parities argue against innovation in the name of protecting jobs, keeping prices stable, and so forth. So, we could do more to promote growth by freeing the economy more. Yes, there would be more "creative destruction" to accompany the creative growth. But the artificial stability we have tried to enforce for decades only results in larger shocks and collapses. I prefer the more fluid and incremental (but more frequent) changes in a vibrant economy.

Mandel is not saying that his views would be unalloyed happiness for all. He is saying that more growth is achievable and much of what is holding us back is our low level of expectation and fear. While I don't agree with the picture he paints of the upside, I do agree with him that we should step forward with confidence and let things run more freely.

And I do agree with him that we need to make drastic changes in our educational establishment so the Education Bubble we have enjoyed for decades can continue to thrive (I don't really think it is a bubble, though). Our education establishment not only shows signs of decay, but of contributing negative effects to the economy. This cannot be allowed to stand, not matter the political power of those who want things to continue down the current deadly path.

This thoughtful and passionate book by Business Week's Chief Economist aims to reshape the U.S. political debate about economic policy. Its central concern is to keep the U.S. economy on a path of "exuberant growth," led by innovation and technology. As Mandel reminds us, from one generation to the next, the prosperity of a nation depends on the rate of growth of its economy. He identifies two unique advantages of the United States in achieving rapid growth: a deep bench of scientific and engineering professionals to identify and commercialize technological breakthroughs, and a venture capital industry that will fund promising new technologies and products. But exuberant, technology-led growth comes at a cost, as it is accompanied by instability in financial markets and the real economy. Mandel worries that too many in public life - economists as well as politicians - see that instability solely as a problem without noticing that it is the natural byproduct of innovation and rapid growth. Taming financial and economic instability, he fears, would condemn the economy to stagnation. He calls on policy-makers instead to embrace exuberant growth by subsidizing science education and R&D, protecting investor confidence in financial markets through increased corporate financial disclosure, and ameliorating the costs of instability with a stronger social safety net. Mandel embraces a cause well worth fighting for, grounds his argument in an insightful analysis of the 21st Century U.S. economy, and provides a detailed policy road map for exuberant growth advocates.

Mandel's thesis is that economic progress and technological innovation are inextricably linked and the U.S. is uniquely positioned to take advantage of it. Like many good ideas the link seems intuitive, but as Mandel shows, many respected economists are skeptical of the contribution of technology to growth. This book clearly defines its case and argues forcefully for a change in the prevailing wisdom.

Mandel distinguishes "exuberant growth" exemplified by the internet boom of the last decade from the "cautious" growth of the U.S. in the 1970's or Europe and Japan today. Cautious growth, "suggestion box" growth, is marked by an emphasis on personal savings, fiscal conservatism, and gradualism. This is "capital fundamentalism". But there is little evidence to show that a high savings and investment rate without the jumpstart of technological discovery yields much growth. High savings rates in Japan and Europe have not placed these economies in the vanguard of economic progress. Nor has our historically low savings rate stalled our leadership.

Exuberant growth in the U.S. economy is supported by our "high performance" financial markets. The efficient way in which huge sums of capital are directed to new ideas by venture capital firms and the high-yield (junk) bond market make it possible for breakaway developments to bubble up through the economy. Stock options, maligned for their high profile abuse, serve an important funadmental role by securing the allegiance of valuable wage earners and making them partners in a risky enterprise.

A "hot" economy is a creative one fostering new technologies and economic progress. It is also a risky economy "pulsating" with the flow of capital to the Next Big Thing which may in the end be nothing more than a bubble. The internet has proven to be a disruptive innovation (Clayton Christensen's evocative phrase) creating jobs and wealth. Our efforts in Space and nuclear power have have been less successful. Areas that Mandel lists for possible breakthroughs include biotechnology, energy (e.g. fuel cells), wireless communications, and nanotechnology.

High octane economies make for risky markets. Mandel urges greater corporate transparency and multi-year income tax averaging to soften the tax burden of boom years and to cushion the lean ones. Implicit in all this is the need for a strong commitment to research and development in promising technologies.

Without technological innovation job markets stagnate, skill sets become commonplace and vulnerable to the cheapest provider (e.g. "offshoring"). Exuberant growth is not assured. Mandel is not shy about naming the economists he sees impeding the necessary support for technological initiatives that foster growth. For Mandel their blind spot is "the single biggest failure" of modern economics. This is a book intended to stimulate vigorous debate.

The basic idea of this book is that to bring prosperity we should support increased spending on research, and not worry about the federal deficit. Mandel argues that economic growth comes from technological change, and that we should embrace that. There are many problems here. First, how should economic growth be defined and measured? Mandel admits this is a problem, but he never follows up. Mandel misses the fact that GDP (the usual measure for economic growth) is a statistic so inaccurate that concluding anything at all from its increases is nearly ridiculous. For example, GDP doesn't correct for costs of pollution or drawdown of natural resources. More accurate economic measures, such as the Index of Sustainable Economic Welfare (ISEW) show that there has been almost no economic growth since the 1970s. So much for the great boom that technology has brought in the recent past, which Mandel makes so much of.
Mandel mentions several possible technologies as candidates for the Next Big Thing. In my opinion, Mandel wildly exaggerates the chances of success for these. I think that if our economy has reached the point where only a huge technological leap can save us, we're in trouble. We can't be certain that leap will come, or come when we need it. We'd be riding a tiger that we don't dare let go of.
Another problem Mandel misses is that due to widespread externalities, costs are not being transmitted correctly through the market. When we drive a car, we are not paying for the costs of climate change, or for the cost of building roads or parking lots. When we buy a computer, we're not paying for the hazardous waste its manufacture creates. Instead, those costs are being shoved off onto someone else. Externalities mean that the wrong technologies are being developed. If the externality problem isn't solved, new technologies are likely only to take the economy deeper into a hole.
What evidence is there that "economic growth" as Mandel describes it makes people happy or excited? Is the economic growth we're trying so hard to get really improving standards of living or making people better off? Most people I know are working a lot harder than their parents did, with less to show for it. Health care is stuck in a downward spiral of diminishing returns: vastly more money, health only slightly improved. The same could be said for many other parts of the economy.
As far as the deficit, I am just not convinced that it is unimportant. There are plenty of countries out there where fiscal irresponsibility has led to governmental collapse or civil war. Look at Argentina, for instance. I don't want that to happen here.
Mandel points out that economic growth would make it easier to do everything, from fighting poverty to saving Social Security. This is true, but it's like saying that a perpetual motion machine would solve our energy problems. It would, of course, except that it's impossible.
Mandel does have some good points. I agree that more support of research may be a good idea. However, we can't rely on it to save our civilization.
Mandel criticizes people like me as technophobic environmentalists. I'm not afraid of technology; but I see a lot of past technologies that haven't lived up to their billing. As far as I'm concerned, the technology that we really need to develop now is a more realistic economic science. America could be in the forefront of this.

As we head into the last stages of a presidential campaign where the economy is a top issue, this engaging book is a must-read. Mandel provides a robust critique of economic policy and lays out a road map for regaining exuberant growth. The key he argues lies in making "support for technology...central to economic policy," Yet, such a task is anything but easy. Mandel bemoans the fact that "unfortunately, technology rarely makes an appearance...in Washington economic policy discussions." As a result, while policy makers may talk about technology-driven growth, in Washington it's "the poor step-child, receiving a microscopic amount of time, energy and money from politicians." He's right.

Mandel goes on to "out" the enemies of exuberant growth, including naming names of economists who for all their claim to fame, actually neither understand nor support technologically-driven economic growth. Here's a Ph.D. economist saying that the emperor (the economics profession) has no clothes (they don't understand how the 21st century innovation economy works.

He goes on to lay out how its not just mainstream economists who don't get it, but that on "both on the left and the right, there is a profound discomfort with technological change." In spite of this, Mandel is optimistic about the future, given America's advantages in financial markets, entrepreneurship, and technology. Mandel got it right (albeit he was a bit premature) when he predicted "The Coming Internet Depression" (who besides Mandel had the foresight to buck conventional wisdom in early 2000 that the Internet economy was going to go through a big correction). I hope he has it right now when he predicts good economic times for the next decade at least. He lays out some interesting and useful policy proposals (although my only complaint with the book was that I wish he had gone into more detail on these) that could help spur growth in the future. All in all a great book and on top of that an enjoyable, "journalistic" read. I only hope economists take the time to read it.

This book makes a simple argument. First, economies need new technologies that are successful in order to grow more rapidly. Second, such more rapid growth benefits everyone if appropriate attention is paid to social and environmental risks of the new technology. Third, many people automatically oppose faster growth out of fear for the potential harm such growth can bring. Fourth, without a social consensus on seeking new technologies that can bring helpful innovations, there will be slower economic progress. Fifth, there seems to be enough potential for improvement in energy, nanotechnology, biotechnology, advanced forms of telecommunication (especially portable devices) and space, that one or more are likely to bear fruit if well pursued. Sixth, government needs to keep incentives in place to encourage investment in these ways and to create as large a Ph.D. workforce in advanced technologies as possible. Seventh, without such a focus, many college educated people will see their incomes either grow more slowly or decline in real terms.

There are some helpful sections in the book such as the evidence for the role that technological innovation seems to have played in the past. But most of the book seems to simply repeat the same argument in slightly different forms and from slightly different angles. As a result, I had a feeling like "Where's the beef?"

Economics is a poor platform to make this argument. Dr. Mandel tries to overcome that by pointing out the quality of life and "fun" aspects of faster technological growth. But in areas like medical research using biotechnology, he feels constrained to mostly look at the economic implications rather than the noneconomic benefits.

I also wondered how devoted people are in opposing technology. In the cases where opposition is strong (such as nuclear energy), the caution seems more than warranted. I felt like that part of the case was overstated.

He is also concerned that many more foreign students are getting technology Ph.D.'s in the United States. It's almost a protectionist sort of argument. U.S. based companies are full of Ph.D.'s who were born elsewhere, became educated here, and now live and work here.

I think he would have made better use of his time to write a magazine article with the evidence that he presents here. There isn't enough to justify a book based on his arguments.

But I like the book's title: Rational exuberance can be good for one and all.

The first reviewer stated "In fact, the NASDAQ had already imploded in the first quarter of 2000" before Mandel's first book "The Coming Internet Depression" was published. Actually the NASDAQ traded above 4000 the month before and then started the real implosion about the time that first book came out.

The reviewer also stated that there never was a depression. Mandel was predicting a depression in the Internet and Information Technology industries, not necessarily the entire economy. The subtitle of his book was "Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterwards". I know all about the I.T. industry depression...I lost my job in 2001 and I am still unemployed to this day.