Innovation focus of economic plenary

 

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Coming out of the worst economic recession in 80 years, there was a subtle sense of urgency in the air as a panel of economic leaders discussed steps to spur economic growth at the inaugural New York Forum. The message from each of the panelists was clear; future economic prosperity depends upon strong innovation and dynamism for real job growth.

Even as the American economy emerges from the recession, a new norm is emerging to take the place of the rosy economic reality of the 1990s, said Edmund Phelps, Nobel Laureate in Economics and Director of the Center on Capitalism and Society.

“The public thinks that part of this return to normal is that innovation will continue and increase but this is all wrong,” Phelps said. “Evidence suggests that the U.S. economy faces a new normal that is markedly worse than what the public was accustomed to.”

The idea of a new normal was embraced by Leo Tilman, President of L.M. Tilman & Co.

“We have a new normal of lackluster growth, high unemployment, mediocre investments,” Tilman said. “This uncertainty is upon us. We have to think of ways to adapt.”

Each panelist agreed that while innovation in the United States is on a downward spiral, the U.S. is still a global leader in innovation across sectors. Phelps argued that Europe has been stagnant for more than a generation.

“It’s a global problem,” Phelps said. “Europe stopped innovating a long time ago. In Sweden, most of today’s top companies were around in the 1920s. The United States has been the exception. I worry now, I think in the past decade — there’s circumstantial evidence and direct evidence that the tendency to innovate — dynamism, is on the decline.”

Richard Robb, CEO of Christofferson Robb, said there were misperceptions about what actually spurs innovation. He said venture capitalists liked to suggest they were the main catalysts for innovation, but when you look at the statistics, their contribution was minimal.

Vikram Pandit, CEO of Citigroup, further said that innovation in the U.S. and Europe might begin to fall behind emerging markets that are home to more favorable business conditions.

“Emerging markets have less public debt, the price of capital is lower and there’s less policy uncertainty, and the cost of doing business is lower,” Pandit said. “There’s a virtuous circle going on there that we’d like to see here. We need to get moving, it’s no longer just about the U.S. and Europe.”

There was a general cry for less government participation in the private sector. “A year ago, business people said uncertainty in the market was freezing them in place,” Glen Hubbard, Dean of the Columbia University Graduate School of Business, said. “Now they say uncertainty in Washington is freezing them in place.”

The panelists agreed that the role of business in fostering innovation and dynamism is to loosen the purse strings and begin to lend money to the business sector, something it hasn’t done in a long time.

“The banks haven’t been lending — the capital’s not there,” Pandit said. “Over the last many years we created in this country a shadow banking system. Now, it’s a shadow of itself.”

From 2000 to 2006, stock market capitalization was nearly flat. Phelps said that the lack of innovation is nothing new.

“We had this lack of dynamism before the financial crisis,” Phelps said. “The rot was growing all this time, but we didn’t know it because it was masked by the housing bubble.”

When asked by a crowd member whether investment banks should be in charge of solving the financial crisis given their implied responsibility for creating it, Tilman called for careful consideration.

“If we accept as fact that we are in uncertain times, we can sit back and wait for things to change, or we can fundamentally change the way we handle our business.”