| Pessimistic narratives about the economic outlook may dominate the financial and academic press, but Americans actually have many reasons to be optimistic about the long-term view of the markets, a former Fed economist said on Thursday.
"Many people see the glass as half-empty. Really a pessimistic narrative has taken hold," Daniel Sichel said at the annual Economic Outlook Breakfast sponsored by Middlesex Savings Bank.
Sichel, currently a professor of economics at Wellesley College and formerly a senior associate director in the research and statistics division at the Federal Reserve Board in Washington, D.C., said that pessimistic narrative has focused particularly on the idea that "faltering innovation will not overcome headwinds." Or in other words, that there are no more gains to be had from the digital revolution, that this is as good as it’s going to get.
"But I want to persuade you there are some reasons for being optimistic," Sichel told the audience.
Of course, Sichel did not downplay the challenges still to come. For one thing, output per hour has still not increased to its pre-recession percentages. For another, the housing market has been slow to recover, driven partly by demographic changes, including slower household formation among younger generations. Market preferences have shifted toward rental housing, which tends to generate less economic activity.
And finally, income growth, after adjusting for inflation, has been relatively modest, Sichel said. That’s largely because job losses during the recession were heaviest in high- and mid-wage industries, while post-recession job gains have largely happened in low-wage industries.
But in spite of headwinds like slow labor force growth, immigration, education, fiscal challenges and cuts to research and development funding, Sichel set out to convince his audience that happier times are ahead of us.
Comparing the digital revolution to the first and second industrial revolution, Sichel said that delayed gains from innovations are typical and that there can be large transition costs associated with implementing those gains and new technologies.
Furthermore, underlying technologies are still improving rapidly and making waves in fields like health care and education. If things seem a little slow right now, put that down to a combination of long lag times and big transition costs.
"We’re not going to see tremendous progress [next year], but we’re going to see progress," Sichel said.
Massachusetts – and in particular, the Greater Boston area – may stand to see some gains in areas like software and robotics, health care and related sciences, education and financial services, he said.
Finally, he noted that a high level of pessimism is typical following an economic recession, and he expressed hope that younger generations might be a little bit more optimistic and will push for greater change than his own.
"If one looks at the historical record, the U.S. has met great challenges in the past," he said. "It’s never easy, it’s never pretty, but I don’t think the American character has changed that much."
