A Tale of Two Economies

September 27, 2011

Rich Cooper has a nice write-up of Electronic Arts CEO John Riccitello’s fascinating recent speech on technology, innovation, jobs, and disruptive enterprise. Of particular interest were the following remarks:

“I see an unfortunate gap between the economic performance of key parts of the tech sector, and the rest of our economy.  I see two economies on such radically different trajectories that it’s hard to believe they co-exist in the same country. In tech -- Silicon Valley, North Carolina, Austin and Boston – we are witnessing the most dynamic period of creative destruction and economic construction in history.   And that construction is creating new and very high paying jobs."

“Economic disruption is a constant everywhere….but today in tech, economic cycles turn, not over multiple years, but in months….large companies and fortunes are built, erased, and built again with frightening speed. In tech, the most impressive and profitable operations are constantly being destroyed…and replaced with even better businesses.  And these businesses are hiring a rapid pace.  Job openings exceed the number of qualified workers and wages are skyrocketing.  And companies with only a few years in operation are assigned multi-billion dollar valuations."

“Some say that tech is in another bubble.  They might be right.  If so, you can expect another bubble right behind it because tech is resilient.  Bubbles pop but the ideas and the investment dollars and demand for more engineers, quantitative marketers and business managers with a global perspective never stops. “Over to the rest of the American economy.  Cycles move slower….federal and state governments intervene…. and the disruption creates longer periods of pain across large regions and sectors.  Unemployment is now above nine percent and more Americans than ever before are on government assistance.”

Despite all the doom and gloom about the economy these days – the problems in Europe, the high rates of unemployment, the troubled housing market, and so on – Riccitello’s remarks provide a good reason for optimism.  Some of the most dynamic sectors of the American economy are thriving. The key is to unlock disruptive forces in other sectors.

But where? In a recent essay in the journal National Affairs, my colleague Arnold Kling and I discussed what we call The New Commanding Heights of the economy.  These include health care and education.  These are sectors where demand is increasing rapidly and there is room for robust job creation and innovation – provided dynamic market forces can be brought to bear. These are two areas where policymakers can focus attention and get real results. If education and health care can become more dynamic, more innovative, and more entrepreneurial, the job market and the broader American economy and will benefit.

It’s useful to think of the American economy not as a single entity, but as multiple economies operating at differing levels of dynamism and efficiency. Some of the sectors, such as tech, energy, and telecom, are experiencing rapid change, innovation, and growth.  Others are so sheltered from dynamic market forces that they are not advancing sufficiently rapidly.  This is where policymakers can make a genuine difference, provided they emphasize competition, technological disruption, and experimentation.