Economist: telecom and tech will lead economic recovery, but how strongly?

Economist Michael Mandel says communications and information technology delivery are likely to be the industries leading the way to the next economic boom. However, innovation has not been flourishing over the past decade.

The sector most likely to drive economic growth in the next few years is the communications sector -- which includes telecom and information technology delivery. These industries could lead the way to a robust economic boom that will create new jobs, or could be derailed -- just as innovative industries were during the last decade.

Dr. Michael Mandel

That's the warning sounded by Michael Mandel, economist and fellow with Wharton's Mack Center for Technological Innovation School, in a paper published by the Progressive Policy Institute, which asserts that innovative industries in the United States have been unable to generate job growth through the decade of the 2000s:

"The job drought actually started well before the meltdown. In the last business cycle—running from 2000 to 2007—the private sector created 4.4 million net new jobs. But out of those, fully 74 percent were in the health/education sector."

In other words, Mandel says, most of the jobs were in sectors heavily supported by the government, versus the pure "private private sector" -- where much of the innovation happens:

"America’s great strength— its innovative sector—actually lost jobs during the 2000-2007 business cycle. This sector includes everything from aerospace to pharmaceuticals to telecommunications to software.  ...collectively, the innovative sector lost almost 700,000 jobs from 2000 to 2007, before the bust hit."

Mandel blames sweeping regulations such as the Sarbanes-Oxley Act, as well as the rise in offshoring practices, for the anemic job growth in this sector. With restrictions on stock option payouts, startups became more expensive to launch, he says.

The best hope for economic and job growth in the coming years, Mandel says, is in the broad communications sector – Internet companies, wireless telecom carriers and computer systems design. These are industries that continued to create jobs through the recent downturn, as the rest of the economy slid into double-digit unemployment. Mandel cites these sectors as “job leaders” that could spearhead a broader expansion of employment as the U.S. economy fully recovers from a financial meltdown and recession.

"I've gone back and looked at previous recessions, and history tells us that industries that add jobs in a recession are the job leaders in the recovery that follows," he said in a recent interview. "Industries that add jobs during a recession tend to grow twice as fast in recovery as the rest of the private sector." This innovative energy is strongest in the communications/IT sector.

Mandel's point is that the threat to this new growth now comes from heavy-handed regulation. In his paper, Mandel says there are proposed regulations over the communications sector, warning that “in the early stages of an innovation-driven boom, permissive regulatory policy is important to let new products and services take root.” Regulators should step in once growth is underway to keep tabs on the excesses, he advocates.

"There's a good chance the communications industry -- broadly defined as infrastructure and content and application development companies -- have enough dynamism to be at the core of the next boom," Mandel relates. However, he cautions, "innovation is tough to do. It's also fragile, and if you've got something that's working, why mess with it.  You've got something that's working now in an economy full of things that aren't working."

This post was originally published on Smartplanet.com

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