Well, Gates is not going to get any sympathy from me, and neither is Cisco Systems or any other part of the New Economy. What is the New Economy? It’s “smart appliances.” Oh, joy, our toaster can talk to our fridge, expressing such deep thoughts as “Leggo my Eggo.” The New Economy is the Internet, which puts all the fools on earth in close personal touch. Matt Drudge used to be a guy in LA who didn’t know from beans. Now those beans aren’t known from everywhere on the planet. The New Economy is www.matchedsocks.com. All I have to do is enter the bar code for the missing half of my hosiery pair and I’ll get a read-out—“caught under the agitator in the Maytag”—for a monthly fee. The guys who thought this up became paper billionaires at age twelve. How young are the high-tech moguls? There’s a sign on the door at most New York investment banks: NO SHIRT, NO SHOES, NO IPO.
The web is just a device by which bad ideas travel around the globe at the speed of light. And on April 17 and 18, they did. The same investment community that decided tech stocks were wildly overvalued on April 14 decided they were wildly undervalued on April 17. That is what’s significant about April 2000. NASDAQ crashes on Friday, and the next Monday NASDAQ has its highest point gain ever except for the point gain it has on Tuesday, which is even higher. We’ve entered a world of bungee valuations. We can’t even slide into a comfortable recession with stock prices in a reassuring decline because, while we’re going broke and losing our jobs, half the time the markets are up. Go figure. But don’t do your figuring on a computer—the whole high-tech field is obviously insane. And if you think people were angry during the Great Depression, wait and see how they feel when NASDAQ leaps to 10,000 while they’re standing in breadlines.
“Although,” said my wife, “it will be croissant lines, these days.”
If you ask me, the problem is nobody wanted to be the prick who burst this bubble. Nobody, that is, except me and every other journalist in the universe plus Alan Greenspan. The chairman of the Federal Reserve has serious concerns. He’s in charge of the nation’s money supply, and he’s worried that what the stock markets have been doing is, basically, printing a bunch of fake money with things like CISCO SYSTEMS STOCK CERTIFICATE printed on the front instead of FEDERAL RESERVE NOTE. Meanwhile, journalists just know that the Great Depression sold a lot of newspapers. Also we’re mad about buying Cisco Systems on March 27, 2000, and selling on April 14.
“The New Economy is like the Dutch tulip-bulb mania of the 1630s!” we journalists say in unison, with our usual brilliant individuality of mind. Hardly an op-ed piece about the New Economy gets to paragraph three without reference to the wild rise and fall of 370-year-old Netherlandish tuber prices. A book is already out on the subject, Tulipomania, by Mike Dash. And of course—what’s a mania if the maniacs aren’t in on it?—there’s a web site: www.bulb.com/historymyth/romp.html. Boning up on seventeenth-century flower crazes in Holland has become the journalism Year 2000 equivalent of listening to the Linda Tripp phone tapes.
“The New Economy is like the Dutch tulip-bulb mania of the 1630s!” I said to friends of mine who are economists and actually know something about these things.
“No,” they said, “it isn’t.” And I suppose, come to think of it, they had a point. Try streaming video on a tulip bulb or using it to store your income tax files. If my godson spent all night in his bedroom chatting with tulip bulbs, that would be a worry. Also, if you look up the history of the tulip craze, you’ll find it happened in the middle of an enormous expansion of the Dutch economy between the 1620s and the 1670s and that tulips didn’t much affect this expansion one way or the other. Bulb speculation was for the rubes and boobs—more Beanie Babies than Microsoft. Besides, just how much of our economic model do we want to base on people in wooden shoes with their fingers stuck in dikes?
Last spring I went to talk to William Niskanen, chairman of the Cato Institute think tank, PhD in economics from the University of Chicago, and acting chairman of the President’s Council of Economic Advisors eighteen years ago, when the U.S. boom began. “‘New Economy’ is a journalists’ term,” scolded Niskanen. He told me that what I was actually talking about was the “digital effect,” which is not something that Steve Jobs and Steve Wozniak were plugging dikes with in their garage.
The Internet is “flattening organizations,” said Niskanen. All those expensive middle-management types are being fired because nowadays the CEO of Taco Bell can be in direct communication with his employees simply by logging on and e-mailing the zitty kid behind the counter in Dayton: Time to nuke some more Chalupas.
The web means “fewer intermediaries between buyers and sellers,” said Niskanen. The guy in the horrible sport coat who rooked me on the car lot has been replaced by me, in virtual plaid, rooking myself electronically.
“The net,” said Niskanen, “is reducing the need for agglomeration,” this being what economists call getting up in the morning and going to work. Someday soon we’ll be able to convert all of America’s office parks into homeless shelters for automobile salesmen and Taco Bell vice presidents. And we can convert all of America’s warehouses, too. Another important (if not exactly Buck Rogersish) thing the digital effect does is control inventory. According to the Congressional Joint Economic Committee, U.S. inventory-to-sales ratio went from over 2.7 in 1990 to under 2.4 in 1997. This is the kind of statistic that turns us civilians glassy-eyed but gets a big whoop out of economists because it means that products no longer experience a sort of adolescence on the wholesale shelves, just hanging around uselessly. Products now get up and go directly to buyers. Plus, Niskanen explained, computerization means greater manufacturing flexibility, leading to wider product variety. A new Nike shoe style every ten minutes. And Muffin will just have to have them.
“Is this a good thing?” I asked.
“Heretofore,” Niskanen said, “many economists have been skeptical about computers increasing productivity.” It seems that from 1870 to 1973 productivity in the United States increased annually by an average of 2.3 percent. Then computers arrived and—think Hal in 2001: A Space Odyssey—productivity growth dropped to an average of 1.3 percent for the next twenty-two years. This was known as Solow’s Paradox, named after MIT economist Robert Solow, who said, “You can see the computer age everywhere but in the productivity statistics.” Of course Solow wouldn’t have thought this was paradoxical if he’d ever walked around an office watching what people do on their computers: play solitaire, send pointless e-mail messages, and check their high-tech stocks (ticker symbol YO). But the supervisor finally caught them. Or something. Anyway, productivity has been rising at an average rate of 3 percent a year since 1996.
Niskanen believes that the introduction of a valuable new technology reduces productivity, sometimes for decades. Innovations are a shock. This must have been literally true with the introduction of electricity. Imagine all the would-be high-tech moguls of the nineteenth century grasping a live wire in each hand and reducing their productivity to a burnt crisp. Niskanen thinks we’re over that, and the digital effect will now bring tremendous growth.
“I tend to be an optimist,” Niskanen told me. His main worry is not overvalued New Economy stocks but government intervention in that New Economy, which, said Niskanen, “is still vulnerable to bad policy mistakes.”
The Microsoft antitrust case comes to mind. We don’t want to find ourselves saying a twenty-second-century equivalent of “Good thing we broke up Ford Motor Company, otherwise where would America’s draft-horse industry be?”
I also went to see Stephen Moore, Cato Institute’s director of fiscal policy studies and a former senior economist at that source of inventory-to-sales ratios, the Congressional Joint Economic Committee. Moore agreed with Niskanen about the danger of government intervention. But he didn’t think the government had the guts to do much of it. Moore said, “Bubbles burst because of, one, protectionism; two, tax increases; three, bad monetary policy; and four, welfare state expansion.” There’s no danger of numbers one,
two, and four unless the vegans-with-face-tattoos vote gets a lot larger. As for number three, Moore pointed me to a passage in Bob Woodward’s 1994 inside-the-Clinton-administration book, The Agenda:
Clinton’s face turned red with anger and disbelief. “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?”…
Nods from his end of the table. Not a dissent.
“Politicians are impotent today,” Moore told me, beaming. He explained that the free market is running the world. “Libertarian. Self-organizing. Democratic. It votes every minute.” Governments, he said,
“get immediate rewards for good policy, immediate punishments for bad policy. This is new. Even the Europeans are getting their act together.”
Moore didn’t think the high-technology field is insane. “If we want to have a share-the-wealth economy,” he said, “the only way to do this is to have people own things.” America is supposed to have a very low rate of savings, but, Moore explained, buying stock doesn’t count as saving. While the Japanese were getting tiny Christmas Club interest payments and free toasters, Americans were investing. “We’ve created twenty trillion dollars in new assets,” said Moore. “The other day I was driving by a construction site, and there were four guys in hard hats sitting on an I-beam reading The Wall Street Journal. Don’t underestimate the intelligence of ordinary people. I’m skeptical of the skeptics. Are you,” he asked me, “smarter than the millions of people who are voting with their money?”
“As a matter of fact…” I said. And then I thought about our stock portfolio—ticker symbol YO. “So this isn’t a bubble?”
“Well,” said Moore, “I’m not fully convinced by these Internet stocks. The more they lose, the more they sell for. I wouldn’t buy NASDAQ.”
So this is a bubble.
Not that a new economy can’t be both real and a bubble at the same time—ask people who invested in Packard, Studebaker, Hudson, Nash, Cord, Duesenberg, Stutz Bearcat, Pope Toledo, Baker Electric, and Stanley Steamer.
Anyway, of course this is a bubble. The indications are clear. The mine shaft canaries are giving away their little mirrors and perches and birdseed cakes and scratching farewell notes on the newsprint in the bottom of their cages. When NASDAQ hit the 5000 level for the first time on March 9, 2000, 20 percent of its value was made up of companies that didn’t even exist in 1998, and three-quarters of those companies had no earnings at all. And observe the progress that New Economy companies are making. NASDAQ darling Amazon.com had almost $610 million in sales in 1998, losing $124.5 million. By 1999 sales had grown to more than $1.6 billion. Resulting in profits? No. Resulting in losses of $720 million. The Amazon.com business philosophy: Lose a little on every sale and make it up in volume. Meanwhile, the rats have been donning life jackets and signing up Kate Winslet to play them in the upcoming film NASDtanic. Between November 1999 and February 2000, Internet executives sold some $48 billion worth of their own stock in their own companies. This was approximately six times the usual rate of insider selling. Drugstore.com’s founder sold 150,000 shares at $23. Two months later the stock was at $9.88. Micro Strategy insiders sold $80 million worth of stock shares shortly before the stock dropped 62 percent in one day. And former surgeon general and all-around killjoy C. Everett Koop made $3 million selling shares of drkoop.com at $9 in February. The stock went to $2.31 in April. Have a cigar, Doc.
“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich,” said American economist Charles Kindleberger. And this disturbance has come at an inopportune moment of general affluence. Said English economist Walter Bagehot, “At particular times a great deal of stupid people have a great deal of stupid money.” High-tech investing has reached the men and women at the bottom of the fad chain. Joseph P. Kennedy used to claim that he got out of the 1929 stock market when the shoeshine boys started giving stock tips. The day after NASDAQ reached 5000, The Wall Street Journal had a story citing, approvingly, an old lady who walked into the office of her conservative Coral Gables financial planner and berated him for “missing the boat” on high-tech stocks. “I think the world is changing,” she said. “It’s very possible there’s a new economy.” Three days later The Washington Post printed a story, also approving, about a group of young people who had placed second in the “Maryland–DC student stock market game”—the young people being inmates of the Montgomery County Detention Center. The Post’s famously behind-the-curve gossip column had already run an item about StockGift.com, a bridal registry where newlyweds can pick out things from the equity market that they’d like to have around the house.
There’s an old joke that Alan Greenspan is said to tell. A man gets a tip on an obscure stock. He calls his broker and says, “Buy me a thousand shares of XYZ.” The next morning the man opens The Wall Street Journal and sees that XYZ has gone up. He calls his broker and says, “Buy me another thousand shares of XYZ.” The next morning he opens The Wall Street Journal and XYZ has gone up again. He calls his broker, “Buy me another thousand shares of XYZ.” The third morning XYZ has gone up yet again. The man starts to think, Let’s not get greedy here. He calls his broker and says, “Sell me out of XYZ.” And the broker says, “To who?”
No one is more high tech than Esther Dyson. She is the chairman of the Internet Corporation for Assigned Names and Numbers, author of the book Release 2.0: A Design for Living in the Internet Age, and a member of the President’s Export Council Subcommittee on Encryption. She sits on the board of directors of the Electronic Frontier Foundation, Scala Business Solutions, E-Pub Services, iCat, and many other New Economy corporations and is president of Edventure Holdings, which hosts tech conferences and publishes a newsletter devoted to “complex adaptive systems and the transformation of artificial intelligence into commercial technology.” That phrase might as well be in Russian as far as I’m concerned, but that’s okay because Esther Dyson is fluent in Russian, too.
I phoned Esther Dyson two days after NASDAQ reached 5000. “So when is this bubble going to burst?” I asked.
“I thought it would have happened by now,” she said.
Not that Dyson doesn’t believe in the New Economy. “I think the Internet economy is real,” she said. That, however, is the problem. Dyson explained—the way William Niskanen had—how computers make an economy more efficient. But she pointed out that “when an economy becomes more efficient, it’s harder for investors to make money. They can’t spot the inefficiencies.” Investors get rich by noticing things that are undervalued, buying low and selling high. “An efficient economy means capital and machinery are selling for the lowest possible price,” said Dyson. “In an efficient economy like this the only thing left with value, the only thing that’s unique, is the human being. An efficient economy is good for people.”
And that was a relief because, although I may be flummoxed by technology, confused about economics, and useless as an investor, I am absolutely, indubitably, purely, and completely a people.
“Good for good people,” said Dyson.
“Oh,” I said.
Of course I could be wrong, I said to my wife. Maybe this New Economy will just keep expanding forever. “All the old rules seem to be obsolete,” said former labor secretary Robert Reich at that White House Conference on the New Economy. Sometimes short, annoying guys who suck up to powerful people know things. I’ll have to check and see how Truman Capote did in the sixties stock market. Maybe the NASDAQ troubles are just a blip. Maybe we’ll all keep getting richer and richer until everybody in America is a billionaire. And how weird will that be? Nobody will care about money anymore, just sex. I’ll have to sleep with the guys at the car wash to get the interior vacuumed.
“You could get a job,” said my wife.
I have a better idea: a new book project. One of those success-in-business things that are always on the best-seller lists. It’s the management secrets of mothers with toddlers
.
“And how, exactly,” said my wife, “did you research this?”
Chris Buckley and I had a long lunch. He thinks I should call it Kid Pro Quo. Here’s my opening paragraph:
In the 1970s there arrived in the American workplace something that would change the business world forever. This thing would prove more important than Arab oil embargoes, dim-bulb Carter-era monetary policies, or even the desktop computer. It wore lipstick. Although only if it wanted to.
“There were no Dress-Down Fridays when I was at Nasser and Stein,” said my wife. “However, we did consider Dumb-Down Fridays for certain clients who were freelance writers.”
And then, I said, I go on to say: that until about 1978 the majority of adult female Americans did not have jobs, not even when they were supposed to during World War II. Why is a matter of debate. Sexual discrimination, social tradition, and lack of economic opportunity doubtless played their parts. Although my own opinion (and I have known a number of adult female Americans personally and am married to one) is that women decided to go to work because they felt like it.
Anyway, the results have been spectacular. The Independent Women’s Forum, a nonpartisan pro–free market think tank very much devoted to having women do what they feel like doing, has collected statistics on the subject. Between 1960 and 1994 women’s wages increased ten times faster than men’s. Females are currently starting businesses at twice the male rate, and women-owned enterprises are growing more quickly than the overall economy. In 1973 only 11 percent of corporations had women on their boards of directors; now 72 percent do. In 1970 the legal profession was 95 percent male. Today there’s a 29 percent chance that your wife’s divorce lawyer will be…
The CEO of the Sofa (O'Rourke, P. J.) Page 5