From: hal@finney.org
Date: Mon Feb 26 2001 - 16:39:23 MST
Barbara forwards from:
http://www.abcnews.go.com/sections/business/DailyNews/net_depression_part1.html
> So what's the problem? It's this: for the first time, the process of
> technological and business innovation amplifies the normal rhythms of the
> overall economy.
> Funding for innovation now depends on the state of the stock market and
> the expected growth of the country's gross domestic product (GDP).
> Technology has become synchronized with the ups and downs of the rest of the
> economy.
> The result is that the Old Economy business cycle has been replaced by
> the New Economy tech cycle: longer expansions, followed by deeper and
> harsher recessions.
> On the upside, innovation and economic growth reinforce each other.
> More money spent on innovation means faster growth with low inflation.
> Faster growth and a rising stock market increase the incentives to invest in
> innovation - which yields more startups, faster adoption of technology, and
> more pressure on existing companies to keep up.
The problem with this is the assumption that "innovation" funded by
capital investment leads almost immediately to faster growth. But I
don't think this time frame is correct, and I think also that the
connection between these innovations and growth is much more tenuous.
Economists have strained to see any measurable increase in productivity
from the introduction of computers into the work place, and this has
been going on for 20 years now.
I doubt that even the most hyped technologies to come out of Silicon
Valley over the past five years have actually led to significant economic
growth since then. They may have excited investors with their prospects
and led to some stock run-ups, but it is hard to see any measurable
increase in economic output within the kinds of time frame the article
is talking about.
Turning it around, then, if investors pull out of technology stocks, the
economy is not going to grind to a halt just because the next version of
Java comes out a couple of years late. Innovation takes time to percolate
through society, and if the money burned through in the past 10 years
did accomplish something, we will be its beneficiaries for years to come.
Any increases in productivity of labor or capital due to technology will
help cushion a forthcoming recession, not steepen it.
Having said that, it is certainly possible that we will have a tech
recession; there's no reason to suppose that any industry is immune.
But I don't see why it should be particularly long or deep. Recessions
are necessary in the long run, like forest fires. They clear out the
dead wood and get people to focus on what works. A good year or two
of cutbacks will leave the industry ready to move forward and grow.
It's happened countless times before in other industries.
Doomsayers love to point to 1929, but with hindsight we can see what
went wrong back then. We won't make those mistakes again. (We'll make
different ones.) The article raises the spectre of the "stagflation"
of the 1970s, but even that was cured with the Reagan recession which
lasted about a year and was soon forgotten. By the time he ran for
reelection, it was "Morning in America" again and we had several years
of strong growth.
Hal
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