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SPENGLER
Singing in the (cold) shower
Two years ago in this space, just before the
peak in US equity markets, I asked what the implications
might be if technology stocks were valued fairly. The
answer was that to generate enough future income to
justify prevailing prices, Americans would have to spend
most of their lives enjoying virtual sex with animated
avatars. For what other purpose would we need all that
broadband?
As it turns out, existing
infrastructure was quite sufficient for Americans'
principal uses of data communications, namely,
downloading pornography and swapping popular songs.
Would America have been better off in the case that the
market had been right? Had the American stock market
continued to rise rather than crash, would America be
better off today? What precisely would be different?
More upper-middle-class Americans would have
retired early, depriving the economy of many of its most
talented professionals and managers. More Americans
would have worked less and bought more luxury goods,
trading capital gains in the equity market for the labor
of other countries, and increasing America's trade
deficit. In 2001 America's trade deficit exceeded 5
percent of its GDP, as foreigners sold their goods to
buy US risk assets.
Talented students would have
continued to abandon their education to start up copycat
Internet sites. The folk heroes of popular culture would
have been 20-year-old computer geeks wearing
backward-turned baseball caps and flip-flops, with the
aesthetic sensibility of a junkyard dog.
In
short, America would have been subject to the curse of
wealth. With the collapse of equity prices, the curse
has been lifted, and America is much better off for it.
In the extreme, the curse of wealth produces
hydrocephalic economic monsters. Bernard Lewis is fond
of observing that 300 million Arabs export the same
value of goods as 5 million Finns, apart from oil, of
course.
There are other societies in which no
one works and everyone is rich. Greece is bursting with
wealth, but no one seems to work very much. Taxi drivers
take three-month vacations. Commercial bankers earn
perhaps a fifth of their American counterparts'
compensation. Yet Athens daily grows in resemblance to
Los Angeles. Greece pumps no oil, but the average Greek
family owns half a dozen pieces of property scattered
throughout the country, the cumulative inheritance of a
rural population that has emigrated. Selling vacation
property to Americans and Germans has made Greeks
wealthy. To spend its wealth without working, Greece
must import labor, and has done so to the point that the
cultural clash with immigrants has become a dominant
theme of Greek politics.
But the curse of wealth
has been lifted from the fortunate shores of the United
States. Now that America's broad market indices have
fallen nearly 50 percent from their peak, millions of
Americans in their 50s and 60s who expected to spend the
next 20 years on the golf course will have to remain in
the labor market. Rather than earning 20 percent a year
on savings in the stock market, Americans will be
resigned to earning 5 percent in the bond market. That
means they will have to save more. Rather than cut back
consumption, they will work for another five or ten
years.
But don't markets provide an unbiased
estimate of future economic growth, as the textbook
tells us? Doesn't a collapse of equity prices show that
something is terribly wrong at the heart of the American
economy?
I see no reason to draw this
conclusion. Indeed, equity valuation is the scandal of
finance theory. Equities offer dividends in perpetuity.
To form a view of future cash flows we must imagine a
far distant future. Technologies arise which transform
our lives. Children no longer die of diphtheria. Farmers
no longer must live within horse-and-wagon distance of a
city. Scribes no longer must copy documents by hand. We
only can imagine how our lives might change.
But
it is meaningless to speak of "unbiased estimates" when
it is such a trivial exercise to bias estimates. A
standard classroom demonstration employs a large jar
full of beans. The students are asked to write down
their estimate of the number of beans in the jar. If the
sample is sufficiently large (100 or more) the average
estimate usually comes quite close to the correct
number. Then the students are told that the jar's glass
is deceptively thick. Once bias is introduced in this
fashion, the estimates go wide from the mark.
Cultural bias suffuses our view of the future.
During the 19th century the problem was transmission not
so much of information, but people and freight. Cheap
freight offered by competitive rail lines brought
millions of farmers to the American heartland, many to
marginal land. Like today's telecom companies, the
American railroads went bankrupt, some two or three
times over, as the pioneer dream overreached and
collapsed.
By the 1890s, historians pronounced
the frontier dead. E H Harriman and J P Morgan bought up
the bankrupt railroads and established profitable
monopolies, and in the process ruined millions of
marginal farmers. This begot a populist movement, the
myth of the evil monopolist, and a whole literature
about rural tragedy.
In today's case the dream
had psychedelic colors and a techno beat, and its demise
may be a blessing. This time, the tech bubble collapse
has ruined millions of marginal investors, as another
dream of the future overreached. The public is shocked,
shocked to discover that corporations window-dress their
earnings, and equity valuations suffer a downward bias
due to universal paranoia about accounting fraud.
Federal Reserve chairman Alan Greenspan observed
in congressional testimony last week that the national
income and product account profit estimates, which are
based on corporate tax collections, show a modest but
significant improvement. If that is the case, Greenspan
concluded, the actual profitability of corporations must
be rising (because corporations do not wish to pay taxes
on inflated earnings). America is doing just fine, thank
you, and will be better for the cold bath.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
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