On December 18, 2002, I wrote a post to the online economics discussion list
Post Keynesian Thought (PKT) about an earlier post of February 11, 2000, when
the Dow Jones Industrial Average was heading towards 12,000.
The earlier post challenged the extravagant claim by the Bill Clinton
administration Council of Economic Advisors (CEA) Annual Economic Report for
2000 that the business cycle was heading for historical relic status because of
effective policies carried out by the Clinton White House. A few days after
that earlier post, the equity markets started to fall. By December 2002, when I
wrote the later post, US markets had lost US$8 trillion in market
capitalization, the entire face value of M3 money
supply in 2000 and 80% of gross domestic product.
The e-commerce fad, which had been identified by the CEA report as a
technology-driven force for a new economy purged of business cycles, was stuck
in the mud. The new millennium dawned confidently with the danger of the Y2K
bug in the computer universe proving to have been overplayed by technology
alarmists. Optimism about the future still seemed boundless. But there had been
ominous dark clouds gathering, and by the end of 2000 the economy was consumed
by full-fledged firestorm that has come to be known in history as the dot com
During the five years previous to 2000, there had been occasional warnings from
a few level-headed analysts that prices that went up above fundamentals still
inevitably had to come back down, often to levels below fundamentals. These
warnings were ignored by hysterical rising market exuberance typical in a boom,
silenced by stock prices that seemed to defy economic gravity, by the tidal
wave of new on-line companies attracting limitless venture capital and
extraordinary IPO (initial public offering) capitalization if their names
carried a suffix of "dot-com".
There had been warnings that new enterprises with revolutionary business models
with uncertain and unrealistic revenue streams have a high risk of failure.
Such warnings were dismissed as "old economy" mentality.
A "new economy" dot-com powerhouse named AOL acquired "old economy" media giant
Time-Warner on January 10, 2002. Never mind if many dot-com start-ups had no
current revenue; the explosive growth of the Internet would take care of that
Alas, the new virtual gold rush mentality could not repeal the fundamental laws
of business. As 2000 progressed, more and more investors began sensing they had
been caught in an irrational dot-com bubble and started to stop throwing good
money after bad. A wild price volatility phase was followed by a sharp market
rout. The sector identified by the Clinton White House economists as the leader
to banish the business cycle was leading the economy into recession.
CNET.com summed up the situation at year's end:
It was a tough year for
technology. Investors fled the online shopping sector ... leaving Web companies
to go belly-up and giving traditional retailers a leg up. After starting 2000
with strong sales, computer makers were blindsided by soft demand in the second
quarter and the collapse of growth during the Christmas holidays. The 451 IPOs
in 2000 [posted] an average loss of 15% by mid-December, compared with an
average gain of 194% in 1999. Venture capitalists are still flush with cash,
but they have become highly skeptical of most business plans and don't think
many start-ups are worthy of their money.
CNN.com ascribed the
dot-com implosion to "a combination of poor business planning, intense
competition and weak advertising markets [that] pushed scores of dot-com
companies to the brink, wiping out billions of dollars in market capitalization
and sending share prices tumbling."
Exemplary of the dot-com collapse was Pets.com, launched as an online business
selling pet supplies and accessories direct to customers. Its striking TV
commercial featuring a sock-puppet dog captivated Super Bowl viewers in January
2000. The company went public in February, but never managed to attain the
critical mass of customers sufficient to support an ambitious business plan. By
November, with wary venture capitalists declining further funding, Pets.com
closed its doors. Its stock, which had sold for $11 per share in February, was
worth 19 cents at the time of liquidation.
A similar fate would await Webvan, a California Foster City-based online
credit-and-delivery grocery business. It also was buoyed by ambitious
aspirations, but a lack of management experience in the supermarket industry
hampered those efforts, as did lavish spending, which far exceeded sales
growth. Webvan reportedly signed contracts for $1 billion worth of warehouses,
bought 30 powerful Sun Microsystems servers, dozens of Compaq computers and
several Cisco Systems routers, more than 80 21-inch color monitors and more
than 100 high-end Herman Miller chairs topping $800 each to pamper a young cool
staff. With no revenue, the company ran out of working capital money by 2001
and donated its stores of unsold non-perishable foodstuffs to local food banks
to sell as tax deductions.
Webvan's collapse was not the only bad news of 2001. Even before the terrorist
attacks of September 11 weakened an already shaky economy, most of the
high-tech industry was caught in a slump of unprecedented severity. The 2,400
member companies of Semiconductor Equipment and Materials International saw
revenues plunge more than 30% from the previous year. Dataquest said the chip
sector had suffered "the worst industry decline in the history of the market".
Even market leader Intel saw a revenue drop of more than 22%, and it was
estimated that the semiconductor industry worldwide had lost $100 billion.
Personal computer sales fell for only the second time in the sector's young
history. Palm reported a 44% decline after celebrating four consecutive
quarters of 100% revenue growth a year earlier. Cisco Systems posted its first
quarterly loss in 11 years as a public company. Sun Microsystems had a yearly
revenue plunge of 43%. High-flying Exodus Communications was forced into
Chapter 11 bankruptcy protection.
Carnage from the dot-com meltdown left dead corporate bodies all over the
virtual universe. News.com summed up the ensuing blame game by ascribing the
collapse to "day traders who gambled on obscure companies, mid-level engineers
who cashed in stock options and retired at age 29 [with multimillion dollar
nest eggs]. Wall Street analysts who preached 'eyeballs, stickiness and
price-to-sales ratios', forecasting companies that predicted exponential growth
and business publications that canonized the rich and gave others hope of
striking similar fortunes."
The title of my February 11, 2000 post on PKT was: "End of the Business Cycle?"
The post reads as follows:
Usually, when confidence crosses over to
hubris, disaster is not far ahead.
The Clinton administration's Council of Economic Advisors (CEA) Annual Economic
Report for 2000 claims that the longest economic expansion in US history can
continue "indefinitely", as long as "we stick to sound policy", asserts
Chairman Martin Baily, according to the Wall Street Journal. The NY Time's
report differs somewhat by quoting Baily as saying: "stick to fiscal policy".
Putting the two papers together, one get the sense that the Administration
thinks its current fiscal policy is sound policy.
I trust Post-Keynesian economists may have something to say about that.
Economics scholars, unlike those of us mortals who are unfortunate enough to
have to float in the daily turbulence of the market, tend to focus on long-term
trends and their congruence to economic theories.
Yet, long-term is increasingly being re-defined. In the technology and
communication sectors, long-term evokes periods lasting less than 5 years.
Two factors have been identified by the CEA Report as responsible for the
"good" news technology-driven productivity and trade globalization.
Even with somewhat slower productivity and spending growth, the CEA believes
the economy can continue to expand. As for the huge trade deficit, the CEA
expects global recovery to boost demand for US exports. Yet the US officially
pursues a strong dollar policy [that makes US exports more expensive in local
currency terms]. The optimism on e-commerce has yet to be substantiated by the
results of the current federal data-gathering initiative. B to B
[business-to-business] portion of e-commerce is expected to rise to $1.3
trillion by 2003 from $43 billion in 1998.
The CEA Report does not address the question whether this is a merely a shift
of commerce or a real growth. Does the possibility exist for technology to
generate negative growth? It happened to IBM - the increased efficiency (lower
unit cost of calculation power) of IBM big frames actually reduced overall IBM
Creative destruction leaves real bodies in its path, not just phantom concepts.
Are financial intermediaries and stock exchanges sunset industries, killed by
[Electronic communication network (ECN) is the term used in financial circles
for a type of computer system that facilitates trading of financial products
outside of stock exchanges. As it happened, over-the-counter derivatives
trading outside of exchanges overwhelmed stock and futures exchanges all
through the decade between 2000 and 2010.]
On fiscal policy, government spending declined as a share of the economy during
the Clinton watch. This in no small way contributed to a polarization of both
income and wealth, with visible distortions in both the demand and supply sides
of the economy. The wealth effect tied to [rising] equity markets can be
reversed suddenly. Private debt is at an all time high and celebrated as a
positive factor. Household spending seems to be heavily based on expected
rising future earnings or paper profits, both of which may vanished on short
Politically, trade globalization is facing complex resistance worldwide. Such
resistance will either slow further globalization or force the terms of trade
to be revised.
Now, it may be interesting to do a role-playing gaming simulation exercise:
assuming PK [Post Keynesian] economists gain control of the CEA, what kind of
report would they issue and what different policies would such a CEA propose?
I answered my own question in a later post:
I would think that a PK
influenced CEA would advocate a policy towards domestic economic development
with massive government credit for infrastructure, restructuring and regulating
of transportation, communication, national health care, mutualization of
insurance, public education and social security, rather than the Bush tax cut.
Also, internationally, the US can lead in redirecting domestic development as a
preferred path of growth and put trade back in proper balance, in an auxiliary
role rather than the main path for growth. The emphasis should be to boost
global aggregate demand, and not just maintaining the US as a market of last
resort for Third World exports.
Together with a reorientation of trade, the US is in a position to launch a new
international finance architecture, re-introduce foreign exchange control,
regulate international financial markets, and regulate the banking and
financial system. Above all, set full employment as a policy goal and manage
monetary policy to accommodate it. Establish a credit allocation policy based
on balanced growth, rather than allowing credit allocation to be determined by
the price of money - interest rates. Reform corporate accounting standards to
prevent balance sheet manipulation to produce phantom profits while destroy
real production. 
Five years later, the global deregulated
markets crashed in 2007 with an unprecedented financial crisis that has yet to
run its course after three years. Had the above proposed measures been taken by
those in power, the current crisis could have been avoided. Alas, three years
into the mother of all financial crises, with a president elected by populist
political forces, none of the above measures have enacted.
The White House is infested still with the same Clintonite neo-liberals who
landed the economy in earlier crises. Unless the above policy measures are
adopted, the world can face another crisis of even greater damage within a
decade. The business cycle has not ended. In fact, it has been made more deadly
by hubristic policy.