nettime's_roving_reporter on 5 Oct 2000 05:02:04 -0000

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<nettime> Michael Mandel: The Coming Internet Depression

The Coming Internet Depression
A Leading New Economy Proponent Predicts Economic Bust

A new book by Michael Mandel argues the high-tech boom is about to go bust
and the fallout will be worse than you think.
Could all of the factors that have led the nation into its high-tech boom,
also spell the end of the longest economic growth period in the country's
history? That's the argument made by Michael Mandel, economics editor at
BusinessWeek magazine and a much-lauded business journalist. Until now,
Mandel has been a leading proponent of the New Economy. But in a new book
coming out Oct. 9, Mandel has a very different story to tell - a severe
downturn that will not only devastate technology stocks and the stock market
as a whole, but wreak havoc across the entire economy. We've got an
exclusive look at the first chapter of Mandel's The Coming Internet

Peril and Promise

Every economic era is afflicted by its own unique curse. Agricultural
economies were tied to the rhythms of the harvests. Villages would prosper
when crops were good, and suffer when drought or pests withered the fields.
A long enough drought could devastate a region or even a civilization.
Trading economies, like that of England in the 1600s, were considerably less
affected by a failed harvest in a single location, since they could import
food if necessary. But the growing importance of overseas trade introduced
new sources of unpredictable fluctuations.
The opening up of new trading opportunities could create a burst of new
wealth and prosperity. Alternatively, a flood of gold or silver from
overseas - as when Spain conquered Mexico - could ignite an inflationary
boom. The free flow of goods between nations was regularly impeded by war,
religious disputes, and deliberate currency manipulations by governments.
The result, according to one historian, was that "variations in prosperity
were random and discontinuous."

Growth More Predictable . or Less?

The gradual shift to an industrial economy seemingly made growth more
controllable and predictable. No longer was prosperity tied to the harvest
or the vagaries of colonial exploitation. The new source of wealth was
systematic investment in capital goods - machinery, factories, railroads,
electrical, and telephone systems - which could be used to multiply human
At the same time, the rise of the modern stock and bond markets in the
second half of the 1800s provided financing for large capital projects on a
scale never before dreamed of. The dawn of mass production permitted
industrial economies to achieve unprecedented growth rates and living
It soon became clear, however, that industrial economies were prone to new
types of economic fluctuations. Worse, these shocks were broader, more
pervasive, and in many ways more violent than any country had experienced
before. Starting in the middle of the 19th century, national and global
capital markets opened up the door, for the first time, to national and
global economic crises - the boom-and-bust cycles in business investment and
labor markets that we now recognize as the familiar business cycle.
In the early 20th century, housing and consumer durables such as autos
joined the business cycle as well. Easy credit would fuel overinvestment and
overproduction, which would be followed by a sharp recession and a daunting
rise in unemployment. The stock market and banking systems necessary for
funding long-term capital investments could go badly awry, paralyzing an
economy dependent on credit. The result was a series of national and
international economic downturns, including deep ones in 1873, 1893, 1907,
1920, and of course 1929. The last event, especially, raised fears that
modern industrial economies were simply too unstable to be trusted.

Managing the Business Cycle

But over time, and after intense arguments, economists and policymakers
figured out ways to manage the instability of market economies - a triumph o
f which economists were justifiably proud. As economist Paul Krugman wrote,
"In effect, capitalism and its economists made a deal with the public; it
will be okay to have free markets from now on, because we know enough to
prevent any more Great Depressions."
Measures such as deposit insurance and unemployment insurance were put in
place to protect the industrial economy from its own worst excesses.
Washington policymakers at the Federal Reserve Board, the White House, and
Congress learned how to use monetary and fiscal policy to manage the ups and
downs of the business cycle, cutting interest rates and taxes and boosting
government spending to jump-start growth when recession loomed.
The central bankers at the Fed, despite their innate caution, learned to
embrace the obligations of "lender of last resort." That meant they had a
responsibility, no matter what, to move quickly to pump money into the
financial system whenever it looked like it might unravel.
True, the rule book for managing the business cycle did have to be rewritten
several times. Deficits or surpluses in the federal budget came to be seen
as far less important for regulating the business cycle than monetary
In the aftermath of the inflationary surge of the 1970s, policymakers became
much more concerned with making sure the economy didn't overheat. By the
beginning of the 1990s, economists were fairly confident that they
understood how to avoid (or at least soften) the business cycle's highs and

The New Economy Boom

Enter the New Economy, also known as the Information Economy, the Internet
Economy, or the 21st Century Economy. Built around the high-tech revolution
and globalization, the New Economy seemed partially immune from the ills
that plagued the old industrial economy, just as the industrial economy was
partially immune from the vagaries of the harvest. A computerized and
networked supply chain allowed the real-time monitoring of inventories, so
production never got too far ahead of sales.
The combination of soaring productivity and intense competition, at home and
abroad, kept inflation in check despite low unemployment rates. That meant
that instead of acting aggressively to slow the economy, the Federal Reserve
Board could afford to let growth roll.
In February 2000, the expansion that started in March 1991 became the
longest period of uninterrupted growth in U.S. history. This milestone
provoked a burst of enthusiasm from journalists, economists, business
executives, and investors, both in the U.S. and elsewhere - even many who
had been skeptical about the New Economy. More and more people were willing
to consider the notion that the expansion never needed to end.
It would be wonderful if it turns out we have reached the promised land.
Given the misery that recessions and depressions have caused over the years,
any moderation of these fluctuations would be a major benefit of the New
Economy. What's more, the elimination of the business cycle, if it turns out
to be real, would reduce the risk of investing in equities and justify the
lofty valuation of the stock market.

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