Subject: Stelzer col. 10-12-00
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Date: Wed, 6 Dec 2000 03:15:00 -0800 (PST)

IMS1012.COL
Attention:  John Jay

IRWIN M. STELZER
The Sunday Times
10 December 2000
    Buried deep in an issue of last week's Wall Street Journal is an
interview with venture capitalist Bill Davidow. As the crash in the value of
internet companies sours investors, and fills the financial pages with tales
of impending doom, Mr. Davidow has taken to reminding all who will listen,
"There was a tulip business even after the tulip mania." Which prompted me to
dig out my copy of Mike Dash's Tulipomania -- subtitled, "The Story of the
World's Most Coveted Flower & The Extraordinary Passions It Aroused."
    Davidow is indeed right, and in the post-bubble history of the tulip
business may lurk some clues as to the history of the dot.coms, many of which
have been liquidated, while others have seen their values fall by as much as
90%.
    After the bubble burst, the trade in bulbs did not disappear. Prices
fell, but in a few years "the trade regain[ed] some sort of equilibrium. The
speculators had gone, but there was still a market for the flower." But at
far lower prices, with the specialty bulbs doing better than the garden
variety tulip. And it is not to stretch the analogy between tulip-growing and
the dot.com business to cite Dash's observation that "most of the new and
inexperienced growers who had been attracted by the prospect of rich profits
gave up the business or were driven out."
    Eventually, bulb growers learned how to turn a profit again. They
converted their business from a seasonal one to one that could produce all
year 'round -- something e-tailers have still to learn. They learned how to
destroy the viruses that periodically destroyed their businesses -- something
Microsoft et al. have still to learn. They learned how to compete with other
varieties of flower -- just as e-tailers have been learning how to click with
bricks-and-mortar retailers.
    In short, although the past is not necessarily prologue, history suggests
that there indeed life after a bubble bursts. For one thing, investors have
short memories: the tulipomania was followed by a spurt in the prices of
hyacinths in the eighteenth century, and by one in dahlias in 1838. Indeed,
as recently as 1985 prices of the red spider lily soared in China, reaching
$50,000 for the most coveted varieties, "an amount that puts even the sums
paid at the height of the Dutch tulip craze to shame", according to Dash.
    More important, the bursting of a bubble separates the wheat from the
chaff. The fact that the business graveyard is overflowing with the corpses
of dot.coms tells us less about the future role of the internet in our
economic lives than it does about the propensity of some to irrational
exuberance. It should come as no surprise that companies that not only failed
to earn any money as their customer lists swelled, but touted their mounting
losses as proof of their success in growing their businesses, should
eventually fall from investor favour.
    Nor should it be surprising that inexperienced entrepreneurs, whose sole
lasting contribution to American life has been the destruction of the
business suit, have discovered that there is more to running a successful
business than attracting the adulation of equally young and casually clad
reporters for trade magazines.
    Finally, it should not surprise us that the accumulation of data in this
era of the so-called "new economy" has led to a more sober appraisal of the
contribution of new technologies to the ability of the American economy to
grow without triggering significant inflation. We now know that the massive
investment in new technologies has increased the rate of growth in
productivity, and that the economy's speed limit has been raised to something
closer to 4% than to its old limit of about half that. That's not as
revolutionary as some of the more strident "new economy" advocates have been
claiming, but it is enough to make an unemployment rate of only 4%
sustainable in the long run without setting off a round of wage-price
inflation.
    What we have, then, is what might be called the residue of the dot.com
collapse -- a new way of doing business, greater productivity in important
sectors of the economy, lower transactions costs as buyers and sellers come
together without the intervention of middlemen, new exchanges in which
everything from electricity to broadband capacity can be traded efficiently,
and an increase in consumer power to resist price increases.
    These are permanent changes. The pace at which they are introduced and
become entrenched will, of course, be affected by the increased volatility of
share prices. Such volatility, after all, makes investment in shares somewhat
riskier, which is another way of saying that the price that entrepreneurs
will have to pay for capital to reward investors for taking these higher
risks will rise -- indeed, has already risen. But the improvements in
productivity and efficiency will not be reversed, even if the economy slows
significantly, as it now is deemed likely to do.
    Perhaps most important of all of our new knowledge is our increased
understanding of the use of the policy tools available to cope with economic
downturns. The market soared last week after Federal Reserve chairman Alan
Greenspan suggested that he was considering lowering interest rates, and the
Florida courts increased the likelihood that George W. Bush rather than the
more antibusiness Al Gore would move into the White House when the lease of
Bill and Hillary Clinton expires next month.
    Investors know that Greenspan can stimulate the economy by lowering
interest rates, which are high in real terms. After all, as discussed
elsewhere in these pages, he reversed a far more serious stock market plunge
in 1997 by easing monetary policy. Investors know, too, that the Bush team
aims to ease fiscal policy by pushing a tax cut through congress. That
combination of looser monetary and fiscal policies can go a long way towards
preventing this slowdown from becoming a recession.
[ET

IMS1012.COL
Attention:  John Jay

IRWIN M. STELZER
The Sunday Times
10 December 2000
    Buried deep in an issue of last week's Wall Street Journal is an
interview with venture capitalist Bill Davidow. As the crash in the value of
internet companies sours investors, and fills the financial pages with tales
of impending doom, Mr. Davidow has taken to reminding all who will listen,
"There was a tulip business even after the tulip mania." Which prompted me to
dig out my copy of Mike Dash's Tulipomania -- subtitled, "The Story of the
World's Most Coveted Flower & The Extraordinary Passions It Aroused."
    Davidow is indeed right, and in the post-bubble history of the tulip
business may lurk some clues as to the history of the dot.coms, many of which
have been liquidated, while others have seen their values fall by as much as
90%.
    After the bubble burst, the trade in bulbs did not disappear. Prices
fell, but in a few years "the trade regain[ed] some sort of equilibrium. The
speculators had gone, but there was still a market for the flower." But at
far lower prices, with the specialty bulbs doing better than the garden
variety tulip. And it is not to stretch the analogy between tulip-growing and
the dot.com business to cite Dash's observation that "most of the new and
inexperienced growers who had been attracted by the prospect of rich profits
gave up the business or were driven out."
    Eventually, bulb growers learned how to turn a profit again. They
converted their business from a seasonal one to one that could produce all
year 'round -- something e-tailers have still to learn. They learned how to
destroy the viruses that periodically destroyed their businesses -- something
Microsoft et al. have still to learn. They learned how to compete with other
varieties of flower -- just as e-tailers have been learning how to click with
bricks-and-mortar retailers.
    In short, although the past is not necessarily prologue, history suggests
that there indeed life after a bubble bursts. For one thing, investors have
short memories: the tulipomania was followed by a spurt in the prices of
hyacinths in the eighteenth century, and by one in dahlias in 1838. Indeed,
as recently as 1985 prices of the red spider lily soared in China, reaching
$50,000 for the most coveted varieties, "an amount that puts even the sums
paid at the height of the Dutch tulip craze to shame", according to Dash.
    More important, the bursting of a bubble separates the wheat from the
chaff. The fact that the business graveyard is overflowing with the corpses
of dot.coms tells us less about the future role of the internet in our
economic lives than it does about the propensity of some to irrational
exuberance. It should come as no surprise that companies that not only failed
to earn any money as their customer lists swelled, but touted their mounting
losses as proof of their success in growing their businesses, should
eventually fall from investor favour.
    Nor should it be surprising that inexperienced entrepreneurs, whose sole
lasting contribution to American life has been the destruction of the
business suit, have discovered that there is more to running a successful
business than attracting the adulation of equally young and casually clad
reporters for trade magazines.
    Finally, it should not surprise us that the accumulation of data in this
era of the so-called "new economy" has led to a more sober appraisal of the
contribution of new technologies to the ability of the American economy to
grow without triggering significant inflation. We now know that the massive
investment in new technologies has increased the rate of growth in
productivity, and that the economy's speed limit has been raised to something
closer to 4% than to its old limit of about half that. That's not as
revolutionary as some of the more strident "new economy" advocates have been
claiming, but it is enough to make an unemployment rate of only 4%
sustainable in the long run without setting off a round of wage-price
inflation.
    What we have, then, is what might be called the residue of the dot.com
collapse -- a new way of doing business, greater productivity in important
sectors of the economy, lower transactions costs as buyers and sellers come
together without the intervention of middlemen, new exchanges in which
everything from electricity to broadband capacity can be traded efficiently,
and an increase in consumer power to resist price increases.
    These are permanent changes. The pace at which they are introduced and
become entrenched will, of course, be affected by the increased volatility of
share prices. Such volatility, after all, makes investment in shares somewhat
riskier, which is another way of saying that the price that entrepreneurs
will have to pay for capital to reward investors for taking these higher
risks will rise -- indeed, has already risen. But the improvements in
productivity and efficiency will not be reversed, even if the economy slows
significantly, as it now is deemed likely to do.
    Perhaps most important of all of our new knowledge is our increased
understanding of the use of the policy tools available to cope with economic
downturns. The market soared last week after Federal Reserve chairman Alan
Greenspan suggested that he was considering lowering interest rates, and the
Florida courts increased the likelihood that George W. Bush rather than the
more antibusiness Al Gore would move into the White House when the lease of
Bill and Hillary Clinton expires next month.
    Investors know that Greenspan can stimulate the economy by lowering
interest rates, which are high in real terms. After all, as discussed
elsewhere in these pages, he reversed a far more serious stock market plunge
in 1997 by easing monetary policy. Investors know, too, that the Bush team
aims to ease fiscal policy by pushing a tax cut through congress. That
combination of looser monetary and fiscal policies can go a long way towards
preventing this slowdown from becoming a recession.
[ET