One internut prophet, Michael Mandel economics editors of businessweek, is now becoming a prophet of doom:.
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Inside Technology / Monica Soto
Chicken Little for the New Economy?
This just in: The sky is falling.
Michael Mandel, economics editor at Business Week, is known for predicting the New Economy of the 1990s. Recently, he came out with another prophecy: an impending Internet fallout that will touch every sector of the economy.
In "The Coming Internet Depression" (Basic Books, $24), Mandel writes that the New Economy is not an extension of the Old Economy but rather a separate phenomenon. Whereas the capital markets typically funded physical investments such as railroads, venture capitalists today have gambled on small high-tech start-ups with no proven track record.
Such risks have allowed Amazon.com and eTrade to become palpable threats to the Barnes & Nobles and Merrill Lynches of the world. Such risks have allowed innovation to occur at breakneck speed. (Venture capital is at a point where it rivals research and development as a source for funding innovation, Mandel said.)
But Mandel warns the strengths that have characterized the New Economy will come back to bite us in the rump. The New Economy includes several moving parts: venture capital to start companies, initial public offerings (IPOs) to fuel massive growth, stock options as a form of compensation.
When venture capital runs out, when the IPO market dries up, when employees' stock options dip south, Mandel said it will precipitate a downward spiral that will feed upon itself.
"The problem is, once you've tied yourself to the financial markets, you're susceptible to the ups and downs," said Mandel, who was in Seattle yesterday for a reading at Elliott Bay Book Co.
While payrolls have exploded for tech companies, real wage gains in some nontech industries have been paltry. When the tech boom ends, "there will not be much to support consumer spending ... there is no evidence that the rest of the economy will be able to pick up the slack," he said.
Mandel said an Internet Depression wouldn't occur in a single day but over a period of two years. He drew parallels between the recent goings-on and the Great Depression.
The 1930s saw the rise of consumer credit; roughly 75 percent of automobiles were purchased on payment plans. In hindsight, a falloff in auto sales and auto stocks was a sign that the leading sector of the economy, which had driven growth, was waning and the boom was near its end.
In the same way that auto sales lagged, venture-capital investments today are declining.
Mandel said the onus is on the Federal Reserve to respond quickly. If the Fed lowers interest rates, it will keep the economy running. If it raises interest rates, it may contribute to a longer period of decline.
"The question is: Will policy-makers use old rules of the past, or will they realize they're flying an airplane and not driving a car?" he said.
Mandel said he is not a doomsayer. He doesn't believe Microsoft, Cisco or Intel will go away. He doesn't believe the country's long-term economic prosperity is at stake.
But for the short-term, Mandel stands by his prediction. He said he was chided by economists and journalists alike when he predicted the New Economy. When he began researching this book in February (before the Nasdaq crash), his publisher questioned his reasoning, too.
Only time, he said, will tell. "I'm getting a hearing, and that's all anyone can ask for." |
