Friday, February 4, 2011

The Internet Bubble As An Argument For A Directed Keynesian Stimulus

First of all, the period from say 1996 to 2000 was clearly an economic bubble. Venture capitalists spent their money and investors bought stock in newly founded tech companies in order to make a profit selling stock, not because they expected a return on their investment from the company's earnings. I remember in late 1999 or early 2000 mentioning to someone in the break room at work about how amazed I was when I found out that still wasn't turning a profit. Various NPR shows and other news talked about how people were all excited to invest in some new IPO (Initial Public Offering) without being able to explain what the company did or why the service it provided was useful. Techies would work for startups basically for free with the promise of stock options. Employees at the consulting firm I worked for urged our CEO to take us public. Garry Trudeau ran cartoons about the "new economy" in his "Doonesbury" strip, giving the example of a couple of college students without a clue who came up with the idea for a startup and managed to sell that idea to investors. Then at the tail end of 2000 it all came to an end, with most of the new companies going out of business, investors losing all their money, and the techies going back to straight jobs if they could find them.

Yet the Internet Boom had a lasting effect and made possible the connected and greatly changed world we have today. You could look at the whole thing as stimulus spending with the somewhat vague purpose of building the communications, software, hardware, and academic infrastructure while at the same time changing the direction of the economy to be prepared to take advantage of these new things. The telecom industry expanded, laying more fiber optic cable and creating wireless networks. Universities quickly began using Java as the working programming language for computer science majors instead of C, and their computer science departments expanded with many more students majoring in this field. Consulting companies sprang up overnight, usually consisting of nothing more than a phone number, email address, and some newly hired warm bodies who served as middle-men between companies looking for temporary technical employees and techies looking for consulting work, pocketing a hefty commission (often around 50% of the consultant's billed hours) for nothing more than placing an add in the paper or online (the same add the companies could have placed directly). Big projects were completed with these temporary employees, and the consultants got much more flexibility than they would have had in a normal job, frequently working more occasional hours and taking months off at a time between projects. Many periperal businesses were able to cater to the new young techie demographic, building up other areas of the economy. People in general and businesses in particular began to think of the internet and the many applications that ran on top of it as "here to stay", and made plans with this in mind. Without the Internet Bubble would we have things like the iPhone, iPad, Facebook, the blogosphere, Barak Obama elected President, and the recent twitter-driven Middle East revolutions today?

The Internet Bubble did not directly create jobs since most of those jobs disappeared when the bubble popped, but it did ultimately create all kinds of jobs in our world economy today. Many of these never existed before and are only possible because of the Internet and software applications we have come to take for granted. And lots of people were employed during the bubble: hiring rates were at a level we would love to see now in order to recover from our current Great Recession. Most of the employers were small startup businesses, i.e. not corporations or people currently in the "business community" (I say this based on my own observations - I would love to see some statistics on this, I don't think I would be proven wrong). I wonder why we talk so much about the importance of keeping the business community happy in order to create jobs when the only example of massive job creation in modern times (the Internet Bubble) saw very little involvement by this group (again, I have no stats here, this is what I observed living through this time, tell me if I'm wrong).

If in 1995 you had tried to raise taxes on people with incomes over $250,000 per year in order to finance a big technical buildup, it never would have happened. But these same people were happy to buy stock to fuel the bubble, and ended up losing their money just as if they had been taxed. Or did they really lose it? You could say they invested it and gave themselves a better world to live in.

What am I driving at here? We should give some serious thought to our long term economic future, and to the big things that need to change if we are to succeed, as David Brooks has pointed out. I think these should be things like public transportation (trains between cities, bus lines within cities) to make our energy use more efficient, local agriculture both for health reasons and efficiency with rising energy costs, and training a highly skilled work force for high-end engineering similar to Germany. Contrary to Brooks and most others, I think we should raise taxes to pay for this, rather than cutting other spending in favor of these policies. I think you can get something good for the money you spend, and I point to the Internet Bubble as an example. Also contrary to Brooks, I think we can bring unemployment below 5% if we spend this money, and we will be accomplishing our long term goal with these "jobs", even though they may not be permanent.