Tech Bubble Redux

Even as the Enron and Global Crossing bankruptcies further expose the spectacular waste fostered by the 1990s’ Information Age bubble, an army of lobbyists in Washington is fighting to secure government support for broadband communications, the “next wave” of the “new economy.” Subsidizing an ultra-fast Internet, it’s said, will energize everything, from the stock market to our democracy itself. But if the unbalanced, profligate economy of the ‘90s has taught us anything, it should be the danger of granting any one sector, no matter how appealing, special political favor.

To a remarkable extent, broadband boosters are recycling promises unfulfilled in the 1990s. Then, as now, they assert that super-fast digital communications will spur new entertainment programming and make possible such life-saving devices as toilets that monitor waste to detect health problems. Computer gadgetry and improved online commerce will rise to new levels of sophistication. And by ensuring greater access to information, our political institutions will be enriched.

Given such wondrous benefits, everyone should be champing at the broadband bit. Yet, there’s a problem. More than enough cable capacity crisscrosses the United States to transmit bulk broadband signals. But not many are paying to hook up the “last mile” of this network to their homes and businesses.

That’s where broadband advocates say government support--targeted tax incentives, state and federal grants, regulatory reform and mandatory connectivity requirements--is required.

In contrast with the late 1990s, the new-economy lobby is having a tougher time selling its technology miracle. President Bush ignored industry pressure to allude to broadband in his State of the Union address. Subsidy skeptics have been quick to point out that since cable television already has excess broadcast capacity, there’s no reason to think new broadband channels will stimulate novel programming or entertainment options. The collapse of broadband providers that hooked up consumers, like Excite@Home, also suggests caution.

Yet, the most important reason to resist elevating broadband above other sectors of the economy is that such favoritism contributed to the worst excesses of the 1990s’ bubble economy. Like all human endeavors, business and politics are influenced by fashion and hype. When public attention is obsessed with a small segment of the economy, as in the latter ‘90s, misguided investment and policy decisions almost inevitably follow.

Consider the “business to business” Internet mania, the attempt to automate inter-corporate sales. Fed by countless media, Wall Street and public pronouncements, B2B, as the mania was known, was touted as an absolutely “can’t miss” phase of the new economy. Even normally sensible industrialists like former General Electric chairman Jack Welch giddily declared it “the elixir that big companies need” to become more nimble and competitive. Hundreds of billions of dollars were earmarked to “modernize” business Internet linkages.

B2B service providers sprouted everywhere. Some, like Ariba Inc., a Northern California e-commerce software firm, didn’t even have a product to sell, yet attracted nearly $6 billion when it went public in mid-1999. A few months later, Ariba’s stock had risen by nearly 800%, and the company’s market value was higher than that of Boeing, General Motors or Ford. But Ariba, like other once-flourishing B2B companies like Chemdex Corp. or VerticalNet Inc., never turned a profit. Something new and incredible was apparently generating unbelievable wealth in hitherto unknown ways.

Except it wasn’t. When tested in the real world, most B2B business plans were exposed as either incomplete or poorly conceived. Promised inter-corporate efficiencies never came close to justifying the expense.

Firms like Ariba and VerticalNet promptly shed nearly 98% of their peak market value. Others, like Chemdex, went out of business. Silicon Valley alone consumed an unheard-of $21 billion of venture capital in 2000, many times the previous year’s record, only to earn the most negative returns in U.S. investment history. All told, $3 trillion to $4 trillion--the equivalent of hundreds of Enrons or Global Crossings--was stripped from the value of U.S. stocks and America’s retirement nest eggs.

Worse still, public policies that favored white-collar Information Age jobs over working- and middle-class employment harmfully skewed U.S. economic development. Mistaken perceptions about the sustainability of new-economy growth, fed in part by the political influence reaped from windfall corporate and personal-income growth, transformed land-use and development policies. The ill-informed spending decisions that politicians made then have now produced unanticipated budgetary shortfalls in state after state.

One of the most unsettling legacies of the last decade’s boom is how rapidly a new class of super-rich political entrepreneurs was able to capture, if not monopolize, our country’s political life, despite a lack of true economic capability. According to the San Jose Mercury News, for example, Ariba’s top nine executives cashed out more than $1 billion worth of stock options just before their company’s value collapsed. Similarly, Global Crossing’s chairman, Gary Winnick, is reported to have exercised nearly $735 million worth of options before his company became insolvent. This pattern of instant yet ultimately undeserved enrichment characterized the latter stages of the 1990s boom.

The resulting cadre of articulate, well-educated, cash-flush advocates courted state, local and federal politicians, filling their coffers with campaign contributions. In return, Information-Age business was showered with tax breaks and preferential permit processing, and was assured a seat at the table when matters of significant fiscal or social policy were decided.

One result was that in countless communities, it became virtually impossible to secure permits in a timely manner and open an “old economy” pursuit, like a factory or a shipping company. Moratoria against such development, even in industrial districts or near airports, were commonplace. All things virtual, however, were avidly courted and afforded the most expedited public review.

In California, where Bay Area Information Age businesses parlayed their media and financial power into unprecedented political influence, entire sectors of the economy stopped expanding. During 1995 to 1998, as the state roared out of recession, nearly 20% of California’s 1 million new jobs were in manufacturing and wholesale trade, essential sectors for middle-and working- class social advancement. As public enchantment with the new economy devalued such activities, however, the state’s manufacturing and wholesale-trade employment growth went negative between 1998-2001, despite a still robust economy.

At the same time, California’s spending priorities were distorted by the false promise of Internet wealth. As in most states, the over-concentration of stock-market investment in a handful of unproven companies fostered dramatic tax-revenue increases when their executives exercised their stock options. Despite many warnings to the contrary, California’s political leadership acted as if such trends would continue forever. The state went on an unprecedented hiring binge. Nearly 210,000 new employees were added to state and local government bureaucracies since 1998, an astounding 10% growth in total public-sector employment in just three years.

When the bubble burst, of course, tax revenues plummeted, but the state’s new payroll obligation of more than $10 billion remained. Ironically, that’s almost the amount of California’s projected $14-billion deficit that threatens to cripple state public finance.

Broadband communications may one day live up to its boosters’ claims and earn a niche, perhaps even an important one, in the U.S. economy. If the last decade is any guide, however, we can ill-afford the inevitable long-term costs of such policies at a time when bread-and-butter concerns like defense and energy demand far more serious attention.

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David Friedman, a contributing editor to Opinion, is a Markle senior fellow at the New America Foundation.