It was inevitable that America's dot-com economy would gobble up Super
Bowl advertising. Adoring media have wildly overblown both of them. Each
somehow induces political leaders and ordinary citizens to shower vast sums
of wealth on the fabulously wealthy for elusive promises of "community
development" or "new," perpetually profitable industries.
Yet, while football-focused development is a relatively harmless
diversion, cyberfantasies are warping U.S. society in far more fundamental
ways. Spurred by unprecedented stock-market wealth, land-use, tax and
development policies are skewing economic incentives almost exclusively
toward a postindustrial, dot-com society. Alternatives that might better
distribute technology and capital among the population and diversify the
economy are being sacrificed.
Today's dot-com fortunes owe as much, if not more, to broad political
and demographic factors as they do to novel technological discoveries. The
biggest "new thing" in America over the last decade wasn't the Internet, but
the unexpectedly huge flow of foreign and retirement capital into
once-sleepy equity markets.
After the Cold War, security-conscious overseas investors pumped money
into the United States. Aging baby boomers demanded, and got, highly
favorable tax treatment for retirement investments, including expanded
401(k) and individual retirement accounts funded with pretax income, and
lower capital gains when they cashed in their shares. In response, a torrent
of money flowed into stocks. Annual mutual-fund and foreign U.S. stock
purchases alone rose from about $4 billion in 1990 to more than $200 billion
in 1999, by far the greatest increase in U.S. history.
All this profoundly changed the logic behind the stock market's
performance. Cash-flush fund managers, for instance, invested heavily in
giant corporations with millions of outstanding shares so they could move
large blocks of money in and out of the market. By the late 1990s, defying
years of retrenchment by large firms and the rise of small and mid-size
enterprises, giant-company stocks outperformed the rest of the market.
Investors kept demanding returns much higher than even the big-cap
run-up could possibly justify. They began searching for places to put money
that were not constrained by traditional accounting and business principles.
Information-age electronics and telecommunications companies claiming to
have discovered a "new," limitless kind of industry fit these requirements.
By 1998, prices of "technology" firms--many, in fact, were retail or
marketing operations possessing pedestrian skills, few technical employees
and no earnings or likely prospects for generating them--were rising at
astronomical rates. During 1999, they accounted for nearly 80% of the
$5.2-trillion increase in the total value of U.S. corporate equities.
Despite solid profits, high productivity and robust consumer spending, the
combined value of America's bedrock, high-employment industrial
stocks--aerospace, utilities, insurance, banking, autos, travel, real
estate, food and health--did not grow at all. About 70% of all U.S. stocks
were negative for the year.
Whether these trends presage a market meltdown is anyone's guess. More
certain is the influence the dot-com economy exerts over the public
imagination. Enticed by visions of staggering wealth accumulated by
white-collar whiz kids toiling in campus-like buildings, public officials
are gambling as never before on a postindustrial future.
Throughout the country, urban land-use policies are increasingly and
exclusively oriented toward high-end activities believed essential for
entering the information age. Factory or warehouse projects proposing "old"
economic elements or, even worse, fostering traditional working- and
middle-class jobs, are opposed on a variety of environmental, zoning and
similar grounds. Reflecting such sentiments, information-age companies
receive billions of dollars in relocation incentives, tax breaks, training
grants and expedited permitting.
Dot-com CEOs are proving as adept at corporate welfare as sports-team
owners who lobby for publicly financed facilities. Internet retailers
exploit mail-order state-tax exemptions to offer products at prices local
stores, which must pay such levies, can't match. Efforts to close such
potentially devastating loopholes are ineffective against the dot-com
juggernaut. Few even noticed when Congress immunized software firms from Y2K
programming negligence liability, though the same protections have never
been extended to other critical, but lawsuit-plagued industries like
aerospace and pharmaceuticals.
Even the hyperbole is similar. When accounting groups proposed to end
the chronically unfair advantage that stock-option compensation (which isn't
charged against business revenues) enjoys over wages (which are), dot-com
advocates went ballistic. "If we have to record a reduction in income [to
offer options]" one said in a widely circulated report, "we won't be able to
keep employees. It would destroy all American business and Western
Behind all this is the conviction that disfavored industries are
naturally fading away. Service-led growth, and the dramatic inequality
increasingly evident in media-favored cities like New York, San Francisco
and Washington, may be troubling but under such circumstances, unavoidable.
Thankfully, dot-com opulence is more than adequately replacing the sectors
of the past.
But it isn't. U.S. job growth in the 1990s was the slowest since the
1950s. Employment grew just 1.8 times faster than the population expanded,
compared with more than 2.6 times as fast during the previous three decades.
For the first time, retail and service occupations, the lowest paid of all
major industry groups, now comprise nearly half of U.S. employment, up from
just 37% in 1980. The dot-com boom did nothing to halt America's
manufacturing decline. Production employment fell to just 14% of the total
economy, an all-time low.
More troubling still, U.S. job growth was least impressive in precisely
those regions that most fully realized the dot-com model of service and
retail-sector expansion. Communities with the greatest average
service-employment growth and manufacturing-job losses, including most of
the politically influential Northeast, grew at just half the national rate.
While many spun showcase "high-tech" projects as evidence of an urban
comeback, U.S. core cities grew much less rapidly, relative to the nation,
than in previous decades.
At the same time, regions that fostered full-spectrum economic growth
in lieu of service-sector expansion--Riverside-San Bernardino, Las Vegas,
Phoenix and Dallas, for example--grew far more rapidly, and in more balanced
ways, than the national norm. Manufacturing, distribution and high-tech
enterprises jointly expanded as they absorbed middle- and working-class
families displaced from deindustrializing urban centers. Yet, few were
hailed as "miracles"; rather, they were condemned as lowbrow sprawl.
Therein lies the deepening paradoxes of the dot-com era. Why do we
celebrate regions that promote unbalanced inequality but revile those that
foster more economic opportunities for everyone? Why do we burden wage
income and savings with regressive taxes but exempt stocks from similar
treatment? Why is it so much harder to open a factory in most urban areas
than to build high-end, exclusive development projects? Why do we act as if
a postindustrial future is so certain when the "old" and "new" economies
flourish together when given the chance?
America's peace dividend--the tremendous capital surge throughout the
1990s--is being squandered on a strikingly limited, elitist myth. Rather
than wait for a catastrophic "correction" to fix the problem, incentives
presently skewed against more equitable alternatives should be redressed.
Most critical is to end the politically based distortions that artificially
inflate dot-com and related sectors. Working wages and savings should be
afforded the same tax treatment as stock and equity investments. Local
subsidies and permitting procedures that discriminate against working- and
middle-class development should be constrained by industry-neutral, readily
understood standards and rules.
It's possible that Internet entrepreneurs and coffee shops will still
define America's destiny even with a level economic playing field. Forcing
such a result seems an unnecessary risk. Point-and-click mail order has made
a few wealthy and influential, but it's time to assure comparable
opportunities for those pursuing other, equally promising game plans. *
David Friedman is a Markle Senior Fellow at the New America Foundation.
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