New Economy - Skeptics Abound

SKEPTICS ABOUND

While the booming economy proceeded and commentators routinely chalked it up to the breakthroughs in technological development, there did exist the many, though much quieter, killjoys who insisted that the boom, as large and prolonged as it was, represented nothing evidently new as much as it represented a traditional stock-market bubble, a run-up of investment fueled by unsound predictions of lucrative returns and can't-miss myths that would, eventually, crash on itself. For instance, e-commerce itself, despite its tremendous publicity, was a very small factor in the surge in productivity and economic growth in the late 1990s. Both business-to-consumer and business-to-business e-commerce sales in 2000 accounted for only about one percent of total U.S. sales in those categories.

The first empirical challenges to the New Economy thesis came with the tech-market bust of spring 2000. Through the rest of the year, tech stocks sank. In late 2000 and 2001, moreover, the economy was certainly slowing, and analysts debated whether the United States was heading for recession. The Nasdaq high-tech stock market index, the benchmark of the New Economy, plunged through much of 2000 and early 2001, most glaringly in the realm of dot-com start-ups, and profits of Internet giants, such as Cisco, fell off dramatically. The rose-colored predictions by equity analysts in late 2000 of sustained long-term profits growth of 19 percent, according to The Economist, just months later sounded like wishful fantasies. By 2001, with the U.S. economy slowing and unemployment on the rise, the idea of a New Economy immune from the capitalist business cycle was transformed into a laughable notion that few were willing to admit to having entertained. When the technology markets began to retrench in 2000, major IT firms, such as Cisco, Sun, and Nortel, long remained certain that they could soundly weather the storm without any substantial decline in earnings. In the end, however, such companies ended up lowering earnings projections, stinging many New Economy faithful into accepting that one of their cherished assumptions was unsound.

While dot-coms and other Internet companies rejoiced in what they saw as the New Economy's abandonment of economic laws, many acted as though the Internet Age brought the suspension of labor laws as well. While a tight labor market and a seemingly endless supply of venture capital turned many hotshot dot-coms into attractive places to work, once the financial bottom fell out of the market and these firms scrambled for cover or closed their doors, many neglected to adequately honor their employee agreements, resulting in drastically thickened caseloads for employment-law firms across the country, particularly in New Economy hotbeds like California. Failure to adequately warn employees of, or compensate them for, mass layoffs was the most common blanket claim against such firms, encompassing negligence on agreements, loosely worded contracts, and even misuse of 401(k) withholdings. As companies surged ahead to take advantage of the hot dot-com economy, according to Business Week, many left clear human-resources policies and contract language on the back burner. When stock options, health benefits, and even back pay were increasingly pulled out from under employees as the Internet economy cooled, employees turned to litigation.

Another claim of the New Economy enthusiasts also suffered from embarrassing realities in the early 2000s. According to The Economist, IT-based inventory control systems and the widespread adoption of just-in-time inventory techniques were supposed to ensure that production across companies' diverse operations, even across international borders, would be so systematically and expertly controlled that large inventories would never be permitted to swell up due to excess production relative to sales figures and projections, thus avoiding the massive inventory stockpiling that helped generate earlier recessions. The evidence across many IT-saturated industries by 2001, however, suggested otherwise, with companies that implemented the latest cutting-edge software forced to scale back workforces due to excessive production.

In the end, the Internet blitz followed the pattern of other major technological innovations, such as railroads and electricity, before investors, awed by the new technology and its potential, poured money into the industry and sent stock prices soaring, only to watch the market plunge as economic reality began to catch up. Between spring 2000 and 2001, according to Laura D'Andrea Tyson, dean of the Haas School of Business at the University of California at Berkeley and writing in Business Week, more than half of the previous five years' astonishing gains in the high-tech sector were obliterated by the stock-market plunge, resulting in an unprecedented cycle of wealth creation and destruction.