08 Mar 2002 Out with the Old and In with the New
The week has been an exciting one for stock investors as proof of a turn in the economy mounted. Notably, in yesterday’s Congressional testimony, Mr. Greenspan said the economy is “already improving,” revising comments made before Congress just a week earlier. Professionals on market trading floors say this rally represents real buyers, not just short-coverers. Also encouraging is the fact that the rally is more orderly than previous ‘panic’ rallies where money managers feared being left behind and, consequently, over-inflated stock prices as they bought in at any cost.
As welcome and exciting as the revelation of an improving economy is, an even more compelling story is being told by today’s news and by the markets. You know very well my strong belief that America’s future lies in the ‘New Economy’ or the ‘Information Age’ and not the ‘Old Economy’ or ‘Industrial Age.’ And that free markets and competition bring out the best in business enterprise. Compelling proof of that claim comes from today’s headlines and market actions.
The first thing you notice is they are all green. The biggest news was the big surge in non-farm productivity. Strong growth in productivity allows our economy to grow faster without inflation pressures than it would otherwise. The consumer has been the power in this economy all through the recession. Rising consumer credit shows that consumers have confidence in their ability to repay their loans. Automobile loans represented, by far, the largest part of the increase as car manufacturers continued their discounts and zero percent financing incentives, continuing that sector’s unexpected strength. Consumer credit is colored green because of its fueling of the economic expansion, but if the expansion stalls, it could become a drag on the economy. We will watch it and other consumer measures very closely in the coming months.
The New Economy
The Industrial Revolution was the major force in this country’s economy beginning in the late 1800’s, but that influence began waning in the mid 1900’s. One of my favorite prognosticators, Don Hays, thinks that the Industrial Revolution reached the peak of its health in the mid-60’s when General Motors’ stock price topped out at a price that was not bettered for another 20 years. Others, such as Alvin Toffler, place the origins of the Industrial Revolution’s decline in a similar timeframe.
New names, such as IBM, Polaroid, and Xerox came into prominence in the fifties and sixties as the old names began to loose some of their luster. They were followed by even more exciting companies like Intel, Cray, Apple, and Microsoft. During World War II, IBM’s computers were used to process information faster than ever before. Thousands of lives were saved, as solutions to wartime problems, such as accurate firing solutions and rapid code breaking were made possible by these machines. After the war, it became increasingly apparent that technology could be used even more effectively in industry to save hours and dollars.
Up to and including WWII, this country’s might was in its ability to produce high quality goods rapidly. After the war, a new force began to evolve. As servicemen returned from overseas and women left their wartime plants for home, there was a new focus on quality of life. The homebuilding industry exploded. A new interstate highway system enabled easy travel spawning the motel and the fast food industries. Peace and prosperity drove Americans’ desire for, and industry’s willingness to supply, new goods and services that dramatically improved living standards. The shift toward a service-based economy began to flourish.
During the years following the war, and more particularly since the late sixties, information and productivity took on a life of their own. Whole industries evolved around the notion of providing customers with the tools to improve their efficiency and productivity by harnessing information, just as steam and electricity drove the Industrial Revolution. Information has become the power that will drive the 21st century.
The markets understand the shift, but it is hard for people to let go of the past. The ‘Internet Bubble’ was about the excitement of the information revolution and all its promises, but it was also about too much excitement too fast. The past is rich with similar bubbles that marked major shifts in economic paradigms. Each event demonstrates how the entrenched old views eventually gave way to the new ways, but not without pain and displacement.
Just two days ago, President Bush announced the imposition of tariffs designed to protect the U.S. steel industry against cheaper imports from abroad. The justification was that the foreign governments bolster their steel producers, enabling them to sell at lower prices than they might without such support. Guess who objected to the tariffs? You are right if you said the customers of big steel, the most efficient and productive domestic producers of steel, and me. Free markets are ALWAYS better than government control and manipulation – look at our utility industry and the telecom industry for proof. For that matter, look at what happened to the totally controlled Soviet economy!
The market reaction to the tariffs told the story better than any journalist could. Here’s an excerpt from a Bloomberg press release: “Shares in U.S. Steel, the largest [and less productive] steel maker, rose 20 cents to $17.95; Nucor Corp., the most profitable manufacturer, declined $1.61 to $58.53. The industry has lost most of its market value since 1998, when a surge of imports began.”
In other words, the efficient mills thrive in free competition and the non-efficient producers do not. Clearly their customers want the cheapest steel they can get. David Phelps, president of the American Institute for International Steel said “[p]rofitable, successful, efficient mills don’t need protection, and weak and bankrupt companies will not be saved even with a 40 percent tariff.” The tariffs simply prolong the inevitable failure of the inefficient steel producers and they make the raw materials for everyone tied to steel that much more expensive.
The damage tariffs cause is actually worse than the problems they are designed to fix. Take for example General Motors and Ford. The chief raw material for their cars just went up, making their products more expensive than those produced with cheaper steel. What happens when GM and Ford can’t sell cars? They lay off or fire workers, probably in greater numbers than the steel industry might have lost without the tariffs.
Over two thirds of the world’s population is in poverty. This number represents millions of people who will work for next to NOTHING. Just as sure as nature abhors a vacuum, business capital seeks the highest returns. Wherever labor is the major component of manufactured goods, expect those industries to increasingly locate in stable areas where labor is willing and cheap. The days of steel production, and indeed most heavy industrial production in this country, are numbered.
America’s economic strength rests in her ‘free’ markets, which drive competition, her system of laws and patents, which foster innovation, and her relatively friendly tax structure that enables investment. The future of the U.S. economy rests in technology – information and productivity, not in steel or government manipulation. The companies that produce and enable productivity, as well as those that embrace it, will be the winners in the new ‘New Economy.’
