The best economic insight this writer has encountered came not from an economist but from an engineer.
It was in the mid-1990s. Computers were gaining muscle. The internet was moving from nerdy backwaters into the commercial mainstream.
Together, people said, computers and the internet would change everything—work, economics, business, everything.
Heavy industry would become obsolete. Labor would give way to knowledge. The old economic order would crumble.
Then came the insight.
"Somebody," said John Kennedy, then editor of Oil & Gas Journal, "still has to make brake parts."
For that morsel of ingenuity, unfashionable as it was at the time, Kennedy should get a Pulitzer Prize. It was prophetic. When Kennedy uttered it, things hadn't even gotten weird yet.
The web craze
Weirdness came when the worldwide web swept through business like flu through a kissing contest and turned the stock market goofy.
Day-traders of flighty stocks became cultural heroes. Twenty-year-old programmers commanded six-figure salaries and sure-thing stock options.
Entrepreneurs with big ideas for the web and homes in three states sipped pricey wine from crystal goblets and talked of a new economy in which profits no longer mattered. The day-traders wanted to see burn rates. Spending promised growth. Growth meant riches for everybody.
And pity any poor sap who made brake parts for a living.
As things turned out, of course, the new economy was better at manufacturing fools than anything else. Even in an online world, profits matter. They matter a lot.
The bubble burst in 2000. The rest is history.
In a presidential election year, this all is worth remembering.
Presidents receive credit or blame for whatever happens in the economy during their terms of office, whether or not they had anything to do with it.
Former President Bill Clinton thus gets credit for the long expansion that lifted a lot of economic boats during his two terms.
Likewise, President George W. Bush gets credit for the strong growth under way now, although Democrats will do their best to show why he doesn't deserve it. No political point is intended here. It's just a fact that the Clinton and Bush economies differ.
Clinton's was the weird one, the dot-com frenzy, the stock market spasm. It wasn't Clinton's fault that web-crazed investors lost their senses—and their fortunes—and that so many of those coveted stock options turned out to be worthless.
It wasn't Clinton's fault, either, however much the phenomenon grew out of the times, that so many managers and accountants lost their ethical moorings and came to embody the very worst about business.
It's simply worth asking, when Clinton's political party looks back nostalgically at their man's growth years, whether Americans should want to lurch greedily through that intoxicating muck ever again.
The current expansion lacks the giddiness of its extended predecessor but may prove even more durable.
According to the Department of Commerce, the US gross domestic product in the first quarter grew at an annual rate of 3.9% after a 4.1% increase in last year's fourth quarter.
On July 20, Federal Reserve Board Chairman Alan Greenspan, in his semiannual report to Congress on monetary policy, described the economy like this:
"Economic developments in the United States have generally been quite favorable in 2004, lending increasing support to the view that the expansion is self-sustaining. Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment."
That tone of contentment contrasts with the obvious worry Greenspan showed in a December 1996 speech to the American Enterprise Institute. Discussing the prices of stocks and other earning assets, the Fed chairman famously warned of the "irrational exuberance" then gripping markets.
Capital spending
In his latest testimony, Greenspan noted a strong increase that began in the second half of 2003 in capital spending—"no doubt spurred by significantly improving profits, a low cost of capital, and the investment tax incentives enacted in 2002 and enhanced in 2003."
The spending has continued this year.
"Orders and shipments of nondefense capital goods have been on the rise, and backlogs of unfilled orders for new equipment continue to build," Greenspan said.
Instead of trading dot-com stocks, in other words, people are making brake parts.
As Kennedy said, somebody has to do it. Kennedy, by the way, makes intellectual brake parts as president of 21st Century Energy Advisors (www.21stcenturyenergy.com).
