World's wizards at the mercy of the little man
February 3, 2000
by Irwin Stelzer
THE SUNDAY TIMES
January 30, 2000
The wizards of industry gathered in Davos and the wizards of monetary policy that will convene this week at the Fed have a secret in common. They are, in fact, no more powerful than the Wizard of Oz.
But there is a difference between today's wizards and Frank Baum's fictional powerless little man with the imposing facade. The Oz faker knew that he was a con man. The Davos glitterati and the Federal Reserve Board's monetary policy committee really believe that they control events when they are, in fact, virtual prisoners of those events. It is America's millions of consumers who are in charge.
And those consumers are feeling just fine. On Tuesday America's long-running expansion will enter its 107th month, making it the longest running in the nation's history, surpassing the 1961-1969 run that ended when policy makers made the mistake of trying to finance both the war on poverty and the Vietnam war without raising taxes. Some 20 million new jobs have been created; trillions of dollars of wealth have showered down on America's shareholders and homeowners; productivity has soared; and the government's perennial budget deficit has been transformed into a surplus projected (mark carefully the word "projected") to total almost $2 trillion over the next ten years.
As they look forward to a world in which their incomes will rise, their wealth will increase, their government's debt will vanish, consumers are more confident than they have ever been. The Conference Board, a research group funded by businesses, reported last week that its index of consumer confidence rose in January to the highest level it has ever reached since it began being recorded in 1960. And Lynn Franco, the Conference Board's research director, says that "consumer optimism and consumer spending could rise even further in coming months." Since consumer spending accounts for about two-thirds of America's GDP, it seems more rather than less likely that forecasts that the economy will continue to grow at a rapid rate will prove correct.
The money markets know all of this, and haven't waited for the Fed's policy makers to catch up with events. The stock market has already priced in three interest rate increases of one-quarter of a percentage point each. All that is left for the Fed to do is underwrite these expectations with a formal declaration of the anticipated increases. It has little choice but to do just that. With America running a huge trade deficit that might induce foreigners to wonder whether they want to continue financing the nation's consumption binge; oil prices at levels not seen since the Gulf War; Europe and Asia moving from stagnation to growth; and some asset prices at levels so high that even many optimists are overcome with vertigo when they look back at historic price:earnings relationships, interest rates have nowhere to go but up.
Just as Greenspan and his colleagues are the prisoners of economic forces, the executives gathered at Davos to ski, scheme and schmooze are the prisoners of a technological revolution that some few of them understand, most of them barely comprehend, and some just don't get. AOL and Time Warner merged not because they wanted to, but because they had to. Gerry Levin was not consumed with a desire to abandon his smart suits for open-necked sport shirts, nor Steve Case with a yen to don a suit and tie. They both had to change because technology made them do it.
AOL knew that it would be out of business unless it could offer its customers the speedier Internet access that Time Warner's cable systems make possible. And Time Warner knew that it needs AOL if its massive inventory of films and music is to be distributed over the Internet sooner rather than later. Levin and Case may be first class executives, but events are in the saddle, riding them, rather than the other way 'round. It is not that the Davos biggies are powerless. They do, after all, command huge financial and human resources. Rather, it is that most of them are chasing after new trends that are being created by jeans-clad innovators so young that they would once have been consigned to the mail rooms of most of the corporations represented at Davos. "Anxiety Is The Engine of the New E-conomy" proclaims the Wall Street Journal in its run-up story to the Davos conclave.
And so it is. The new buzz-sentence is that your competitors are only "one click away". Po Bronson, in his wonderfully entertaining "The Nudist on the Late Shift and Other True tales of Silicon Valley", captures the new precariousness of corporate life by contrasting Silicon valley with other communities. "Boston is a nicely arranged ... meal on Sunday china, and Seattle is a huge hunk of Microsoft barbecue..., but Silicon Valley, California is ... a stew that never comes off the gas heat.... It's spiced up with high achievers from every nook of the world. Heat waffles off the ground.... This market is scary-competitive."
And not only for businesses, but for governments as well. Just as private sector leaders are trying to figure out how to maintain anything like profitable price structures when their customers can troll the web for bargains, governments are trying to figure out how to maintain tax structures when businesses can operate from web sites rather than factories.
In America, state and local governments are desparate to tax the sales of firms such as book-and-everything-else seller Amazon.com. In Britain, the chancellor is seeing his tax on betting undermined by click-accessible e-betting shops in Gibraltar. Andrew Shapiro, a senior adviser at the non-profit Markle Foundation, writes in his book, "The Control Revolution", "If governments were Hollywood carictures, the average nation-state today might be a cross between Arnold Schwarzenegger and Woody Allen; a neurotic powerhouse worried about its own irrelevance and eager to show otherwise."
Irrelevance. That's the disease that dare not speak its name on the slopes of Davos and in the marbled halls of the world's central bankers. It threatens to become pandemic. And there is no cure. That's the good news. Right now, there isn't any bad news.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.