March 28, 2001, 12:00 AM

On Irrational Pessimism

This is no time to give up on the Internet in retailing or any other endeavor. The Internet economy is in transition—driven by the real market for goods and services.


When Alan Greenspan testified before the House Banking Committee last month, he was asked why the Fed wasn’t moving even faster to lower interest rates to jump-start a stalled economy. Still others questioned why Greenspan got on board the Bush tax cut train. Not long ago, such skepticism was unthinkable. The Fed Chairman, the closest thing the American economy has to a Deity, is hardly accustomed to being second-guessed.


But if you listen carefully to Greenspan, you realize why the Fed boss is not about to overreact to the downward spiral of the Nasdaq, which is evoking as much irrational pessimism in its stunning dive as it did irrational exuberance in its breathtaking climb. Remember it was Greenspan who warned against the latter, and it is Greenspan who now cautions us against the former. Indeed, Greenspan points to the underlying strength of the U.S. economy, which has its underpinnings in the remarkable productivity growth of the last five years. In that span, the nation’s productivity, as measured in output per hour, rose at an annual 3% clip-double the average rate of the prior 25 years. Such productivity is largely the result of information technology and the commercialization of the Internet, and Greenspan thinks the end of this productivity boom is nowhere in sight.


Thus, while the President promotes his big tax cut as an antidote to an impending recession, Greenspan accepts the cut for an altogether different reason: we can afford it. He argues convincingly that we continued to enjoy rapid productivity growth in the last half of 2000 even as we entered a no-growth economic cycle. That, he says, “adds to the accumulating evidence that the apparent increases in growth of output per hour are more than transitory.”


It means that the huge surpluses projected by the Congressional Budget Office for the next decade are likely to be real, because the productivity improvements we are making are not ephemeral but rather structural in nature. To emphasize the point, Greenspan notes that American industry has yet to implement much of the information technology developed in the last five years, let alone what is under development now. This is clearly the case in retailing. Even the shattered tech-heavy Nasdaq gives reason for this bullish long-term view. While it has lost fully 60% of its value in the last year, the Nasdaq Composite is still double what it was just five years ago, before Amazon became king of the jungle.


In short, this is no time to give up on the Internet revolution in retailing or any other endeavor. The collapse of Internet equities does not signal the end of this revolution. It merely underscores the fact that the Internet economy is in transition-driven no longer by the stock market but by the real market for goods and services.


Last year, American net worth declined 2% thanks to the demise of the Nasdaq. It was the first such decline since the end of World War II, when the economy went through another transition-from war to peace. Now as then, there are pessimists who fear this decline in wealth spells our economic doom. But let us take a lesson from the last transitional decline in American net worth. In 1946, Montgomery Ward, fearing that the end of wartime prosperity would usher in another depression, pulled in its horns. At the same time, rival Sears Roebuck, believing that washing machine production would rev up as tank production wound down, began building huge stores throughout the novel bedroom communities springing up just beyond America’s city limits. We all know how these two strategies played out. Retailers inclined to cut their investment on Internet initiatives in light of the Nasdaq’s woes would do well to consider the consequences of missed opportunities and remember December 28: The day Ward’s filed for Bankruptcy after 103 years in business.

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