The long bust?

The long bust? By Andrew Leonard. With the collapse of stock prices, Silicon Valley hype also takes a fall.

Published September 1, 1998 7:00PM (EDT)

In the wake of Monday's continuing stock market meltdown -- the Dow down by 512 points, the worst day ever for tech-heavy NASDAQ -- shell-shocked investors might be excused for wondering what ever happened to the high-tech-boosted "new economy." Stuff like this isn't supposed to happen in the age of the "Long Boom," is it? Didn't Silicon Valley solve the problem of the boom-bust business cycle?

It's almost always a mistake to infer anything overly profound from a sudden market swing. But the last few weeks of steady market declines, combined with recession in Asia and political chaos in Russia, are sending strong signals that the economy is in for a rough ride. In an effort to find out how the current gloom jibes with "new economy" hype, Salon tracked down one of the economists whose work was cited in the now infamous "Long Boom" article in Wired magazine -- a high-water mark for digital-revolution euphoria.

But Paul Romer, a Stanford economist who specializes in "new growth theory," was quick to disassociate himself from "new economy" pipe dreams.

"I can't control where I get cited," said Romer, who emphasized strongly that his research interests do not mesh closely with "new economy" hype.

"I think that there has been a lot that has been said about the current economy which is silly and was destined to be revealed to be silly," said Romer. "This includes a lot of the hype about how extraordinary the recent economic performance has been."

Romer distinguishes between what he does, which is research the underlying "growth trends" that characterize economic growth over long periods, and the "new economy." The latter, he says, is a "vaguer concept popular with journalists" prone to such assertions as "we're never going to have recessions anymore, inflation isn't coming back and the trend rate of growth has permanently increased."

Romer outlines "new growth theory" thus: "You want to think about the performance of the economy as being determined by an underlying trend, and then departures or wiggles around that trend. Those wiggles include things like recessions. During the middle of this century, macro-economists became obsessed with the wiggles, because we had this very disruptive event, the Depression. What new growth theory says is that in the long run, it matters more how fast the trend is increasing than whether we are in a little bit of a downturn at the beginning of a wiggle, or an upturn coming out of the wiggle."

"The problem with a lot of the hype right now is that it completely missed that point," said Romer. "Those people who are making those exaggerated claims mistook a positive upturn in one of those wiggles for a sign that the trends had completely changed."

The cheerleaders for the "new economy" may even be lulling us into unhealthy inaction, suggests Romer. One of the side effects of the booming economy of the 1990s has been that it provides ample justification for policymakers to do nothing. With the stock market setting new records every year and growth rates revved up, who could argue with Silicon Valley's success? Let the free market ride and get out of the way!

But it's not so simple. Romer's research suggests that, while the government shouldn't get involved in a short-term game of picking winners among specific industries, state policy can influence long-term productivity and growth trends. As examples he cites the creation of the land-grant university system in the late 19th century and the establishment of computer science departments in the 1950s. Romer believes that we could be experiencing higher growth rates than we are now if we helped fuel them with more appropriate policies.

"The reason new growth matters is that policy can influence that long-run trend," said Romer. "You wouldn't care if there was nothing you could do about it. But we need to get the policymakers to focus on long-run fundamentals, because I don't believe we have fundamentally changed the trend rate of growth in the economy yet. I don't think we've made the changes that we need to make."

So is the current stock market decline a wake-up call for new thinking on how to boost the economy for the 21st century? Maybe, maybe not. Romer advises not taking the ebbs and flows of the market too much to heart.

"I honestly think that the stock market is not a very good indicator of whether we are succeeding or failing," said Romer. "There is too much noise in the stock market. Generally, as you look at the last 10 or 15 years, the high-tech sector has performed exceedingly well, and there is a good chance that it will continue to perform well for the next 10 years or so. And the stock market will go up and the stock market will go down."

"But I would worry about the following question," said Romer. "In 2030, when they look back and say, 'You know, it's a really good thing that we did "X" at the turn of the century,' what are they going say? Are they going to be able to see anything similar to what we did back in the 1950s?"

Unless something changes, Romer said, the answer would appear to be no.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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