Thursday, Jul 24, 2008
Neither Bush nor the Democrats have grasped how to get the country moving again: Spurring innovation back to boom-time heights.
Nov 18, 2002 | The Democrats' Election 2002 script was supposed to go something like this: Swallow misgivings about President Bush's Iraq plans; go along with a moderated war-powers resolution; turn the discussion to the economy and how it, well, sucks. There is now a raft of explanations for why that didn't work. Much of the country remains preoccupied with security and terrorism. People like the president personally and rallied around him. Polls indicate that people don't blame Bush for the economy or think Washington can't do much about it. But here's one explanation that seems to ring most true: The Democrats didn't have any bright ideas on how to turn the economy around. And the American people figured that out.
In the ensuing couple of weeks, we've continued to get the same mixed picture of where the economy is at and where it's headed. Alan Greenspan and his normally incrementalist Federal Reserve Board cut short-term U.S. interest rates by a whopping 50 basis points (that is, a half percentage point) from an already low 1.75 percent, leading many market watchers to think the Fed believes that things are worse than it's been letting on and are going further south quickly. Add in some war fears, and the stock market once again gyrates downward. But after you discount the factor of uncertainty, the markets -- like the American people -- are looking for leadership. When will some person, industry, or trend step up, reawaken our innate and uniquely American faith in the future, and lead us onward and upward, the Osama bin Ladens of the world notwithstanding?
And what should the leaders focus on when they decide to lead? The new economy. Don't laugh. That by now old mix of hardware, software, e-commerce and new-media businesses, and emerging and established companies was the engine that drove the good-times economy. Unless someone gets serious about how to get that sector back on its feet, it's going to be a long tortured haul before those good times roll again. And while the Democrats may have muffed their opportunity to articulate a plan in time for the midterm elections, it's not as if any hopeful signs are emanating from the White House, either.
Let's start with the all of the anecdotal stuff around us, particularly out West. First question: Will the last out-of-work person to leave the San Francisco Bay Area please turn off the lights? The figures say that the unemployment rate is 5.7 percent nationwide and 6.3 percent in California (and 7.9 percent in Silicon Valley). But we're finding those numbers as hard to believe as Enron's balance sheets. What about those throngs of working-age people in coffee houses every day? We suspect those places would be even more crowded save for the legions of the busted, long-term unemployed who can no longer afford a cuppa regular joe, let alone an overpriced one with steamed milk. A scan of the papers shows that things seem little better in the other big Western tech centers, from Seattle to Denver to Albuquerque to Phoenix to Austin. The scene isn't as grim in diversified L.A. -- never exactly a hotbed of the tech boom -- but even from there come reports of more and more "For Rent" signs in tony shopping districts such as Melrose Avenue in West Hollywood.
Here's the heart of the issue: America's growth depends on innovation -- much of which has traditionally come from the West. In the latter half of the 1990s, a disproportionate share of the U.S. economic and job growth came from new companies at the bleeding edge of innovation. The only bleeding edge these days is on the big ax that's taken out so many of those companies. And, to circle back to the leadership problem, the most disturbing thing about this is that no one -- politician, business leader, whatever -- is talking about it, let alone leading us to a solution. How do we get the innovation machine going again and plant the seeds of the next boom?
Since the carnage began some two and a half years ago with the NASDAQ meltdown, we've all been told -- and we've desperately wanted to believe -- that the next wave of prosperity is just around the corner. Well, here's a news flash: It's clearly not. We keep turning corners only to find the same damn dark alleys.
Many analysts are now saying that the ongoing venture-capital smackdown could last as long as another two years. San Francisco-based VentureOne and Ernst & Young in late October issued survey results indicating that "with $3.9 billion invested in 464 financing rounds, investment in the third quarter of 2002 was at its lowest level in four years."
The Washington Post -- in a six-part profile of the tech bubble published this past week -- cited statistics indicating that that venture capitalists at the peak of the boom in 2000 funded 6,500 companies to the tune of $107.5 billion. This year, about 1,500 companies will get a little bit over $10 billion -- a funding level last seen in 1996. This all means that many early-stage companies that are still running on fumes will run out of funding. And if two years of pain are what's in store for the start-up sector, an essential motor of job creation, that's yet another 24 months before the seeds even get planted for the next crop of start-ups.
But what about the big hardware and software companies? Well, many of them are still busy laying people off (such as Sun Microsystems, which last month announced it will be cutting another 4,000 jobs). Judging by forecasts issued by the Washington-based Precursor Group, an institutional-investment research firm, things are starting to turn around, but very slowly. The firm reports that spending on information technology peaked in the third quarter of 2000 at an annualized $395 billion, bottoming out in the fourth quarter of last year at an annualized $327 billion. Spending started to tick up in the third quarter of this year and may rise between 3 and 6 percent in 2003 (with Microsoft emerging from the tech blow-out with its strongest position in five years, Precursor says). But that growth will be weak relative to what Precursor says is a historical trend of an 11 percent annual growth in IT spending.
Perhaps that's just a sign of an industry that's matured. OK. But even Greenspan says that the broader economy has only scratched the surface of the kinds of productivity-enhancing innovations that the tech industry has been producing. The prognosis is dire. We may be in the throes of a cycle where an underfunded entrepreneurial sector just isn't capable of creating new innovations -- the kind of that get commercialized by the big boys and adopted throughout the economy, thereby creating jobs, rising incomes and stock values, prosperity, and yes, happiness for all.
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