In August 1982, the Dow Jones Industrial Average, which is a pretty good proxy for the U.S. stock market as a whole, stood at 777. Today it is well over 10,000, a 14-fold gain, or 20 fold if you include dividends. In 1995, 1996, 1997, 1998, and 1999, the Standard & Poor's 500-stock index, another good proxy for the market as a whole, returned more than 20 percent--in each of those years! This never happened before in American history. Now, in fact, until 1997, the S&P had never returned more than 20 percent for more than two years in a row. Now, it's five years and counting.
Something profound has been happening in the stock market. Yet, during all this time, during this amazing rise in the market--a 20-fold increase in 18 years--what have we heard from academics, from Wall Street analysts, from media pundits? We've heard that stocks were over-valued, that we're in a bubble, that we're about to crash. We hear it today. We heard it five years ago when the Dow was one-third its current level. We heard it five years ago when the NASDAQ was at one-fifth its current level. We heard it 10 years ago when the Dow was at 2300. We've heard it during this entire robust bull market.
Back in 1996, while I was writing a syndicated column for The Washington Post, I began thinking about--among other things--what was going on in the stock market, especially about why it kept going up and up and up, and about why the experts kept saying it couldn't last, we were in a bubble, the price-to-earnings ratios have gone out of sight. Well, after about a year of work, my colleague at the American Enterprise Institute, Kevin Hassett (who, unlike me, is a full-fledged Ph.D. economist with experience at the Federal Reserve) and I published our findings in an op-ed article in The Wall Street Journal. That was almost two years ago exactly, and the title of the piece was, "Are Stocks Overvalued, Not a Chance." This was 3,000 points ago on the Dow. We got an enormous response to that article--almost all of it negative. So we figured that we were on to something.
The financial establishment doesn't like us. We had struck a nerve, and there was lots of squealing. So from that article came a book, called Dow 36,000, which was published last September. It argues that stocks are considerably undervalued, and that the proper valuation for the market today using the Dow as a proxy is 36,000--or roughly three times current levels. It is a controversial book, there's no doubt about that, but it has been taken seriously by more and more serious economists.
Since the publication of the book, Kevin and I have been on a kind of crusade. Currently, 48 percent of Americans own stock, up from 15 percent just 20 years ago. But we want all Americans to share in the growth of the economy, not to be scared away by doomsayers who have been dead wrong for 10 years now. And we want Americans not to be deterred by a public policy that favors consumption over savings and investment. For this reason, reforming Social Security should be at the very top of any free-market conservative agenda.
We need to cut the cord that binds tens of millions of Americans to Washington, an attachment that is based on a reliance on annuities, on checks from the government, which is basically returning money to citizens--to these same citizens who paid it out in taxes in the first place--with little or no return on their investment. Instead, payroll tax dollars should go into private savings accounts. That is the way to build wealth and personal and family responsibility.
It is also the way to change the political dynamic in America. As more families own stock, their views will change on taxes, on the regulation of business, and on labor and management relations. This investor class already has the power to change the political landscape, but it does not yet know its true strength.
But--at least at this point in history--the rise of the investor class depends on the continued rise of the stock market, and the continued rise of the stock market depends on continued economic growth, but, especially over the past year, I have grown more and more concerned about threats to that growth.
Today, the threats to the new economy are not coming from China or Iran or Germany. They're coming from right here at home, in the form of political intervention. And it is because of my concern about such intervention that I became host of a new Web site called TechCentralStation (at www.techcentralstation.com). Our slogan is "Where free markets meet technology." We serve as a forum for news and opinion on technology and finance from an unabashed free market perspective. We are carrying on, in one sphere, the work of the great Friedrich von Hayek, who, in 1944, wrote the classic The Road to Serfdom.
Let me just read a little bit from The Road to Serfdom on the subject of technology. John Blundell of the Institute for Economic Affairs in London was just telling me that this book was written during the war. Hayek was an Austrian who had fled to England. He was in Cambridge, and was writing the book as he served as an air raid warden. He was a spotter, a fire warden, and he jotted down these thoughts in his spare time, writing one of the great books in history. He wrote:
Well, it is true of course, that inventions have given us tremendous power. It is absurd to suggest that we must use this power to destroy our most precious inheritance, liberty. It does mean, however, that if we want to preserve it, we must guard it more jealously than ever, and we must be prepared to make sacrifices for it. There is nothing in modern technological developments that force us toward comprehensive economic planning. There is a great deal in them that makes infinitely more dangerous the power a planning authority would possess.
And that's what bothers me. A planning authority at work on technology. My concern today, and I think, the concern of everyone in this room, is to help Americans and people all over the world to lead better lives through freedom. And technology is the engine for that improvement.
The Commerce Department reports that the communications, computer, and software industry accounted for an average of more than one-third of the growth in the economy over the past four years. Without this growth the U.S. economy would have increased at a rate of 2.6 percent, which is about average since World War II, instead of its actual rate of 4.3 percent. It's a huge difference. And falling prices in information technology have been lowering inflation by a full percentage point-- meaning lower mortgage rates and lower costs for consumer loans.
But what can public policy do to continue and indeed to accelerate this prosperity? I spent 30 years as a journalist advocating free market public policies and principles for two reasons: first, because the prime value of this nation is human freedom. The Declaration of Independence says that we are endowed by our Creator with certain inalienable rights. Rights that can't be taken away. Among these are life, liberty, and the pursuit of happiness. And second, because free market principles produce prosperity. That's the lesson of the post-World War II era. But what are some of those principles?
One of the most important is a very simple one: Consumers first. This does not mean listening to self-appointed consumer advocates from Ralph Nader on down, who seem today to be in the thrall of plaintiffs' lawyers. No, it means allowing consumers to drive the market with their own free choices. Consumers naturally want more value at lower costs, and by this measurement, the computer industry has been the most consumer-driven industry in the history of the world. So how did this apparent miracle happen?
One thing we know is the government did not get between the creators of new technology and the consumers who stood to benefit from it. Nobody told the entrepreneurs in the garages of Silicon Valley and the garages of Redmond, Washington, what products to invent, how to sell them, what prices to charge, and which deals to offer to consumers-- until lately that is.
Indeed, it is the largely unregulated nature of high technology that has produced the boom that we see today. The Internet has been a virtual regulation- and tax-free zone. It is a fabulous case study for the success of low intervention by government. But something is changing, and I believe it is fear of those changes that has helped to send the NASDAQ index down by about 30 percent in the course of a month. The new economy is threatening to begin to look more and more like the old--an environment in which the winners are not necessarily the companies that please customers the most, but the companies that do the best at keeping government at bay, or better yet, at using government to thwart competitors. Stock prices are falling because the risks to real innovators are rising.
Today, I want to identify five threats that caused TechCentralStation to issue what we call an investor alert on April 3. I didn't say to investors that they ought to bail out of the market or abandon technology stocks. Instead, I said they should be vigilant about the new threats to their assets and their livelihoods. Even better, they should become active in opposing those threats. Otherwise, technology will prove to be not the road to freedom, but in Hayek's words, the "road to serfdom."
What are those threats? First, what we like to call "the revenge of the middle-man." At a recent breakfast that I attended, an FCC commissioner noted that one of the joys of the Internet was that consumers are creating buying groups. By posting notices, 30 of them, for example, could get together and, as a more powerful force, get discounts if they all buy the same model of Chevrolet, for example.
Well, unfortunately in most states, these buyers can't get that Chevrolet directly from the manufacturer. It's against the law. Car dealers are busy in state legislatures getting laws passed that ban direct buying from manufacturers, even the buying of parts and insurance. Here's a real life example: When leases are up, auto manufacturers typically take back the used cars and sell them in closed auctions with dealers. Well, the automakers got an interesting idea: Why not post descriptions of the cars on the Internet and let consumers buy them online? Then, let each consumer choose a dealer for delivery of the car. Great idea. Saves money all around. Unfortunately, dealers in Texas put a halt to it since the process involved buying directly from manufacturers. That state shut down the Internet site.
In a sense, auto dealers are waging war against the American consumer, and so far the auto dealers are winning. Now dealers, suppliers, and other middlemen are feeling a squeeze in many industries because of the Internet. It's true. But rather than adapting to the new reality of high-tech commerce with what David Potruck of Charles Schwab calls "clicks and mortar" sensibility, they are appealing to politicians for help. And if this trend continues, such restrictions will slow the boom in Internet sales and derail this prime engine for growth.
The second threat comes from old-model, or "weird" model, monetary policy. Alan Greenspan's new theory is that wealth causes inflation. Here's what Greenspan laid out on March 6, 2000, in an important speech which I urge you to read. It's pretty appalling. I am paraphrasing: As technology helps make companies more productive and more profitable, their stock prices rise. Higher stock prices mean more household wealth (So far, so good.) But that leads consumers to increase demand which pushes prices up, thus inflation, Greenspan concludes.
But I've got one question: What about supply? Higher stock prices make it easier for companies to raise capital which they plow back into their businesses, increasing supply, so prices don't have to rise since supply rises as demand rises. Look at the last ten years. Ten years ago household wealth and equities totaled about $2 trillion; today it's well over $10 trillion. But do we have more inflation than we had ten years ago? No. We have less. While Greenspan's stewardship has been largely productive, he now threatens to derail the surging economy, especially the capital-hungry high-tech sector, and we're watching it unfold right now.
The third threat is the increasing threat of companies running to politicians for help. Rather than battling for business in the marketplace, they seek advantages through government. For example, what does the consumer of high-tech products want right now more than anything else? If you spend any time on the Internet, you probably know the answer: speed. Unfortunately local telephone lines are still owned by government-created monopolies. And we've been waiting a long time for this to change. During an interview that we did at TechCentralStation, I asked Congressman Tom Bliley (R-VA), the chairman of the House Commerce Committee, why consumers were not getting broadband or fast access to the Internet. His answer: the local telecom bottleneck.
The good news is that small companies are emerging and prodding these local monopolies. Companies like COVAD are offering high-speed service over phone lines. Satellite and wireless operators are developing their own competing services, and cable operators have now signed up more than one million customers for high-speed Internet connections. The technology is there, but unfortunately many of the Internet providers need the cooperation of local telecoms to get their service to customers, and they aren't getting it. Why?
In 1996 Congress and the President agreed on a way to deregulate telecommunications for the benefit of consumers. It wasn't perfect, but it was the best solution possible. The idea was to let local telephone monopolies into the already competitive long distance business as long as the locals opened up their own markets to let other companies compete with them. For three years, the local Bell monopolies dragged their feet. Then, a little while ago, in New York, where I live, they were finally certified to open their markets enough to allow local companies to move into long distance.
But since then New York has been a disaster area. The technical job wasn't finished, certification was premature--and it should be a warning to other states and the FCC. But even worse, recently local companies have convinced members of Congress to introduce a bill called H.R. 2420 that will let them into the data part of long distance, which will soon represent 80 percent of long-distance transmissions, without opening up as the Telecom Act requires.
Now what will be the effect of the passage of that bill? Congressman Bliley said that it will stall the dissemination of broadband, and he's right; just when consumers need it most. And broadband is so important to those of us in this room.
The great thing about the Internet is that it is not mediated. We don't have Peter Jennings or the editors of The Washington Post in between the readers and the people who are telling the truth. In the battle of ideas, we win as long as our ideas are not mediated by somebody else. And that's what the Internet allows us to do--get the word out directly. But the Internet needs to be speeded up. It is absolutely urgent.
The reason that politicians should not get involved in technology is that by helping particular producers, they almost always dampen competition, which hurts consumers. The fact is that you never know where the next great idea is going to come from.
In the mid-1980s a husband and wife on the Stanford University faculty wanted to exchange e-mail love letters at work. Unfortunately, their academic departments used incompatible computer networks. So they created a new type of digital bridge over the divide, and in the process they created a new company. They named it Cisco Systems, one of the most successful businesses in American history.
As much as politicians may want to help, it's nearly impossible for them to know which companies will yield the greatest benefit to society. Who would have predicted that Cisco, now one of the three largest market-cap companies in the world, would have emerged from that e-mail love letter problem?
Still, sometimes in their zeal to support technology, politicians will be very tempted to help specific companies that say, "All we want is a level playing field." This usually means they want the government to give them someone else's property. And property rights are at the heart of technological progress. If companies can't be sure that, when they invest in a new product, they will own it, then they won't invest in it. And consumers will suffer.
Consider another example, also in the vital area of telecommunications. For a year America Online campaigned in Congress, in state legislatures, and in city councils to get laws passed that would force cable companies to permit AOL to use, at government-fixed prices, the cable pipelines that the cable companies, at great expense, laid down themselves. The cable companies, such as AT&T and Cox, have shown that they have every intention of selling access to their fast, fat pipes to content companies, but it is they and their clients, not city councils and legislatures, that must decide the terms. If you deprive cable companies of their property rights, why would they invest billions of dollars in high-speed access?
Then, in January, AOL announced that it was buying Time-Warner, with 13 million cable subscribers, and suddenly the shoe was on the other foot. Now in an embarrassing reversal, AOL has said, in effect, "Well, never mind, we don't really want government intervention, at least not in our new-found business." But it may be too late.
I was recently in San Francisco, where the board of supervisors is moving ahead. Also, as a result of AOL's action, a federal court in Portland will soon rule on whether thousands of local governments can legally become Internet regulators. A lower court has said that they could. This decision would be disastrous for technology, and it shows the problem with inviting government's help. Once inside the gates of the competitive free market, government is a Trojan horse.
But perhaps the most egregious example of government action aimed at helping particular companies instead of consumers is the Microsoft antitrust case, which up to this point has cost investors at least $200 billion and consumers great benefits as well, as top officials of that company have been diverted from the productive course of developing great technology in order to spend thousands of hours fighting the federal government, 19 state attorneys general, and 60-plus class-action suits.
A recent survey by Zogby America found that 67 percent of registered voters believed that money spent on the Microsoft antitrust suit is a bad use of tax dollars. And by a margin of 55 percent to 16 percent respondents said that Microsoft's business practices have helped rather than hurt consumers.
I'm not saying that Microsoft is completely innocent nor that companies that believe that they were wronged by Microsoft should not have recourse. They do have one. They can go to court. But it's a lot easier and cheaper to enlist the government to go to court on your behalf.
Make no mistake, the power of government-- federal or state--and the phalanxes of trial lawyers who have now joined in the war is overwhelming. And it frequently amounts to nothing less than state terrorism--similar to the raid we recently saw in Miami. The actions against Microsoft are the financial equivalent of such a raid.
The fourth threat is no less damaging and coercive--the threat of rising Internet taxes. State legislators and local politicians see the Internet as a honey pot. In a short-sighted way they want to impose sales taxes on transactions across state lines, a move which studies show would deter e-commerce.
What's working like gangbusters in the e-economy is unregulated commerce, free of sales taxes. This allows fast growth, which in turn is generating more wealth, higher off-line tax revenues, higher property tax revenues, and higher income tax revenues. Why would anyone want to disrupt that virtuous circle?
Yet when the original moratorium on new Internet taxes was passed by Congress, it won in a voice vote in the House and with, I believe, 96 votes in the Senate. But today, governors, Republicans as well as Democrats, have mobilized and deadlocked a commission headed by Governor Jim Gilmore of Virginia. The Internet is thriving as a tax-free zone, but the threat to its status is mounting.
Finally, threat number five: state attorneys generals, in league with plaintiffs' lawyers, are setting their sights on rich New-Economy companies. The attorney general of Michigan was recently quoted as saying, "We want to do a Smith and Wesson-like thing with Doubleclick," referring to the gang-tackling tactic that politicians have used against gun manufacturers. Now the AGs are turning to a far richer target, high-tech companies. Doubleclick has been targeted for alleged privacy abuses, but it is only one in a series that includes eBay, the Internet auction firm, and, of course, Microsoft. Make no mistake: An all-out attack on tech companies is in the works, and it would be disastrous for the tech boom.
When we look for critical moments in U.S. economic history, I would certainly point to President Reagan's firing of the air traffic controllers 20 years ago as beginning a new era. An important act, both substantively and symbolically. Today, I fear, the equivalent act that may end this new era is the suit against Microsoft. I certainly hope not, but it is my fear.
Ultimately, economic growth has a single aim, to secure our physical needs and comforts so that we can pursue what really matters, not getting and spending, but developing our spiritual lives and helping others to develop theirs. More than prosperity is at stake here. Much has been accomplished in the last two decades, thanks in great measure to the efforts of people like Ed Feulner and his crew at The Heritage Foundation and to like-minded fighters for freedom from around the country. But much more needs to be done.
"Is Government Strangling the New Economy?" That was the headline of a piece I wrote recently for The Wall Street Journal. Certainly, the hands are now beginning to tighten around the neck. It is time to do what we can to get them off.
Just as Hayek warned more than half-a-century ago that we were heading down the road to serfdom, I fear that government is now threatening us on the road to freedom, a road to a New Economy wrought by a new technology.
James K. Glassman is the host of TechCentralStation and Resident Fellow at the American Enterprise Institute.
