What did the Roaring ‘90s have in common with the Roaring ‘20s? No, the answer is not a speculative stock market boom and bust, says economist and hedge fund manager Roger Alcaly. In his new book, a contrarian take on the New Economy, Alcaly contends that in both eras, America witnessed revolutionary technological advances that dramatically transformed the U.S. economy in ways both positive and enduring.
In The New Economy: What It Is, How It Happened, and Why It Is Likely to Last, Alcaly argues that market transformations sparked by technological innovations, like the development of mass production and electricity in the 1920s and the widespread emergence of Internet technology in the 1990s, have historically been associated with stock market bubbles that invariably burst. But in contrast to the 1920s boom, which quickly devolved into the Great Depression, today’s productivity-boosting innovations in communications and business practices, bolstered by sound economic policymaking by the Federal Reserve Board, have enabled corporations to maintain high productivity growth rates and prevent the onset of a deep, extended downturn.
The speculative excesses of the late 1990s “have not undermined the long-term prospects for the new economy and, in the absence of external calamities or inappropriate reactions by policy makers and investors, are not likely to impede its continued growth,” Alcaly writes. A former Columbia University economics professor, Alcaly is now a principal of Mount Lucas Management, a Princeton, New Jerseybased firm with $700 million under management.
Such a rosy view can be difficult to sustain, especially with the U.S. economy still at risk of a double-dip recession. But even if his optimism is not altogether persuasive, Alcaly offers a useful historical perspective.
We’ve had it much easier than our counterparts in the ‘20s, he reminds us. Back then the Federal Reserve failed to stem the damage from the 1929 crash; the Great Depression delayed the economic transformation set in motion by the widespread introduction of electricity, mass production and the internal combustion engine until the 1950s and ‘60s, when productivity growth reached 3 percent a year.
In contrast, Alcaly writes, we have enjoyed two decades of almost uninterrupted economic growth. After languishing at just above 1 percent from 1973 to 1995, productivity rose by more than 2.5 percent a year from 1996 to 2000; in 2000 alone it rose by 3 percent. The long run ended in March 2001, but productivity has held up remarkably well despite the current slowdown, which was mitigated by astute monetary policy. Productivity grew 1.1 percent in 2001 and 4.8 percent in 2002.
Again and again, Alcaly asserts, laymen and experts alike have underestimated the transformative power of technological innovation and the boom in productivity it so often sparks. J.P. Morgan’s father, banker J.S. Morgan, once wrote that electric light might be “good enough for our Transatlantic friends” but was “unworthy of the attention of practical or scientific men.” But the younger Morgan backed Thomas Edison, and Morgan’s Wall Street office was the first to be powered by the Pearl Street generating plant, which began operating in 1882.
Occasionally, however, Alcaly’s arguments seem overly simplistic. He maintains, for example, that the personal computer helped make investment analysis easier and therefore “may have been instrumental in launching the takeover wave of the 1980s, which helped remake the business landscape” and set the stage for New Economy efficiencies.
Alcaly also has a weakness for extensive digressions that do little to advance his argument. He spends almost 40 pages, for example, praising disgraced financier Michael Milken for helping to increase corporate efficiency and create a new pool of finance for New Economy companies by revitalizing the junk bond market. Alcaly also includes overlong -- and familiar -- accounts of the Fed under Paul Volcker and Alan Greenspan.
Alcaly believes that we have yet to see the full benefits of the New Economy. “There is reason to think the best is yet to come,” he writes. But there are many reasons to believe the wait could be a long one. The 2001 recession may have been mild, but the recovery is still nowhere in sight. And, much as Fed officials helped precipitate the Great Depression, today’s policymakers may be making economic mistakes of their own by running up enormous budget and current-account deficits that could ultimately erase many of the considerable gains of the New Economy.
