The Obama administration's economic stimulus package may help by lending capital to tomorrow's innovators. But throwing money at the economy is how we got into this mess in the first place.
President Obama has just signed into law his economic stimulus package approved by Congress last week. The bad news is that it will speed an economic recovery about as much as the New Deal cured the Great Depression or massive government spending and direct liquidity injections into banks reignited Japan's economy in the 1990s.
In fact, the President's cure is bound to hurt more than it helps. After all, it is hard to fix something you don't understand. And there are few signs that policy makers understand our current economic predicament, and in particular the impact the microprocessor life cycle has had on the economy with its four stages of introduction, growth, maturity and decline.
To understand today's problem and the pivotal role technology plays in the economy, a quick history lesson is necessary. The microprocessor's growth stage began with the introduction of the first PC by IBM in 1981. It ended with the death of classical scaling in 2000. Along the way, there were real increases in worker productivity, product innovation and wealth creation. Government created money, the financial system lent it and new, innovative companies like Intel, Cisco and Oracle rose to prominence around the microprocessor.
The period from 1982 until 2000 is often called the greatest secular bull market in American history, as the stock market rose about 1,200 percent.
The trouble started when the microprocessor life cycle entered maturity. Immense productivity benefits became harder to achieve, and good investment opportunities dried up. Still, government monetary policy remained accommodative, resulting in cheap money going into dot com startups with no real value.
After the inevitable crash in 2000, the government responded by lowering interest rates and making monetary policy even more accommodative. Once again there were still no good investment opportunities. This time the money flowed into residential real estate, and other assets like oil. False wealth was created based on cheap money and speculation, rather than innovation and productivity.
During the microprocessor's growth stage, there was a significant need for capital and the ability of the economy to generate high growth rates with low structural unemployment. As the microprocessor life cycle matured, the need for capital and the growth potential of the global economy declined. Pushing capital into the system that could not be productively invested only created speculative asset bubbles. There is a good reason companies from Exxon to Microsoft built up big cash reserves over the last several years: There are no good investments for immense sums of money in today's economy.
This is why the government's spending plan is doomed. Even if the Obama administration and Congress could more productively invest money than the private sector (a big "if"), high historical growth rates require that a big innovation like steam power, electricity, the internal combustion engine or the microprocessor be entering its growth stage.
Of course government should do something. A working financial system is necessary for lending capital to the innovators of tomorrow. The toxic securities clogging the system should be cleared out by the Treasury Department. But throwing money at the economy is how we got into this mess. Moving from overly accommodative monetary policy to profligate fiscal policy will only crowd out the private sector, set the stage for poor economic performance and possibly spark inflation.
The good news is that economic cycles have their ups and downs. At some point, a disruptive technology will enter its growth phase. Yet such a development also carries economic risks. The microprocessor has become a largely commoditized technology, and MPU makers lack pricing power. With the emergence of a new technology the risks of consumer inflation will rise.
That day still appears to be over the horizon. Previous secular bear markets tended to more than a decade. Even if one optimistically dates the start of this period as 2000, we are still likely to be in for some additional difficult years characterized by economic false starts.
Stephen Brennan (firstname.lastname@example.org) is a principal of Financia Capital, a San Francisco-based money management company.