The consumer Internet has changed almost everything. Thanks to wireless broadband has made answers to virtually every question available with a touch and a swipe. Cloud computing has allowed entrepreneurs everywhere to set up servers and store terabytes of user information with nothing more than a web-based login. And e-mail and its successors have made communication global and instant.
The one thing that hasn’t changed is the stock market. The numbers tell the story: as recently as last Christmas, the S&P 500 index stood at just below the level it had been – not even adjusting for inflation – when Americans first heard of Monica Lewinsky in 1998.
Let me translate that: according to the market, the total expected profits of the largest American firms hasn’t changed since about the time Yahoo went public. In short, with the exception of natural growth in the early 90’s following a recession, the Internet hasn’t done squat to make the sum of America’s corporations more profitable.
And this is amazing. When we consider how much the Internet has done to make communication, productivity, content generation, and logistics easier, it is astounding that the market has literally stood in place throughout the information technology revolution.
How can we explain? I’m going to posit two explanations – and then I’d like to suggest why we all better hope the second one is wrong.
Explanation 1: The Internet Giveth, and the Internet Taketh Away.
One explanation for the stagnation of leading equity indices is this: the Internet has done as much to harm firms’ bottom lines as it has to boost them. Upstarts like Amazon.com were instrumental in creating national markets for everything from books to hammers. In the process, they upended the “monopolies by default” held by everything from the local bookshop to Best Buy. By “monopolies by default,” I’m referring to the fact that, prior to the Internet, if you needed a hammer or a stapler, you had few alternatives to hitting up the local retailers; the cost of driving further or searching longer was not worth it, and local retailers profited as a result. As these monopolies weakened, profit margins at brick and mortar retailers fell and began a glacial transfer to Amazon, which accepted minimal margins in exchange for sheer volume. The transfer of profits left the market standing in place.
Productivity may have suffered a related hit. Sure, e-mail has made it easier to manage projects, stay in touch with clients, and deliver deliverables. But Internet in the workplace has introduced many well publicized problems as well – from the distraction of blogs, to the toll of constant distraction of always on connectivity and its effects on attention spans. Many of the professions that purportedly benefitted most from the IT revolution (think the white collar workers from “the Office”) may also be most susceptible to the productivity hit that happens when your PC workstation also contains every blog, newspaper, and Wikipedia page you could ever want to read.
Could factors such as these be enough to hold back the dreams of a “New Economy” promised by Internet oracles of the late 90’s? Maybe. But the alternative could be even worse.
Explanation II: The Internet Created Value. Just Not Enough.
The specter of American decline has been around since at least the 19th century; however, the oil shocks and the U.S. economic and political impotence of the 1970’s gave doom mongers more than they could possibly ask for. The America that emerged after this difficult period (a period well captured in the outright depressing speech Jimmy Carter gave during the decade, which we know today as the Malaise Speech) was a different country altogether.
According to the doom and gloom interpretation, America experienced two quick-fix solutions since the 1970’s, starting with financial deregulation of the 1980’s. By unshackling America’s corporations and investment banks, the Reagan administration unleashed an economic boom that papered over many of America’s weakening fundamentals, including a slow-boiling fiscal crisis underwritten by falling tax revenues. The boom made a lot of people rich – and gave the stock market a dramatic push.
America’s second quick-fix solution, according to this interpretation, was the Internet. Forget everything you read in Explanation I, and suppose that the Internet really was a productivity and profit miracle. Workers blasted e-mails and penned deals at the drop of a hat. Consumers around the world purchased billions of new computers, many of them made in America. And new companies and ideas were born. Some, like Apple, were reborn.
A great story. But all the while, America’s fundamentals stagnated. The stock market jumped, but not enough to overcome America’s own national balance sheet – deteriorating public school quality, growing national debt, and a big empty question market about how to pay for America’s retiring baby boomers. In such a landscape, the benefits of the Internet boom were akin to running the bathtub faucet with the drain unplugged; they cancelled each other out.
Which Explanation is True?
The data can give us some answers. Since the mid-1990’s, an index of U.S. per hour output (excluding farming) has seen U.S. productivity increase by 47%, according to the U.S. Department of Labor. Similarly, U.S. profits has skyrocketed – increasing fourfold after taxes since the mid-1990’s, according to the Commerce Department’s Bureau of Economic Analysis (by the way, both these figures can quickly be found using an impressive Excel plug-in from the St Louis Federal Reserve, called FRED).
There goes Explanation I – however, attractive it may seem. What about explanation two? A back of the envelope analysis of U.S. census data shows that the number of adults with a four-year college education has increased from 38 million in 1995 to 61 million in 2011 – a rate of 3%, far outpacing America’s population growth rate (under 1%). While this does not capture the quality of education, it does not suggest an obvious crisis of trained workers.
What remains of Explanation II? I would wager that America’s public finance crisis – which recently saw the U.S. credit rating downgraded as a result of political ineptitude at solving America’s debt ceiling crisis – is to blame. Currently, America’s debt is approaching the entirety of the country’s annual output. America’s needn’t even go bankrupt for investors to worry – even experiencing the fate of Japan (whose debt ratio is twice that of the U.S.) would be enough to put an end of stock market growth (see Japan’s Lost Decades). If so, the stock market may simply be putting on the brake so long as investors fear that America’s long term public finances remain intractable.