The Mood Now

The dot-com flameout and ensuing slump have not shaken America's faith in technology and renewed prosperity

By Lee Walczak. With Alexandra Starr and Richard S. Dunham in Washington, and Ann Therese Palmer in Chicago.
Business Week

August 27, 2001

If history is any guide, America could have reasonably expected to slouch toward the new millennium in a fin de siècle funk. Instead, the U.S. economy rocketed through the Nineties at what used to be called Internet speed. Propelled by the potent mix of information technology and ready capital, the economy broke free of the gravitational pull of slow growth and soared for the stars. The result was a virtuous cycle of prosperity that soothed deep-seated social ills even as it appeared to defy the laws of physics--and economics. The nation experienced rapid growth, plentiful jobs, glorious--or so it seemed--investment opportunities, and not even a speck of inflation for the Fed to stomp on.

Then everything went suddenly, spectacularly wrong. With a swiftness that caught business leaders and economists off guard, the extraordinary New Economy boom flared like a supernova and went dark. The aftermath has been ugly: a year-long downturn of unexpected duration and depth, an investment-led slump that still holds the U.S. and the world economy in its grip. The Big Bust vaporized corporate profits, scorched investment portfolios, laid waste to the technology sector, and humbled scores of dot-com "visionaries." It has also inspired endless soul-searching about the meaning of the celestial fireworks we witnessed. The question on everyone's lips: Now what?

Now this: The New Economy that launched the sizzling growth of the past decade is still very much alive. The major change is a renewed focus on quaint concepts such as serving customers and return on investment. "Anyone who thinks the New Economy is over because of the dot-com crash is either defining it too narrowly or being nave," says futurist Alvin Toffler. "That's like saying the Industrial Revolution was over because some London textile plants shut down in the 1830s."

It is premature to declare that the downturn has subsided, yet the foundation of a strong recovery is in place. Business has worked off excess inventories. Consumer spending has held up remarkably well, defying logic and household balance sheets. With the July unemployment rate holding steady at the previous month's 4.5%, the labor market shows signs of stabilizing. And Alan Greenspan's Fed is poised to deliver one more jolt of monetary stimulus to get the economic jets firing again. "Something happened in this country about 20 years ago," muses White House economist Lawrence B. Lindsey. "We opted for markets, deregulation, and lower tax rates. Had we absorbed a shock of this magnitude without these things in place, the impact would have been much greater."

A tentative return to economic health, however, should not obscure the deeper meaning of the historic growth spurt of the past decade--the longest sustained expansion in U.S. history. Will the promise of the Information Age to transform society for the better be fulfilled, or become just another casualty of the flameout? Was the productivity revolution real, or just a statistical eddy? Will incomes advance again, or lapse back into the Anxious Eighties' dreary pattern of stagnation?

Judging by America's mood today, the answers to those questions are largely positive. But does this reflect the country's native optimism, or the oxygen-starved ramblings of a dazed populace?

A BusinessWeek/Harris Poll, bolstered by interviews with a cross-section of citizens around the country, puts the lessons of our collective roller-coaster ride into sharper focus. The findings suggest that Americans are emerging from the downturn bruised and wiser but unbowed, singed but still standing.

They are resilient people, folks like Gloria Egan, a 61-year-old Albany (Ore.) retiree who lost $250,000 trading tech stocks but remains committed to personal investing--the newly fashionable, level-headed variety. "The stock market is an opportunity for economic advancement," declares Egan, who has just canceled a new-car purchase and a European vacation. "Always has been."

Indeed, our pollsters found that most Americans who witnessed the New Economy's collision with the old verities of supply and demand remain confident about the economic future--if less than dazzled by Corporate America's performance under pressure. Only 36% of those surveyed give good marks to the boardroom set, vs. 55% who rate CEOs' showing as fair or poor. Some investors may have lost their shirts, but most haven't shed their appetite for investing; many continue to view stock ownership as a long-term proposition prone to ups and downs, and a large number are diversifying their holdings and focusing more on balance sheets. Small investors had "unrealistic expectations of instant wealth," says Barry Gilbert, former chief executive of, a luxury-products Web site that was launched in 1999 but went under in the debacle of 2000. "How can you fault the 25- or 30-year-old reading publications like BusinessWeek and asking `Why not me?"'

Judging by the BusinessWeek/Harris Poll, the nation's intoxication with science and technology continues. "This is an overwhelmingly optimistic culture. We're technophiles at heart," says former Clinton Labor Secretary Robert B. Reich, now a Brandeis University professor. "The bursting of the tech bubble hasn't done much to change that."

The public's refusal to push the panic button comes in the face of some stiff economic shocks. The collapse of the tech-stock bubble wiped out an estimated $5 trillion in paper wealth. Personal debt has been rising by an average annualized rate of 8.2% a month since last October. Manufacturing hit the skids 10 months ago--and stayed there. At a particularly inopportune moment, energy prices took off. And in a drama that is still playing out, the corporate-profit drought is leading to tens of thousands of layoffs.

Yet throughout the gloom, consumers have kept spending. In the first half of this year, personal consumption added a vital 2% to gross domestic product. That, plus stimulus from government purchases, was about the only thing keeping the economy from flat-lining.

Overall, optimism still reigns. Some 63% of those surveyed by BW/Harris said they believe the U.S. will avoid a painful recession. A higher percentage--76% vs. 22%--feel that the country will resume its rapid growth after the slowdown. "It took the public a long time to be convinced that the good times were real," says Karyln H. Bowman, a demographer at the American Enterprise Institute (AEI). "They're still hanging on, savoring the moment."

That wellspring of good cheer is about to be thoroughly tested. Although confidence regarding the future has risen for two months straight in the University of Michigan survey of consumer sentiment and the Dow has stabilized, the delayed blow of rising unemployment could crush hopes of recovery.

"People continue to run up debt while assuming that things are going to get better--they always have," says AEI economist John H. Makin. "But this is a sharp 19th century-type investment cycle. It's not going to get better for a long time."

If divining an upturn remains tricky, one thing can be said with certainty about the bust: The nearly decade-long stretch of prosperity that preceded it has transformed the nation. Millions were lofted into the middle class by the bounty of the boom, including record numbers of African Americans. Welfare rolls shrank, and cities came back from the dead. Women advanced in managerial ranks and moved closer to pay equity with male peers. And while a lot of those easy stock-market profits floated away like a child's lost balloon, it wasn't all funny money. Data from the 2000 Census show that home ownership rates during the past decade rose to 66.2%, the highest level in the modern era, according to the Fannie Mae Foundation.

Technology blossomed during the boom years, from Net commerce to Palm Pilots to cell phones to B2B software. Culturally, the nation adopted Silicon Valley's tolerance of Casual Fridays, its openness to immigration, and the tech-geek's disdain for the middlemen who rake profits off of two-way transactions. Disintermediation continues apace, despite the tech sector's swoon.

The boom's spur to the democratization of investing also seems destined to outlive it. Nearly a third of Americans earning $20,000 to $30,000 a year now trade stocks, according to a Pew Research Center poll. Union members, with their generous pension plans, are even more likely than their nonunionized counterparts to play the market.

Natasha Zaslove, a 32-year-old San Francisco lawyer who had a typically brief fling with a dot-com that tanked, is philosophical about the boom times. "This was a really important era," she says. "There should be no regrets. It changed forever the way people see their lives. This whole idea of being a free-agent knowledge worker--it's not going to go away."

Still, it's hardly surprising that Americans think technophilia got out of hand. By a 74% to 24% margin, they agree that "people got too carried away with the promise of technology to improve their lives." David L. Barry, a 29-year-old Milwaukee real estate exec, is an example of the slightly chastened new breed. "I've taken more of my portfolio out of technology," he says. "That doesn't mean my perception of technology has changed. Just my perception of the market."

At bottom, America remains a nation hooked on techno-futurism, the near-mystical belief in progress and the transformational effects of the Information Age. Someday soon, we tell ourselves, we'll be flying to work using our jet-propelled mini-vests and facing a future where chronic disease has been vanquished by biotech. Says Zachary Karabell, author of A Visionary Nation: "The dot-com love affair was just the latest in a series of efforts to find the magic formula for a better world. That obsession--to find a link to spiritual and financial contentment--is as American as apple pie. Even if the gloss is lost in the dot-com economy, we will transfer it to something else."

As surely as the sun will rise over smoldering ruins in Silicon Valley, America will resume its love affair with tech as it awaits the Next Big Thing. Notes futurist Toffler: "The changes we are going through are much bigger than dot-coms and digitization. We are shifting to a knowledge-based economy, and one should not expect unbroken growth. Expect turbulence, surprises, chance. That's what revolution brings."

Put another way: Is a decade of technology-fueled, turbo-charged growth followed by a sharp correction preferable to an anemic, uncreative expansion and income stagnation? Is it really a choice?


Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.