- The Washington Times - Sunday, June 17, 2001

The technology revolution is dead, claim the pessimists. These naysayers cite the Nasdaq decline, the dot.com bust, daily reports of sinking tech company profits and the economys slip into near-recession territory.

But reports of the demise of technology, and the economy, are greatly exaggerated, to paraphrase Mark Twain. Just recently, IBM announced a way to increase chip-processing speeds up to 35 percent, while reducing power requirements a boon for cell phone users.

More significant, giant chip-maker Intel announced the development of the fastest and smallest transistor ever, a breakthrough that will pave the way to exponential efficiency gains of semi-conductors.

Then there´s software-creator Microsoft, which recently unveiled a new operating system that will offer telephone capability over the Internet at a fraction of the cost of traditional phone providers.

These breakthroughs belie the notion that the digital revolution is dead. As the eminent economist Joseph Schumpeter wrote 50 years ago, periods of rapid technological advance, with their positive spillover and application effects, tend to throw off economic benefits for many decades.

Economy-transforming gales of creative destruction whether in old-economy sectors like space, energy and defense, or new economy areas such as advanced computers, software, semiconductors, hand-held wireless devices, the Internet or biotech will continue to be a supercharged engine of economic growth, productivity, profits and stock-market gains.

A recent study by Federal Reserve Board member Laurence Meyer shows that technology-driven productivity trends tend to move in alternating cycles of rapid growth and sluggish growth, with each cycle lasting about 20 to 25 years. Between 1973 and 1995, U.S. output-per-hour advanced by 1 percent yearly, a subpar performance.

However, between 1995 and 2000 U.S. productivity increased by nearly 3 percent annually, in large part driven by the information technology revolution. If history is any guide, this productivity improvement and the new economy behind it could last another two decades before petering out.

Unmistakably, technology stocks suffered a bruising decline between March 2000 and March 2001. Risk capital dried up, individual investors fled into cash, huge wealth losses were reportedly more than $4 trillion. From peak to trough, the technology-driven Nasdaq lost nearly 70 percent of its value.

But help is on the way. Since early April, the Nasdaq has risen 29 percent, with semiconductor stocks up about 40 percent. A new bull market has begun. Investors are now anticipating stronger earnings and a rebound in economic growth next year.

That´s for very good reasons. First, Alan Greenspan & Co. have reversed their disastrous over-tightening of last year by pressing down the monetary accelerator over the past six months, adding much-needed liquidity and bringing down interest rates.

Second, energy costs have declined significantly, opening the door to better profit margins for technology and non-technology companies. Crude oil prices have slipped 25 percent, natural gas has fallen 55 percent, and electricity has declined by more than 75 percent from its peak. Even in California, spot market electricity has collapsed to $55 per megawatt hours from $500 earlier this year.

Third, the new Bush administration is far more market-oriented than its predecessor. Already, free market prices have induced substantially less energy consumption and much greater energy investment and production. Free prices work to efficiently allocate production and conservation, if you let them. Hopefully, the new administration will prevent a replay of energy price controls and unnecessary budget subsidies that are reminiscent of the stagflationary 1970s.

The wired technology economy cannot run without power. In the Internet economy, that means electricity. Electricity today consumes more than 40 percent of our total energy use, up from 25 percent two decades ago. In the next 10 years, electricity will be more than half of total power.

But sufficient power, and an adequate supply of money, will go a long way toward reviving the technology sector and restoring 4 percent economic growth. Personal tax rates are coming down, with perhaps a lower capital gains tax to provide new rewards for the venture capital investment that is so vital to funding and commercializing innovative new ideas.

The outlook for technology, productivity and the economy is better than the pessimists would have us believe. Wise investors who commit their savings to an optimistic vision of the future will benefit handsomely.

Lawrence Kudlow is a nationally syndicated columnist.

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