THE NEWS from the markets was grim a week ago, then it became grimmer. Not only have investors lost faith in the American economy, and with it the prospects for an early revival in global growth, they have also lost faith in Alan Greenspan.
That may be unfair, although some rerating of the Federal Reserve Board chairman's godlike reputation was long overdue. Whether it would have made much difference if the Fed had cut rates by three-quarters of a point on Tuesday, rather than a half, is open to doubt, although it hardly helped.
The gloom is contagious, and few people appear ready to break ranks. At some point in every market crisis, a few names emerge as strong buyers and turn round sentiment. The recovery is then often strong. So far, however, people seem more inclined to keep their heads down.
Falling stock markets are having other effects. A few months ago, nobody could write about the American economy without preceding it with the word "booming". Now it is "struggling", or worse.
There has also been a tendency to write off many of the beneficial economic changes of recent years as so much froth.
If technology shares have collapsed, as they indeed have, surely that means the new economy of stronger, technology-driven productivity growth was a mirage. If the telecommunications industry is weighed down by a mountain of debt, surely that will put a stop to talk of a mobile-telecoms revolution.
Actually, no. Out of the wreckage of these markets, wherever they end up, the beneficial effects of new technology will remain. To understand why, we merely have to follow Nye Bevan's advice - "Why look in the crystal ball when you can read the book?" In other words, we should study the lessons of history.
Professor Nick Crafts, an economic historian at the London School of Economics, recently entertained the clients of Phillips & Drew, the fund manager, with a fascinating comparison of the railway mania of the mid-19th century and the technology mania of the past few years. A paper, Railways and the Electronic Age, by Crafts and two LSE colleagues, Dudley Baines and Timothy Leunig, is published this weekend at www.fathom.com.
Railway shares had their own version of the Nasdaq's spectacular climb in the early 1840s, before crashing in 1845. Then, as now, investors piled in because they thought this new technology, which could transport people in 40% of the time taken by a coach and horses, and at lower cost, would transform the economy.
When the bubble burst, so too did the faith of many investors in the railways. Some railway companies disappeared completely. Others, even well-known survivors such as the Great Western Railway, saw their share prices tumble, by 50% or more, and stay down for 15 to 20 years.
But the economic effects were real. As Crafts and his colleagues point out: "In the next 25 years the railways had a huge impact on British economic growth, confirming that the early Victorians were right to sense that the steam railway was a major technological breakthrough." The railways added 0.25% a year to Britain's long-run growth rate. If anything, the performance was better than investors had expected during the mania phase.
What does this tell us about technology, and where we stand now? The Crafts analysis is both reassuring and, for investors, slightly worrying. It is reassuring in that the real economic effects of information and communications technology (ICT) appear to be greater than those of the railways. Using a growth-accounting framework, Crafts estimates that ICT has contributed 0.75% a year to American growth over the past 25 years, and more in the past few years. The technology revolution is real.
It is also real in Britain. Sushil Wadhwani of the Bank of England's monetary policy committee, in a speech last week entitled The New Economy: Myths and Realities, cited Bank work suggesting ICT was responsible for 0.6% a year of productivity growth in Britain between 1994 and 1998.
He also cited another historical episode in which technology investors burnt their fingers. In the 1880s, shares in electrical companies fell 93% when that bubble burst although, of course, the economy benefited hugely from electricity.
This is the lesson of history. Technologies that have big economic effects usually benefit users more than investors. The fall in technology shares says little about the economic impact of new technology.
Does that mean technology shares, like railway shares in the 19th century, are destined to remain in the doldrums? One interesting feature of recent days has been that the Nasdaq has been quite resilient as what began as a technology shake-out has spread to other sectors. It may be, indeed, that the fall in technology shares was overdone and that investors are now taking too gloomy a view of the prospects of technology companies, implying that these shares should rise. I wouldn't want to bet the house on it, though.
PS: Watching the television news the other night, I couldn't help being struck by the unrelieved gloom. First there was a series of reports on foot and mouth, followed by the story of the tumbling stock market, a report on CJD cases in Leicestershire and, for good measure, the woes at BT. It reminded me of the 1970s, when the news was dominated by industrial strife and Britain's status as the sick man of Europe.
Things are very different now. As an economy we are fitter, stronger, faster and better-run. But confidence can fade quickly, as we saw during the fuel crisis in September. Apart from the fact that holding a general election on May 3 will look like a snub to the countryside, this is not the kind of mood the government had hoped for.
Some of what is happening is real. Many people were surprised by the Centre for Economics and Business Research's estimate, reported in The Sunday Times, that foot and mouth will mean a £9 billion hit for the economy, but it is more plausible than the Treasury's view, repeated by Gordon Brown last week, that there will be no discernible effect at all. Price Waterhouse Coopers, the accountant, suggests an impact ranging from £2.5 billion to £8 billion. Add in the effects of falling stock markets, and the potential economic impact is serious.
This adds to the complications of Blair's decision. However bad things look now, they could look a lot worse in the autumn. The chancellor may have made his own luck, but even this eventually runs out.
The Bank of England's task is rather easier. The monetary policy committee left rates on hold at its March meeting because the British data were strong, stock markets had recovered and, although this was not stated explicitly in its minutes, cutting rates on the day after the budget would have jarred. These factors have now fallen away - dramatically in the case of the stock market - and the Confederation of British Industry is reporting renewed manufacturing gloom. An April rate-cut is needed.
http://www.sunday-times.co.uk/
gruß
proxi
