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In The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will be Worse Than You Think, and How to Prosper Afterwards, veteran Business Week economics editor Michael Mandel asks and carefully answers an interesting question: What impact would a downturn in the technology sector have on the economy as a whole? In the process, he argues that the economy is now more vulnerable to a crisis than it used to be. Unlike those skeptical about the sustainability of today’s high-growth, low-inflation economy, Mandel is a true believer in the power of technology and doesn’t argue that a technology-stock crash is imminent. He does say, however, that one is inevitable and that it will take down the whole economy. Mandel’s central claim is that the funding source for risky investments in technology research has shifted. While corporations and the government used to finance that research, that role has moved to so-called risk capital, which includes venture capital and "angel" investing. In other words, businesses no longer develop their own innovations; they wait for start-up companies to produce breakthrough ideas, then buy them. Mandel argues, successfully, that this change is fundamentally destabilizing. He says technology research used to be what I’d characterize as "value R&D investing." Mandel shows that companies committed more resources to basic research during economic downturns, when resources were underutilized and, therefore, cheap. Those investments were stabilizing, because they led to innovation that tended to revitalize technology companies. By contrast, today’s research could be viewed as "momentum R&D investing." Mandel shows that sources of risk capital pour resources into increasingly expensive innovation during booms. The reason is that, to satisfy ever-hungrier investors, risk capital has to produce accelerating returns, even in expanding markets. The drawback is that, once sentiment changes and a downturn hits, risk capital will flee. Mandel says the consequences will be devastatingly destabilizing: Technology innovation will stop. Worse, this instability is hidden from policymakers and investment professionals, leading them to be too optimistic and to make overly risky choices. With innovation halted, New Economy companies would return to ground zero overnight. Investors would give back most of their extraordinary post-1995 capital gains. Programmers and technology experts would once again be paid like schoolteachers, rather than NBA players. Recent M.B.A. graduates banking everything on continued dot-com expansion would be reduced to living with their parents. Mandel refers to the faltering of innovation as reaching "stall speed," analogous to an airplane’s inability to stay aloft if it doesn’t have enough velocity. Mandel also fears that problems in the technology sector will spread broadly and lead to a wide recession. Mandel may overstate the economic effects of a technology-stock crash. Even if the problems spread and produced a sudden evaporation of consumer wealth, the economic impact of six years’ worth of $100 billion-a-year investments in high-technology research—about what has been happening in recent years—wouldn’t disappear overnight. He implies that New Economy businesses inherently depend on continuous investment inflows to preserve whatever real economic value has been accumulated, as well as those businesses’ astronomic market valuations. But many businesses would be able to quickly repay debts and sustain themselves through a downturn. Throughout the book, Mandel takes the view of the historian, pointing to analogies from the Industrial Revolution, the hyper-growth of the automotive industry, parallels from the Great Depression, and so on. He occasionally makes the mistake of assuming, without proof, that we can map the New Economy’s future by studying the Old Economy. Mandel fails to distinguish between the possible impact and the likely impact of a technology downturn. The book also fails to deliver on its promise that readers will learn how to prosper following an Internet Depression. Mandel offers only a few common-sense recommendations on defending wealth. Instead of providing useful prescriptions, Mandel ends the book with two lackluster chapters on the effects of globalization and on recommendations for government policy. The Coming Internet Depression does, however, provide a useful alert that the economy is much more sensitive to technological progress than was thought. Executives who read the first seven fact-filled chapters will be able to draw their own conclusions.
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