Growing Pains Of The Internet Age

It is the most dazzling and dizzying time of our lives. For most people, the Net didn't even exist five years ago, but here it is--generating faster economic growth, lower inflation, amazing job opportunities, and more wealth than ever anticipated. It's also proving to be wildly exciting--a cool, untamed creature that is spawning the greatest digital gizmos, forging business models that shouldn't make sense, flipping the most basic economic theories on their heads, collapsing time, redefining work, and tying together just about everybody on the globe inside a single cybermarket that's open all night. Whew!

It may seem churlish to focus on problems when we're all having so much fun. But even Internet bliss will fade unless some hard decisions are made. Here are our major worries.

One danger is that the Internet Age is creating a prosperity gap that could split the body politic. Peel back the overall statistics for the dynamic U.S. and you will find a tale of two economies: slow growth in investment, productivity, profits and pay for Old Economy industries, fat salaries and oodles of options for Net companies. The divergence is startling. The single most important challenge ahead is to close that gap. But what policies should be used? The New Economy folks, for example, are lobbying Washington to increase the quota for H-1B visas mostly for foreign software writers. More foreign high tech workers, they say, will help their Internet Age companies. But labor unions oppose the visas and want more government money spent on schools to train people in Internet skills. In the most recent round of visa negotiations in Congress, Old Economy forces defeated the New.

The policy split spills over into taxes. Unions and most state governors want to tax sales on the Internet to help fund schools and and link libraries to the Net. But Net people, supported so far by many members of Congress, oppose net taxation. The great success of e-commerce proves this position, they say. Who's right? We must decide--and soon.

Another problem facing the Internet Age is a real doozy. Technology-driven growth cycles often lead to technology-driven recessions. The next downturn in the economy--and current prosperity shouldn't blind us to the inevitable--could be unlike anything seen in recent decades. Histories of earlier high-tech economic booms show that at some point, too much capacity gets built, triggering a recession that is extremely severe. In the next recession, the economy could fall much further and longer than anyone is now expecting.


But what tools exist to bring the U.S. out of a Net recession? Will policies that ease money and boost government spending work? Will some form of high-tech government spending program be needed if things get really bad, and what form should that take? One thing is certain: The transition from one kind of economy to another can be treacherous, and the burden of overcapacity can be overwhelming. Who in Washington is worrying about the tech cycle?

Another concern: frontier justice. As on all frontiers, law and order is a sometime thing on the Net--mostly because old rules don't appear to fit but also because frontier folk don't want outsiders messing with them. The amazing expansion of the Net is testimony to this openness. The deconstruction of business, the irrelevance of middlemen, the invention of new forms of auction pricing, the partnering of customers and sellers, and a host of other changes show that, so far, benign neglect has been effective government policy for the Internet.


But frontiers require self-policing, and e-commerce players have failed to corral themselves. The Net is the grandest of marketplaces because it places the customer at the epicenter of transactions. To function efficiently, it must therefore do two things: guarantee customer privacy and ensure the credibility of the information customers use to make decisions. To date, the Net has done both jobs poorly.

Data from children using Web sites have been collected and sold without parents' knowledge. Data on individuals have been packaged and sold to third parties without their consent. Privacy policies have been promised and not delivered or delivered and not administered. And major differences with Europe on privacy policies have gone unresolved. If the Net is to flourish, its users must feel comfortable--and confident.

Customers require objective, balanced, and transparent information to make their decisions. Many Web sites are paid in ways that create conflicts of interest--when a supposedly objective product review leads to an e-commerce site selling that product. Others routinely steer people to their business partners' sites.

At the least, the consumer should know all about these practices and relationships. Full disclosure and transparency of business ties must be the sine qua non of the Internet if it is to garner customer respect and dollars. At the moment, they're not. Yet consumers' obsession with brand names reflects a desire for credibility and legitimacy online. No one, especially GenY Web surfers, wants to be "taken." This is a big worry for e-commerce on the Net.

The shape of the Internet Age is only now coming into focus. Policy debates are occurring just as a major political realignment is taking shape. A new political nexus is emerging in America, tying together Silicon Valley and Washington as power shifts from the Old Economy to the New Economy--and the Old Economy fights back. New wealth from the Netzone is flowing into Presidential and congressional campaign coffers for 2000. Unlike Old Economy economic interests, such as labor unions, small business, or tobacco, the Net is not tied to either Democrats or Republicans. How this will affect the Internet Age is anybody's guess.

Moving from one economic era to another is never smooth. The Internet's dazzle hides some serious problems. How quickly and capably we face them will determine its future.

Before it's here, it's on the Bloomberg Terminal.