Two Opposing Scenarios for the Economy
Whom are we to believe, Fed Chairman Alan Greenspan or Cisco Systems CEO John T. Chambers? Both are believers in the high-tech revolution's ability to raise productivity and economic growth rates. Both have great information tools at hand that allow them to gauge the ebb and flow of the New Economy. And both were still surprised by the sudden downturn in December. Policymaker Greenspan believes that a V-shaped recovery is under way, every bit as speedy as the stunningly fast descent. Businessman Chambers believes the tech slowdown will extend well into the third quarter, implying that a U-shaped recovery, at best, is at hand. Do we have a Greenspan economy, with growth quickly returning in the second half, or a Chambers economy, with the downturn extending well into 2001? We hope it's the former. But in the evolution of the New Economy, CEOs have often been closest to the real facts on the ground.
In his semiannual monetary policy report to Congress, Greenspan expressed a rather sanguine view of the economy. Temporary factors were behind the downturn. "A temporary glut in these [high-tech manufacturing] industries and falling prospective rates of return were inevitable at some point," he said. The inventory correction will pass quickly, thanks to info-tech-based, just-in-time inventory management, according to Greenspan. With prospects for high productivity growth still very strong, investment and consumer demand should snap back rather quickly. Sounds good.
Chambers seems to be suggesting a darker scenario. The overcapacity in high tech and the bursting of the Nasdaq bubble take longer to correct. The work-out of record levels of consumer debt takes longer. Disappointments with the slow rollout of broadband to consumers, overpaying for 3-G spectrum, and the dot-com blowup combine to slow the rebound in high-tech-driven economic growth.
If we are in a Greenspan economy, with growth returning quickly in the second half, then there is less need for additional cuts in interest rates, or big retroactive tax cuts for that matter. If we have a Chambers economy, the second half could see further weakness, and a lot more monetary and fiscal stimulus is in order. Greenspan has done a fine job in shepherding a long economic expansion, but he has not been infallible in forecasting the economic future or prescribing the right policy medicine at the right time. We hope his prediction of a fast, V-shaped recovery is correct. But we wonder what John Chambers is seeing that the Fed chairman is not.