The New Economy Is Both Destructive and Creative

Karl Marx understood depression etiology--something that modern economists seem to have forgotten (''The Next Downturn,'' Cover Story, Oct. 9). Marx wrote: ''In these crises, a great part not only of the existing products but also of the previously created productive forces, are...destroyed.''

In other words, depressions occur as a New Economy annihilates an Old Economy during a period of creative destruction. Depressions originate from widespread Old Economy destruction, not from New Economy cyclicality.

The Great Depression of the 1930s typifies creative destruction depressions. The New Economy at that time included such industries as automobiles and farm tractors. These two new inventions served to destroy rural Old Economy jobs--which had made up a third of all U.S. jobs in the 1920s. The elimination of farmers' markets for horses and horse feed by the automobile combined with the mechanization of agriculture to leave millions of rural economy workers without the income necessary to repay their loans or buy New Economy products. When New Economy inventions slash the income of a third of all workers, you will have a depression every time, regardless of monetary policy.

Today we have a new creative destruction cycle triggered by the invention of the Internet. New Economy Internet communication can easily bypass the middlemen now clogging all Old Economy, Industrial Age production and distribution methods. Perhaps one-third of all workers now face the same fate as farmers faced in the 1920s. It will be the lost income and unpaid debt of the Old Economy workers whose jobs are destroyed by the New Economy that will ultimately pull down the New Economy from behind.

John A. Frisch
Wichita

Author Michael J. Mandel is right: A steep economic decline--nay, a severe crash--in the near future is inevitable. In spite of all the fancy financial footwork of the Fed and the money-market manipulators, and in spite of all the ''New Economy'' talk, such as IPOs, VCs, and global-this-and-tech-that, risk is still risk; investment is still investment; and the minute we forget the bottom line--the price-earnings ratio--everything else is only a modern market variation of a 1920s Ponzi scheme.

Never mind the railroad boom of the late 1800s, the mining stocks of the early 1900s, or the 1930s Depression. Think back to the Dutch tulip mania of 1633-37, the British South Sea Co. bubble of 1711-20, or the French Louisiana Co., among many others. And remember, too, the 50-to-60-year Kondratieff business cycle may still be lurking around out there somewhere: Perfect storms do happen.

History has a remarkable way of repeating itself, but then, as Thucydides, the Greek historian, wrote ca. 425 BC, ''human nature being what it is, [we] continue to make the same old mistakes over and over again.''

Frederic A. C. Lister
Nauheim, Germany

I fail to understand the value or benefit of scaring millions of investors already nervous from markets that have already corrected so sharply during the year. To note that author Michael J. Mandel made a prescient call on the New Economy way back in 1995 fails to lend credibility to his assumption-laden doomsday predictions.

Mandel errs in the treatment of a decade of breakneck innovation. It's as if all of the factors that created the world's recent productivity gains would somehow be jettisoned into a black hole and businesses will have nothing to build on in the future.

To the contrary, an analyst might assume that what we experienced in the 1990s was only the tip of a large iceberg--and that broadband, photonics, and biotech are in their infancy, or that transactions between companies that once took a week to complete now occur in seconds between servers and without human hands touching so much as a telephone. Not only is this remarkable progress not going to disappear, but it will get replicated countless times around the world.

Instead of a present-day equivalent of a 1929 crash-like depression, Mandel may have to settle for economic growth more moderate than 4% a year and a stock market that returns less than 25% per annum. Nothing exciting about that, which means no one is going to write a book about it.

Suleyman Tombul
Istanbul

Cheaper Energy Storage Will Give Green Power a Lift

''Green power is gaining ground" (News: Analysis & Commentary, Oct. 9) is encouraging, but the story neglects one problem that is common to both solar and wind-power systems: how to meet varying power demands. The problem is particularly severe for solar power--since, as many have noted, the sun doesn't shine at night. (At other times, too. Once, in Minneapolis on a recruiting trip, I was told by a solar researcher that he hadn't been able to get any data for the past three weeks because the sun hadn't shone!) In principle, wind power could meet varying loads by feathering some of the propellers at times of low load demand, but this is costly.

The answers lie in developing efficient storage systems. And there's the rub: The cost of energy storage will generally overwhelm the cost of generation of power. Solar plants that heat water can effectively store energy in the form of hot pressurized water, which can drive a steam turbine on demand. Storage of only 18 hours worth of energy will, in a large plant, more than equal the cost of the solar part of the system. Plants that produce electricity directly (photovoltaic and wind) would probably store their energy in fuel cells. As you say, fuel cells, too, are gaining in use. But they are still costly. To make solar and wind power effective sources of base-load power, we not only have to reduce the cost of power generation but also that of energy storage.

Charles Kelber
Rockville, Md.

Facing the Consequences of U.S. Energy Policy

For the past decade, our policy has been to make energy as cheap as possible (''A modest proposal for the U.S.,'' News: Analysis & Commentary, Oct. 9). Far from insulating us from shortages, it has increased our dependence on fossil fuels and exacerbated the situation, so it is surprising that this is your proposal for the future. The suggestion to try to regulate our way to efficiency can go only so far if no one has the incentive to incur the extra upfront costs for more efficient vehicles, appliances, homes, etc. And if the consumer does not demand efficiency, industry has no incentives to implement it.

The danger of losing sight of efficiency is that it digs us into a hole. A sport-utility vehicle or other vehicle that delivers low gas mileage can be driven for 10 years, and a house with inadequate insulation will be around for three decades, yet when supplies get tight, OPEC can jack up prices in a matter of months.

To reduce dependence on OPEC will require a long-term commitment to maintain the incentives to conserve. Regulations are a step, but it also requires retail prices to be kept high enough for consumers to demand ever-increasing energy efficiency by way of taxation. Such energy taxes should be increased slowly to allow the country time to adjust. The political heat from such a proposal may be dissipated by directing the funds towards another major issue that everyone worries about--health care. Having energy taxes fund health care for those who lose their jobs and for the 40 million Americans without health care would provide a direct benefit from higher energy taxes.

Robert Banta
Andover, Mass.

We have yet another reason to hate the sport-utility vehicle. These monstrosities are dangerous to their drivers and occupants, as evidenced by the rates of fatal roll-over crashes (37% vs. 15% for passenger cars). They are dangerous to other drivers: If you, in your sedan, are struck on the driver's side by an SUV, you are five times as likely to die than if struck by another car.

Now, the miserable efficiency of SUVs is endangering the economy (not to mention the ecology) by consuming so much gasoline. Ending the ''light truck'' exemption from fuel-economy standards is long overdue. Any driver will tell you how few of these vehicles are in use as ''trucks.'' Their exemption from mileage and safety standards is nothing more than pandering to the wealth they have created in Detroit.

It is time Congress faced the reality on the roads, in the emergency rooms, and at the gas pumps and stopped telling drivers that if your car is big enough, you don't have to be concerned with its environmental impact, its impact on the economy, or its danger to passengers and fellow drivers.

Peter M. Lerman
Bethel, Conn.

You attempt to resolve the gas price problem by only addressing the supply element. Addressing the demand side of the equation is done by giving people incentives to take modes of transportation other than vehicles occupied by a single person.

There is a simple solution, and each year it is addressed in the California legislature. This year it was SB17, legislation intended to increase the use of public transit by encouraging employers to provide public-transit passes to their employees.

Employers would be allowed a tax credit against the ''net tax,'' an amount equal to the cost incurred by an employer. Public-transit passes should include privately operated van pools and bus pools. When a company provides transit passes to employees, there is a significant increase in the number of people leaving cars at home.

Brian Peoples
President
Executive Commute
Aptos, Calif.

Lower Drug Prices Can Be Found Online

''Medicines without borders'' (Government, Oct. 9) about drug prices in Canada failed to mention that budget-stretched consumers are finding convenient, safe, and less expensive prescription drug prices online. The reference to drugstore.com in the story's price-comparison chart suggests we charge premium prices for prescription drugs, when, in fact, shoppers are finding prices 20% lower online when compared with brick-and-mortar pharmacies.

Of course, consumers have to ensure they are working with a reputable online pharmacy. The National Association of Boards of Pharmacy's Verified Internet Pharmacy Practice Sites seal is designed to help consumers distinguish legitimate Internet pharmacies from so-called rogue Web sites.

While politicians debate reimportation and enterprising businesses cash in on consumers' anguish with bus trips to Canada, smart consumers are finding they can move their prescriptions to an online pharmacy, use their existing doctor, and receive the same medications for lower prices.

Peter Neupert
CEO
drugstore.com
Bellevue, Wash.

Puerto Rican Statehood Would Harm the U.S. Treasury

Over the past seven years, the pro-statehood government of Puerto Rico has spent close to $4 million on lobbying in Congress, according to Federal Elections Commission records (''Puerto Rico: Send ballot boxes,'' UpFront, Oct. 9). That's more money than Microsoft Corp. has spent. A great deal of this money has been to further the cause of statehood for Puerto Rico--even when the statehood option has lost in the two most recent plebiscites and is rejected by the status quo political party and our small but militant pro-independence movement. Judge Jaime Pieras Jr.'s decision is an attempt to achieve by judicial fiat what the statehooders have not attained in years of spending of local and federal public funds on an aloof and usually indifferent Congress.

While the lobbying in Washington continues, the pro-statehood government has faced scandal after scandal over the misuse of federal funds and outright corruption, such as the convictions of Toa Alta Mayor Angel Rodriguez over the misuse of Federal Emergency Management Agency funds in 1998, the San Juan AIDS Institute corruption scandal convictions in 1999-2000, and the threat of the Housing & Urban Development Inspector General to place the local housing department under court supervision because of rampant misuse and misappropriation of funds. A state of Puerto Rico would not only add a Quebec-like linguistic and separatist element to the U.S. but would also incorporate the sophistication of elaborate corruption scams without precedent, as well as increase the demands of Puerto Rico on a federal Treasury that hasn't realized the true impact of statehood.

David E. Miro
San Juan

How Much Corporate Information Is Too Much?

Your story, ''This 'full disclosure' rule could mean more secrets'' (Finance, Oct. 9), spreads more of the misinformation from the minority (analysts, institutional investors, corporations) who fought adoption of the regulation and lost. Author Heather Timmons says that companies are concerned about what constitutes ''material information'' they can no longer selectively disclose. For at least the past 30 years, the Supreme Court, Congress, and the Securities & Exchange Commission have refused to provide a definition of ''material information'' for purposes of the securities laws. The corporate world has gotten along fine and will continue to do so.

Timmons also raises the specter of ''a slew of lawsuits.'' She ignores, however, that the regulation expressly prohibits investors from suing for violation of the rule. For once, the scapegoats of securities regulation, plaintiffs' securities attorneys, cannot be blamed.

Although her piece purports to be a commentary, she takes at face value a quote from Wells Fargo & Co.'s chief executive that ''it's almost impossible for a small investor to understand [immediately] something as large and complex as Wells Fargo.'' If you accept this logic, why make such large and complex enterprises even file periodic reports or, for that matter, allow small investors to buy the stock? Is Timmons really advocating giving ''large'' investors, who supposedly can understand this information, the tools to make decisions when the ''small'' investors on the opposite side of the trade live in a fool's paradise? Keep them ignorant for fear of confusing them?

Information about changes in corporate fortunes (i.e., material information) is a zero-sum proposition. The stock will rise or fall based on the information; the timing of its release merely re-arranges which investors will get the gains or losses. Let everyone take their lumps when the hammer falls, rather than letting one guy get in (or out) because he knows the latest development before the fellow on the other side.

Michael Craig
Scottsdale, Ariz.

In my opinion, the rule should produce the intended result. It will not lead to more secrets because:

1.) It is rational for a firm to disclose pertinent information to the public regardless of the channel used. The motive for doing so is to raise the value of the firm. By disseminating information and reducing information asymmetry, the firm reduces investors' perception of the risk of investing in the firm. This leads to a higher value of the firm.

2.) The role of an analyst is to interpret information and assess its impact on the value of the firm, not to act as information gatekeeper. Effective analysis requires access to the relevant information, not privileged information.


F. Phillip Ghazanfari
Associate Professor
California State Polytechnic University
Pomona, Calif.