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Does the Government Hate Tech Stocks?

Rob WalkerPosted Wednesday, April 19, 2000, at 5:35 PM ET

The other day, when the on-again, off-again battering of tech stocks was near a peak, James K. Glassman floated his explanation for why it was happening, and how much worse it would get, on the op-ed page of the Wall Street Journal: The government, "often in league with trial lawyers, threatens every high-tech firm in America," and investors were figuring that out. His Exhibit A is of course the Microsoft case. But Glassman says this was "only the catalyst," and trots out what he suggests is additional evidence of "government intervention" crippling business and blowing out stocks.

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I guess if you're going to say something silly, you may as well say something spectacularly silly. Glassman is wrong in his particulars, but his wrongness about the big picture is far more startling. A recently published book, Bull Run: Wall Street, the Democrats, and the New Politics of Personal Finance, by a journalist named Daniel Gross, makes precisely the opposite big-picture case--that, in fact, the Clinton years have seen government (or more precisely, Democrats) embrace Wall Street and the markets as never before. The book is a lot more convincing than Glassman.

Glassman wrote that Bill Clinton and Tony Blair have made "veiled threats about ending private ownership of human genome information," thus driving down share prices in the biotech sector. In fact, they made imprecise statements that were initially misinterpreted and the market overreacted. To clear things up, Clinton had this to say in early April: "If someone discovers something that has a specific commercial application, they ought to be able to get a patent on it." Biotech stocks rallied 11 percent. Glassman left that out.

Next he contends that state attorneys general are going after the Web advertising firm DoubleClick the same way they went after tobacco and gun companies, this time for alleged privacy violations. Nothing of the kind has actually happened, yet he writes: "DoubleClick, by the way, is down 38% since the onslaught began." The profitless DoubleClick, by the way, has a price to sales ratio of 17. Any chance that its stock was, you know, a little overpriced and had plenty of room to fall? Then it's on to e-commerce taxes, which Glassman implies have been forced into law by the National Governors' Association. In fact, the anti-tax forces have pretty much won this battle, at least for the next several years.

Et cetera. So much for his evidence; what exactly would the government's motive be? This brings us to Gross' book, which argues that the Clinton administration is not hostile to the markets at all, but practically joined to them at the hip. This is not a surprising argument to those who follow campaign finance--the neoliberal Wall Street crowd that Gross calls the New Moneycrats donated money to Clinton-Gore and held Cabinet posts in their administration (à la Robert Rubin). Still, it's amusing to be reminded of Clinton's early 1990s attitude toward Wall Street, which was in fact the more traditional antagonism you would expect from a Democrat, railing against the fat cats who "speculate in paper" and so on. After all, the Dow was at 3,000. By January of last year, of course, things had changed, and Clinton was floating the idea of putting Social Security funds in the market.

The most interesting parts of Gross' argument are the earlier chapters of his book, particularly where he discusses how pension funds have subtly marketized core Democratic constituencies of labor and intellectuals. By now, Gross observes, the grand symbolic financial gathering is not Michael Milken's Predators' Ball but Warren Buffet's folksy shareholder gatherings in Omaha. "Running against the markets is a recipe for disaster," Gross concludes. "Anybody who tries to spook them, or who revels in a 300-point drop in the Dow, would be branded a traitor to the vast investor class."

He is more sanguine about all of this than I am--a government that is overly concerned with the investor class strikes me as a government following the path of least resistance. I suspect it would be healthier for someone to use the bully pulpit to remind this investor class how lucky it has been, rather than to, as Gross suggests, laud the CEO of Cisco for creating shareholder value.

Still, he is right that it is impossible to run against the markets now, and I don't even think Glassman seriously believes that anyone in government wants to see the Nasdaq collapse. I think what Glassman is doing, however, is something we may well see a lot more of in political campaigns, which is suggest that the other guy might hurt your portfolio--that the other guy, in short, is soft on bears.

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COMMENTS

Reader Response from The Fray:

On April 17, a little over a week after my piece in the Wall Street Journal appeared, The Industry Standard ran an interesting piece called The End of the Beginning. In a sidebar it listed FTC, Justice Department and SEC actions or contemplated actions against eight Internet companies. And there are lots more than that. My point in the WSJ piece was far from wild. It is undeniable: The Internet has thrived in good part because it has been a largely unregulated, largely tax-free zone. That status is changing, as more and more politicians get into the act: to raise tax dollars, to appease their powerful friends (donors or employers) in the district and simply to do what they do best--meddle in free markets.

I don't deny that Gross may have a point: in the large run, something important is changing in America. When half of households own stocks (and soon, I believe, 80 percent of households will), then political views change--in my opinion, for the better. But, in the meantime, my piece, an "Investor Alert" I issued on April 3 on my website, www.TechCentralStation.com, and a speech I gave that same day at the Detroit Economic Club, urged vigilance.

--James K. Glassman

(To reply, click here.)

To James K.Glassman: There's nothing sinister about the Federal Trade Commission and the S.E.C. making sure that Internet companies don't violate laws, is there? Is it "meddling with the markets" to require companies to follow accounting standards? Do Internet companies, breathtakingly well-capitalized, really need to have a thumb on the scale (to borrow a current phrase) by operating in a "largely unregulated, largely tax-free zone," while off-line competitors do not? It seems to me that all that is going on is that these companies will have to play by the same rules as everybody else--rules that seem to have worked pretty well in the past. One of the great justifications for the massive potential upside of funding or founding an Internet company is that the backer or entrepreneur is taking a risk. If that is so, then why shouldn't they have to play by the same rules any other investor or entrepreneur plays by? The more telling box with the Standard piece is on the next page, and it is headlined "Consumer Net Plays Are Running Out of Cash." The government is not going to "throttle" any Internet companies, but the market undoubtedly will, and that is just as it should be. There is no good reason for the government to act in a way that allows an unviable enterprise to stay in business. Unless, of course, that enterprise is able to wheedle a grant from the National Endowment for the Arts.

--Rob Walker

(To reply, click here.)

(4/25)

Today Wall Street seems more like a source of funding for projects, like so many Internet startups, which enjoy fabulously successful IPOs because the investing public finds them exhilarating, not because they earn money. Thus Wall Street has become like government, or like, say, the Ford Foundation--a source of funds for activities that are socially prized even if their immediate economic viability is unclear. So Wall Street itself is to some degree contradicting basic capitalist values.

--Edward Brynes

(To reply, click here.)

Glassman's piece was a tad over-stated. But his point is still valid: those on the left, whether part of the investor class or not, believe in government entitlement to the fruits of the people's labor. That greater than my own pursuit of happiness, (the physical manifestation of which may be money) is the welfare of "the public". Unfortunately, and I can state this without hyperbole, it is this philosophy of the greater good that has driven the movements of communist and facist alike.

To Mr. Walker, the role of government is to confiscate and redistribute wealth and to remind people that they are lucky to have anything at all.

--Bsea

(To reply, click here.)

(4/20)

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