No one enthused as romantically over Enron as did the financial media. But there is little soul-searching among financial journalists concerning the Enron scandal. No financial media organization I know of has announced that it will now mend its ways, or at least review the process that led it to be so utterly wrong time and again. There is no public call for an explanation of the media’s role in this affair.
Journalists are hiding behind the fact that the Enron debacle is so complex that the company’s misdeeds could not be readily understood. As one journalist defensively put it, it was a green-eyeshade scandal. But Enron’s profit margins were visibly weak. Its earnings were rising rapidly while the company’s cash flow was not. How could this be? The media rarely asked, and rarely bothered to report the simple facts.
Enron was also an active manager of the reporting about itself. When Fortune, which for years had pronounced the company the most innovative in the nation, finally published a piece that was critical of Enron by the admirable Bethany McLean, a young reporter with financial training, management called on the brass at Fortune to complain. Fortune stuck with the story, but few others picked it up. At least one other editor has complained about a similar reaction from Enron management. My guess is that Enron did it frequently. This is an old trick in business journalism: Those uneducated and inexperienced reporters could not possibly understand something so complex, executives tell their counterparts in the publishing suites.
How many publishers or CEOs got calls from Enron would make a fine piece of investigative reporting; how many discouraged certain stories a better one still.
Enron also benefited from the financial press’s infatuation with free markets. Deregulation was Enron’s calling card. The full use of the financial markets was its vision. A fine vision, really, except that Enron was so ambitious that it had to cheat on an enormous scale to maintain it. In my view, deregulation is often good and it is often bad. What we need is better regulation. But Enron was a free-markets company if ever there was one, and the media lay at its feet. The media not only missed the Enron scandal, they extolled the company time and again. Why? Because everyone else said so. The press was a fat, helpless calf from Enron’s point of view, and most of Wall Street’s, for that matter.
Misleading claims for Enron were only one manifestation of a broader failure of the business media over this period. They were taken in by, and indeed a party to, the fads that swept the financial world. Enron was very much part of the biggest “big idea” of the past decade, which was that America was experiencing a “new economy”–one in which information was the key asset and “normal” stock-valuation methods no longer applied. Enron’s aggressive use of derivatives made it a classic example of new economy thinking.
This new economy of the late 1990s was an invention of the media and Wall Street. It was certainly not the contention of economic scholars, at least not initially. Over the previous two decades, the American business press, in particular weekly and monthly publications and the increasingly popular financial programs on cable television, had become highly interpretive and increasingly conferred on themselves expert authority. As a result, opposing views were often given short shrift, and the uncertainty that would normally accompany any thesis was minimized.
On Wall Street, the concept of a new economy justified speculative stock prices. Mind you, the new economy, in the minds of its advocates, was not just a revitalization of economic growth, which had occurred many times in America’s past. It was alleged to be a once-a-century phenomenon. A new economy meant that historical precedent was meaningless. It also encouraged enormous business investment in high technology, including Internet services, much of which turned out to be ill founded. Corporate executives leaped into these new technologies so as not to be left out. Many of these decisions were not carefully reasoned. New economy rhetorical enthusiasm simplified their decisions. Everyone can’t be wrong.
The broad faith in a new economy ultimately did a great deal of damage. It encouraged investors to pay prices for securities that could not possibly be sustained and resulted in serious losses for individuals. Hundreds of billions of dollars were invested in new ventures that did not bear fruit; the capital was dissipated on state-of-the-art communications systems, high salaries, fancy office furniture and corporate jets. Meantime, amid the waste, economists wrung their hands in worry over the low level of savings in America. Most damaging, the nation was convinced by the enthusiastic rhetoric that it had solved its central economic problems. Yet in 2000, when economic growth began to slow down, typical family incomes were only slightly ahead of where they had been at the last peak of economic prosperity, in 1989; poverty rates were only slightly lower than in 1989; average wages were still below their 1970s levels; and half or more male workers lost ground as they aged from their 30s into their 40s, 50s and 60s.
In truth, the new economy was not an economic concept but a social metaphor for the times. After two decades of poor economic results, revolution, especially one without cost, was highly desired. So the media, Wall Street and some politicians determined to make one.
BusinessWeek was a widely cited advocate of a new economy in the late 1990s, but many others followed its lead. BusinessWeek had been talking about a new economy in one form or another since 1981. As long ago as the mid-1980s, BusinessWeek, Fortune and U.S. News & World Report put the new economy on its cover. But it was a different version then. It emphasized the high proportion of services in the economy. The idea fizzled after the stock market crash of 1987 and the slow growth of the early 1990s. But the financial media somehow knew its audience wanted a revolutionary new economy as the answer to its needs. Certainly, Wall Street wanted one. The definition of the new economy changed time and again as the economy changed.
There were two cornerstones of BusinessWeek‘s new economy of the mid-1990s. The first was globalization and the rise of America’s exports. (Never mind that imports rose still faster.) Second was information technology. Business investment in such technology, the magazine correctly pointed out, was rising rapidly. But as the economy strengthened in 1997, globalization took a back seat. Eventually, it was businesses’ willingness to take dramatic investment risks, for example, that spurred the new economy, according to BusinessWeek. In the late 1990s, the Internet itself was the new economy, according to many publications.
Eventually, Wall Street economists such as Allen Sinai, and Ed Yardeni of Deutsche Morgan Grenfell, who was increasingly called a “New Economy guru,” provided enthusiastic arguments in support. The leading economic personage in favor of a new economy, however, was Alan Greenspan. He offered little data to back up his occasional contentions, but he argued that information technology could well have made business fundamentally more efficient. Such changes, he said, might come along only once or twice a century. (He also frequently suggested that the data, which were not as strong as in similar periods in the past, were simply wrong.) More important, Greenspan acted on his convictions, or so it seemed. Beginning in 1996, he either cut interest rates or failed to raise them in the face of more rapid economic growth. The more forgiving monetary policy almost certainly helped stimulate more consumer and business demand. By that time, Greenspan had reached idol-like standing, and his comments, if ambiguous and often contradictory, were influential.
Many economic analysts, including Lawrence Summers, shortly before he became Treasury Secretary, used a single illustrative metaphor to describe the alleged unprecedented power of new technologies. One fax machine alone is useless, they said, but two such machines multiply the value of each. Thus, the power of new networks. But one telephone was also similarly useless. The value of television multiplied as it swept through the nation. In truth, networks were always the essence of a mass production economy. Consider the highways, the railroads or even the A&P grocery store chain.
Another illusion was the speed of evolution of the new economy. The Economist, which was admirably more skeptical than most over this period, still fell prey to one of the more serious and frequent historical gaffes. It reported in a September 23, 2000, article that
Electricity achieved a 50 % share of the power used by America’s manufacturing industry 90 years after the discovery of electromagnetic induction, and 40 years after the first power station was built. By contrast, half of all Americans already use a personal computer, 50 years after the invention of computers and only 30 years after the microprocessor was invented. The Internet is approaching a 50 % penetration in America 30 years after it was invented and only seven years since it was launched commercially.
But television reached a 70 percent penetration seven years after it became commercial, and a TV set was relatively much more expensive than a PC. Radio was also a quicker sell than the Internet.
The Economist also claimed that the big difference between the Internet and the railroads, clearly a transforming technology, was that the Internet carries information. This was another misleading but widespread truism of the press. The railroads, of course, also carried information. The US mail was carried by rail, and the federally run system was the envy of the world in the mid-1800s. Not only that: One of the railroad’s most important functions was to carry dozens of newspapers from town to town.
Helping along the idea of the new economy were such futurists as George Gilder, who claimed in the Wall Street Journal on December 31, 1999, that the economy was an increasingly weightless one, as hard goods became less important. Alan Greenspan thought such a claim was also pertinent. But weightlessness, so to speak, was a trend that got under way beginning in the 1800s, as services like retail chains, large wholesalers, the mails and banking were relatively weightless contributors to economic growth. Contributing to the idea were also Wall Street analysts like Mary Meeker, who was quoted in U.S. News on April 3, 2000, saying that “stocks for a new industry have never risen this quickly, and a new industry has never emerged this quickly.” Where did she hear that? Or consider the supposedly scholarly conclusions of an article in the May/June 2000 Harvard Business Review: “Not since the Industrial Revolution have the stakes of dealing with change been so high.” What about the 1920s? In less than a decade, most families owned a car. Many had washing machines, radios and phonographs, and they went to the entirely new cinema in droves.
Such broad contentions commanded the attention of readers. They exploited as well their desire for good news. The media, especially magazines and television, did not want to be bearers of bad news. The major newspapers were generally more temperate. A symbiosis developed between the media and experts, who had to endorse such ideas to be quoted. Such misleading information tended to feed upon itself. I would call it a “symbiosis of misinformation.”
But the new economy was simply good business for the media. The value of ad pages bought to promote Internet services rose by 183 percent in 2000 over 1999, to nearly $280 million. High-technology advertising in general in 2000 increased by 49 percent at the Wall Street Journal, 34 percent at BusinessWeek, 86 percent at Fortune and 85 percent at Forbes. If the media occasionally ran stories that were skeptical of the new economy, that simply seemed to provide a cover for waxing enthusiastic the rest of the time. Only the crash of high-technology stocks in 2000, and later the slowing of the economy and the uptick in the unemployment rate, tempered the rhetoric.
Throughout 2000, even as the stock market began to slide, the media defended the new economy valiantly. The New Yorker insisted in early 2001 that the new economy isn’t a myth. Well, no, it’s not, but only if you deflate its promises sufficiently. Something surely happened, but was it a full-fledged “new economy”? The Economist published a piece in fall 2000 on “How information technology can boost economic growth.” It argued that the true new economy would probably only flower once the Internet was fully exploited. But as of 2001, commerce over the Internet was less than 2 percent of all business transactions in America. So America’s rapid growth in the late 1990s must have had to do with something else.
By 2001, there were inevitable reaction stories. Some claimed that the new economy was indeed a myth. But the media still maintained loyalty to their brainchild, even if recession was imminent. BusinessWeek started writing about “New Economy recession.” The Wall Street Journal wondered about “New Economy-style ‘growth recessions.'” In the first few months of 2001, there were fewer references to the new economy than in 2000 but still vastly more than the number of references in 1999. It would take more to kill this idea than the high-technology crash.
In my view, the most damaging impact of new economy rhetoric was on public policy. By 2000, the nation had only begun to make up for the erosion in living standards over the preceding two decades. Male wages were still historically low. Families, on average, were working much longer. Both incomes and job insecurity were up. Incomes were adequate to buy food, clothing and electronic goods, which American business made with astonishing efficiency, but incomes fell much further back in their capacity to acquire the key goods and services of contemporary times: housing, education, healthcare, drugs, public transit and childcare.
In the swirl of new economy rhetoric, these issues were largely brushed aside. New economy rhetoric was of a piece with two quasi-religious economic beliefs. One is what George Soros and others call market fundamentalism, which argues that unfettered markets can fairly and efficiently distribute almost all goods and services. Enron was the great exemplar. The second is technological determinism. This suggests that as long as technology advances, economies will grow. Thus, new economy rhetoric implied that America had solved its central economic problems. In the case of the new economy, rhetoric reflected the needs and values of the nation, but it also fostered them. America did not seek to do what it had done so often in the past to support economic growth. Once it created grade schools, high schools, highways, subsidized railroads and public health institutions. But it did not create new institutions for today’s new economy, such as daycare or new educational programs.
The business media occasionally, as noted, published pieces that questioned the new economy. Some writers were diligent skeptics. In general, the business media were far more sophisticated than they were in the 1960s, or even the 1970s. But they did not provide a counterweight to the simplistic new economy rhetoric. Yes, information technology is important, will generate jobs and economic growth, and is in general quite a boon–as have been many technologies throughout American history. The business media should have put it in perspective. To the contrary, they carried new economy overenthusiasm along, reinforced it and significantly amplified it.
Now the media have again adopted a new economy idea. Productivity has risen during the current recession, which is a historical oddity. It must be information technology, the new economy advocates on Wall Street and in Washington, including the ever-romantic Alan Greenspan, now say. The media cheerfully repeat the contention with little or no counterargument. A better explanation of the recent productivity data is newly harsh employment practices. Probably never before have so many workers been fired so rapidly, with companies cutting back work hours faster than sales. This is far easier to do in part because there is such a large temporary work force.
Once, American business journalism saw itself as a watchdog in the service of the public. It was appropriately skeptical. There was never a golden age, but there was a sense of proportion. Now, it is susceptible to the rush of the moment, and indulges the optimism its readers and viewers so badly want. The new economy was the ultimate distortion. Everyone knew what the new economy was, and yet no one did. It was what you wanted it to be. The success of Enron was proof it worked. It wasn’t journalism–it was marketing.