The rapid sinking of the tech stocks over the past five weeks has raised concerns that we may be seeing the bursting of a tech bubble, similar to the dot-com boom that collapsed in March of 2000.
Maybe, but there are reasons to think that the recent tech sell-off is just a painful correction after a few very strong years rather than a popped tech bubble—and those reasons have to do with the economy.
The economy at the end of the 1990s had embraced and even fueled the tech bubble: both were feeding off each other. As a result, the U.S. unemployment rate dropped to under 4 percent—essentially reaching what economists call “full employment,” in which everyone who wants a job can find one.
Needless to say, full employment is not one of our current economic challenges. Indeed, the labor force participation rate has dropped to levels not seen in decades because so many people wanting work have become discouraged and stopped looking.
Second, that discouragement shows up in the public’s attitude about the economy. A bubble is usually accompanied by widespread public optimism about the economy. But a recent Rasmussen poll found that only 28 percent of the public thinks the economy is getting better. Compare that to then-Federal Reserve Bank Chairman Alan Greenspan’s warning about “irrational exuberance.” Optimism is not an issue in the Obama economy.
And third, there’s a pervading economic uncertainty brought about by policies such as Obamacare and the Dodd-Frank financial legislation; companies don’t know what new costs, taxes or regulations they will face under Obama, and so they, unlike a bubble, move very cautiously.
The Economic Policy Uncertainty Index has tracked policy uncertainty over the past three decades. After four years of declining or relatively low levels of policy uncertainty—between 106 and 59 on the index—the index began climbing at the beginning of the recession in June 2007, and has remained high, occasionally spiking to at or near record high levels: 363 in November 2011, 332 in December 2012, and 251 in October of 2013.
In summary, an overheated economy and widespread optimism about it usually precede and fuel a bubble that eventually bursts, which is what happened to the economy, and the tech sector specifically, in the late 1990s. But if anything, today most people are skeptical about the economy and discouraged about the future. And they will likely remain so until a new president can eliminate and replace Obama’s economic legacy.
April 15, 2014