Jeff Chiu/AP Photo
Former Theranos CEO Elizabeth Holmes arrives at federal court in San Jose, California on Sept. 1, 2022. She became the poster child of Silicon Valley hype when her company was discovered to be a fraud; she was eventually sentenced to 11 years in prison.
Just over 20 years after the first one, we are once again in for a tech bust. Shares of even quite profitable companies like Microsoft and Apple have fallen modestly in 2022; Netflix is down by about half, Meta and DoorDash by two-thirds, and real turkeys like Bird—the scooter company that recently announced major bookkeeping problems and a possible bankruptcy approaching—down by more than 95 percent.
The Swiss Re Institute estimates that as much as 20 percent of the U.S. stock market is made of “zombie companies” that are functionally insolvent, dependent on super-cheap credit to stave off the day of reckoning, and that the coming year of inflation, higher interest rates, and possibly a recession will finish off most of them. And as Bloomberg’s Joe Weisenthal points out, these companies are disproportionately newer tech companies, not old ones struggling to keep up.
A recession would be bad. But America has long needed to shift its economy away from nutty tech schemes, and toward old-fashioned “sell above cost” businesses.
Let me set some context. After the 2008 crash, economists commonly said that the U.S. was stuck in a “liquidity trap.” In policy terms, this is the point where the Federal Reserve has cut interest rates all the way to zero in an attempt to stimulate the economy, yet it still isn’t enough to restore full employment.
This liquidity trap was set over the preceding decades by rising inequality and declining inflation. Starting in the 1970s, the rich had steadily expanded their share of national income by lobbying for tax cuts, deregulation, free trade, and union-busting, which gave them more income they could use for more lobbying. Businesses, under pressure from a newly activist Wall Street, gradually slowed investing and instead kicked their profits out to shareholders and executives; consumer spending was propped up with an explosion of personal debt. Both interest rates and inflation steadily dropped.
All it took was the shove of the 2008 crash to knock this weak, top-heavy economy flat on its back. The 2009 American Recovery and Reinvestment Act stopped the immediate crisis, but it was far too small to restore full employment. GDP, job, and wage growth were pitifully slow after the recession officially ended. As a result, even businesses that would have wanted to invest in more capacity found that there weren’t any profitable new markets.
This led to a paradox: Huge profits produced an enormous pool of money at the top of society, but precisely because the rich were getting so much, there was nowhere good to invest. Interest rates on government bonds didn’t keep up with inflation and sometimes sold at actual negative rates; ordinary businesses had no prospects for large growth. The economy was like a man who is sick and feeble because a third of his blood and nutrients are being sucked up into an enormous tumor hanging off the side of his head, which for the purposes of this story we’ll call “Jeff Bezos.”
It’s a good lesson in what really drives a healthy economy: not the megalomaniac fantasies of Silicon Valley oligarchs, but dollars in the pockets of ordinary Americans.
It turns out the liquidity-trap economy is the perfect breeding ground for zombie companies and scams. General Motors might not have been a great investment prospect in 2009, but all manner of utopian dreamers and fast-talking charlatans got billions from investors hungry for huge returns. (The typical pitch was to sell something below cost to gain market share, because that was the only way cash-strapped Americans could afford it.) Companies like DoorDash, Uber, and WeWork—whose business models made no sense if you thought about them for five minutes—lost tens of billions of dollars yet somehow stayed afloat for years. Tesla was briefly valued at more than every other large auto manufacturer put together despite selling about one-fiftieth as many cars. No small number of actual frauds like Theranos got major investment. Silicon Valley made a Wi-Fi-connected juicer that got millions in funding.
Even companies that grew fast and established big revenue streams like Amazon and Facebook desperately tried to find new sources of big returns, and ended up wasting tons of money on loopy moon-shot projects like Alexa and the so-called metaverse.
Most ridiculous of all was the crypto boom, which dispensed with even a pretense of real business. The big innovation here was the “initial coin offering,” which allowed venture capitalists to cash out selling worthless magic beans to the gullible Elon Musk fanboy population without even having to pretend to set up a functioning business first.
But if the post-2008 economy was a sick man, the past two years have been akin to giving him a blood transfusion, a great big protein shake, and a shot of adrenaline right to the heart. He still has Jeff Bezos the tumor, but at least he’s up and moving fast. On the one hand, the most generous economic policies in American history (in the form of the CARES Act and subsequent relief packages) stuffed unprecedented quantities of money into the pockets of the working class. As the pandemic died down, the economy roared to life with the fastest rate of growth and job creation in decades. Businesses in traditional industries like appliance manufacturing and shipping found themselves making huge profits.
On the other hand, supply chain difficulties, Putin’s war in Ukraine, the legacy of corporate consolidation, and the surge in consumer spending pushed up inflation. The Federal Reserve raised rates to compensate, making U.S. government debt more attractive to investors and sucking capital away from dubious money-torching companies. Even Amazon, which bulked up massively in the pandemic when people feared going to a store, is limping along, in part due to being unable to deliver on its outlandish promises of rapid shipping, as quality and convenience decay.
It’s not a coincidence that the Big Tech companies suffering the least from the tech winter, Apple and Microsoft, are older legacy firms whose primary business involves “selling stuff to customers at a profit” instead of setting money on fire in the vague hope that the warmth will somehow pay for itself.
Now, it remains to be seen whether or not the economy will remain upright. If the Fed keeps hiking rates as it has done so far, we might get knocked right back into the liquidity trap. But it’s still a good lesson in what really drives a healthy economy: not the megalomaniac fantasies of Silicon Valley oligarchs, but dollars in the pockets of ordinary Americans.
