U.S. investment spending collapse: what caused it? what have we learned?

• Pages: 360-362

Page 360

On September 29, on the fringes of the Annual Meetings of the Governors of the IMF and the World Bank in Washington, E. Gerald Corrigan, Managing Director of Goldman, Sachs & Company, delivered the 2002 Per Jacobsson lecture, "The Boom-Bust Capital Spending Cycle in the United States:

Lessons Learned." His remarks are summarized here; the full text is available at www.perjacobsson.org. Although the extraordinary run-up and even more spectacular collapse in technology-related U.S. investment spending during the second half of the 1990s and the first two years of the new decade are still recent history, Corrigan believes we already know a fair amount about this "episode." Understanding how these factors not only influenced but dominated behavior is central to our ability to better understand what could have moderated the course of events and what can be done to help prevent or mitigate such episodes in the future.

Why did capital spending surge?

Three separate but related phenomena drove the surge in investment: a burst of new technology, notably related to the Internet and telecommunications; an erosion of business practices; and "hype" associated with the so-called new economy.

Technology. The 1990s saw three technologyrelated forces at work that were guaranteed to spur a dramatic surge in capital spending. Two of these were major technological platform changes-moves to a client-server platform and the Internet platform.

While both of these proved to be watershed developments, their implications for capital spending were, in some respects, working at cross-purposes. The client-server platform called for greater decentralization, whereas the Internet platform pointed toward more centralization. According to Corrigan, these opposing forces caused redundancies and inefficiencies in capital spending. To further complicate matters, the industry had to contend with a third factor that had enormous implications for capital spending on technology-the approach of Y2K. The stage was set for a binge in capital spending.

As these forces fed upon themselves, it should have been more clear that capital spending was destined to overshoot. One reason, Corrigan said, was fear of being left behind.Worries about finding themselves technologically obsolete were so powerful that many companies felt compelled to push ahead with spending programs, even when there may have been doubts about their timing, if not their merits.

Erosion of business practices. Driven...