Remember the dire warnings about the Internet bubble? Millions of investors, gripped by a mass speculative fever, had driven dot.com equity valuations to ridiculous heights of fancy. When the dot.com bubble burst, the investment Calvinists warned, the market collapse would take both the "new" and the "old" economy down hard.

Well, the Bloomberg Internet index is down a stunning 65% year to date. Chastened new economy entrepreneurs are shutting down businesses. Employees at dot.com start-ups own worthless stock options. The caffeine-fueled, sleep-under-the-desk, take-no-prisoners, show-me-the-equity culture of Silicon Valley and other high-tech hotspots are coming under withering criticism. The Wall Street consensus is that the Internet balloon has popped.

But where is the economic Crash? Consider this: The big debate among investors is whether the Fed's year-long campaign of monetary tightening has slowed the economy. In other words, has the economy's growth rate moderated to a 3% or so pace, or is the economy poised to come roaring back in the second half of the year?

Why didn't the bursting of the Internet bubble depress the economy? For one thing, the talk about an emotionally driven, wildly overvalued stock market was always exaggerated. Yes, investors got overly enthusiastic. But the bubble theorist belief that millions of investors were consistently stupid for six years is untenable. Indeed, the current economic expansion is remarkable not only for its record length, but also for how much high-tech innovation is boosting business efficiency. For another, the Internet revolution is going mainstream as management at General Electric, Wal-Mart, and other brand name companies restructure their operations around the World Wide Web.

The bottom line is that the information revolution is genuinely transforming the economy.

 


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