Information, Productivity and Prices Jude Wanniski June 23, 1999

At 2:35 p.m. EDT yesterday, the Associated Press reported from Williamsburg, Va., that the opening statements Tuesday from 17 of the 19 members present of the Advisory Commission on Electronic Commerce -- appointed by the U.S. Congress -- showed that a majority believe the Internet cannot remain effectively tax-free forever. "We must not allow the Internet to become a tax haven that drains the revenue governments need to provide the services that citizens demand," said commission member Joseph Guttentag, a top Treasury Department official. When Wall Street closed at 4 p.m., a check with Bloomberg confirmed my suspicion that NASDAQ stocks were at their high for the day at 2:35 p.m. EDT, at 2642, falling 62 points from there to close at 2580, with the Internet stocks taking bigger hits. This morning, the NYT business pages did not make the connection. It did not even publish the AP report from Williamsburg. *

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The "Science Times" section of Tuesday's NYTimes tells us that chimpanzees who live in different parts of Africa, while genetically identical, have different cultural patterns. Some entertain themselves by watching bugs, others by squashing them. Civilization did not begin until the first "word" was spoken. That is, information came first, taxes later. Ever since that first word, standards of living have risen for the human species as our ability to communicate with each other increased. The wheel followed the word. A nice expansion took place in the Golden Age of the Roman Empire but ended with high taxes and currency devaluations. The long dark ages saw relatively little improvement in the human condition. It took as long for a man to travel from Rome to London in 1800 as it did Julius Caesar. By the 1860s, with railroad lines speeding travel and telegraph lines speeding the word, standards of living began to jump. The reason is that information flows grew in volume and speed. Investment risks declined as the futures market moved closer and closer to the spot market, news traveling faster. Problems facing the exchange economy were solved more rapidly. A half-baked idea in Ancient Rome would normally die there, but now it would soon be in London where someone else would finish baking it into an innovation that would benefit everyone. The printing press and moveable type, the encyclopedia, the Pony Express are of a piece with ticker tape, junk bonds, hedge funds, derivatives, and the Internet.

To put a finer point on it, it was communication advances that led to advances in the production of goods that mankind uses for its sustenance and creature comforts -- not vice versa. In the Monday "Outlook" column in the WSJournal, Washington bureau chief Alan Murray tells us that the world of Adam Smith no longer applies in today's world of commerce: "In Smith's economy, if you consume a good, I cannot. Only one of us can eat the same cookie or ride the same bicycle at any given time. But in the new economy, information is the ultimate good, and information can be consumed by a vast number of people at the same time." This doesn't make much sense in an otherwise innocuous column about Internet "monopolies." It may be the result of Murray not being able to figure out the connection between productivity and prices. He probably does not accept the argument of the WSJ editorial page that Fed Chairman Alan Greenspan has been starving the world of dollar liquidity. That's too simple, so he must argue that from the dawn of civilization until RIGHT NOW, the world has worked along Smithian lines, but all that has changed. This is becoming a fairly widespread view. Greenspan himself does not want to admit he caused the global monetary deflation that wrecked much of the world's developing nations, so he also announces to anyone who will listen that technological advance causes prices to fall. On today's NYTimes editpage, Steven Rattner, the deputy CEO of Lazard Freres, solemnly informs us that inflation is just around the corner and interest rates must go up several times to prevent that from happening. Rattner, a former financial writer for the NYT, is Vice President Al Gore's financial teacher. He almost surely would be named Fed chairman to replace Greenspan in the brave, new, Gore world.

Take notice that this is what always has happened in the history of the world, when Establishment leaders cannot explain the new world around them. In the midst of the Great Depression, John Maynard Keynes argued that Say's [supply-side] Law of Markets no longer applied. Private markets may have been efficient prior to the 1929 Crash, but now it was government's responsibility to prevent bubbles from developing. Consumer spending had to be managed by taxing the rich -- who would not spend fast enough -- and giving the receipts to the poor, who would vote Democratic if they got free goods. Please forgive me if I point out again that George W. Bush's chief economic advisor, former Fed Governor Larry Lindsey, believes the stock market today represents a dangerous "bubble" and that Greenspan may have to raise interest rates three times this year. Bush's Lindsey and Gore's Rattner are interchangeable intellectual commodities, even separated at birth perhaps.

Milton Friedman's Monetarists do not necessarily believe the market is now in a bubble phase, although Friedman himself has said it well might be. Why is the stock market so high, bond prices so low, while the gold price continues to inch lower? CATO, the libertarian think tank that still genuflects at the monetarist shrine, now advises us that we are now in a NEW WORLD of steadily falling prices and that Deflation is good for us. The argument is made by a University of Georgia economist, George Selgin, in CATO's May/June Policy Review. As with all such exercises by Keynesian and monetarist theorists, money's function as a reliable unit of account is not even a consideration. The classical economists understood that this monetary function was the most important of all. It enabled people to communicate across time and space in contracts involving the exchange of goods. How efficient to have one standard of measure. In a memo I posted on my website Tuesday, I advised Selgin that technological advances do not cause falling prices. They simply mean fewer hours of work are needed in exchange for units of food, housing and clothing. If the dollar price of gold remains constant, so does the dollar price of bread. When golfers hit their Big Berthas 20 yards further, does the PGA increase the length of a yard to compensate?

So why tax sales at the Internet? Why tax information flows? Treasury's Mr. Guttentag worries about falling tax receipts? Let him tax Internet sales and he will only push them offshore. Other countries that don't tax Internet sales will take what now is our proprietary lead. Is Guttentag right, though, that an Internet is tax inevitable? Perhaps, but not because government needs the revenue. Wall Street told us yesterday, when it marked down the value of the nation's capital stock in aggregate, that taxing the Internet when the moratorium ends in October 2001 would mean a net decline in tax receipts. No, if our next President signs an Internet tax into law, it will be because Internet companies that first become established begin urging politicians to tax the newcomers, the fresh competition. There are already plenty of Silicon Valley folks who are getting comfortable with the idea of an Internet tax for that very reason. The special advisory commission that already is licking its chops will report to Congress by April 2000. The Republican governors, almost all of whom have endorsed George W, also are licking their chops over Internet taxes. Only a President who says, "Read my lips: No Internet taxes" will be able to head the bad guys off at the pass.