Simonoff: Brian, do you have any thoughts about how this slowdown is going to look different?
Horrigan: There are certainly very classical qualities to this slowdown. We had unwanted buildup in inventories for most of last year, and we have a classic inventory cycle of working out those inventories, with the auto sector playing a very major role on an inventory buildup, and that's a very old story.
What is different this time is that the capital-spending boom we had, capital investment in the capital [goods] raced ahead of output, and now we need to work off excess. What makes it a little different this time is, compared to a decade ago, we had a real estate boom that left us in the late 1980s with excessive real estate development. You know, you had these see-through skyscrapers in Houston, for example. Depreciation for skyscrapers and shopping malls is very low, so it took us the better part of a decade for us to really grow into that excessive capital.
And in the meantime, we'd had a huge capital loss, part of that absorbed by the savings and loans and, ultimately, the taxpayers because of the deflation that excess capacity caused. This time around, the excess capacity is in high-tech. Well, high-tech has a very high depreciation and obsolescence rate. That means that we should go through this cycle much faster than we went through the cycle of the late '80s and early '90s.
Feinman: IT depreciates faster, for sure. That's helpful in getting rid of excess capacity. Of course, the flipside or downside of that is that your net capital stock is going to go away quicker, and maybe some of the capital-deepening benefits that you got from all this IT buildup may diminish, and that may show up in slower productivity growth.
The other issue is that we have got some classic elements in this cycle and we've got some new elements. The inventory buildup, the auto sector looks very much like it typically does during a slowdown and the way they've adjusted production. I would suspect, though, that maybe because of improved inventory-management techniques and the like, you may get-and maybe we are already seeing-a quicker production adjustment to the slowdown in demand. So, it's quicker, maybe sharper, but less prolonged, and it gets over with more rapidly. The auto sector provides a hint of that in that they cut production quickly, and they seem to have gotten, pretty much, on top of their inventory situation and made the adjustment pretty rapidly, so that's maybe one difference.
The other possibility, we have more flexible labor-compensation tools now, with more reliance on options and other kinds of compensation. So we may adjust more quickly. It remains to be seen whether that's going to happen, but that'll be something to watch.
Simonoff: By historic proportions, was what we saw in the late 1990s one of the greatest bubbles that the world's ever seen? How would it rank with the South Sea bubble, tulips in Holland of the 1920s, the '80s in Japan?
McCulley: I wouldn't call it a major-league bubble. I mean, you just mentioned two of the major-league bubbles of all time. And if I felt that we'd had a bubble of that proportion, then I would be forecasting a depression and recommending investors buy canned, green peas and small firearms.
Horrigan: The bubble quality seemed to be pretty much concentrated in the high-tech sector. You can see that even now. If you define a bear market as a 20% drop in peak, the S&P and the Dow just hit bear territory just within the last few weeks. But Nasdaq hit bear territory a long time ago. So these corrections we've seen are not exactly earth-shaking. We had a larger bear market in '87 with no recession, by the way. We had a bear market in the early '90s, until the Gulf War was over, and we had a bear market in '98, during the East Asian and Russian default-crisis period. So a bear market does not automatically mean a recession.