[Congressional Record Volume 146, Number 103 (Thursday, September 7, 2000)]
[Senate]
[Pages S8192-S8193]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

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                            THE NEW ECONOMY

 Mr. HOLLINGS. Mr. President, Ken Lipper, the CEO of Lipper & 
Company investment firm, is a man of many talents. Ken is a novelist, a 
film producer and one of the most profound thinkers with respect to the 
new economy. In a February speech at the University of California 
Technology Conference, he outlined the strategies we must employ to 
address today's economic problems. Although he delivered the speech 
seven months ago, it is still valid. I ask that the text of the speech 
be printed in the Record.
  The text of the speech follows.

                         Remarks of Ken Lipper

       As of February 2000, the United States is in the 107th 
     month of an economic boom, the longest in history. Even as 
     this economic expansion continues, observers have been amazed 
     that inflation remains a low 2.5 percent. Ordinarily, at the 
     stage of ``full employment'' we are now enjoying--
     unemployment is at 4 percent, and is projected at 3.8 percent 
     for the year 2000, with nearly 90 percent capacity 
     utilization--there would be serious labor shortages and 
     rising prices. As a result, the Federal Reserve would 
     intervene to raise interest rates and tighten the money 
     supply, causing the expansion to fizzle.
       Why is this boom different? Currently there is an excess 
     world capacity in basic manufacturing of goods and 
     commodities, due in part to the Asian collapse combined with 
     high unemployment and relatively slow growth in Europe. More 
     important is the unprecedented and uninterrupted level of 
     U.S. capital investment. Productivity has been increasing at 
     historically high levels, an average of 2.5 percent each 
     year, so that with a 3.2 percent annual wage increase, there 
     is a real standard of living increase for workers without 
     significantly increasing unit labor costs.
       In addition, the amount and efficiency of capital behind 
     each worker has increased. For example, in 2000, 
     manufacturers expect to increase revenues 7.7 percent with 
     only a 0.5 percent increase in their labor force; non-
     manufacturing sectors will increase revenues 6.9 percent with 
     only a 1.4 percent labor force increase. These gains are 
     possible thanks to a high level of investment in plant and 
     equipment, which was up 21 percent in 1999 and is expected to 
     rise another 15 percent in 2000. In non-manufacturing 
     sectors, investment was up 4.7 percent in 1999 and expected 
     to rise 8.7 percent in 2000. And this increased investment 
     continues because a high consumer confidence level--now at an 
     index of 144, compared to an average of 115--encourages 
     corporations to expect growth in consumption.
       Another factor keeping inflation low is heightened 
     competition, both domestic and, thanks to free trade, 
     foreign. The strong dollar magnifies the effect of this 
     competition, translating into cheaper prices for imported 
     goods. And buyers can also now compare prices by B-B 
     commerce. As a result, 81 percent of manufacturers and 67 
     percent of non-manufacturers report that they cannot pass 
     along price increases to consumers. At the same time, low 
     interest rates worldwide and the buoyant U.S. stock market 
     have made for cheap capital availability, enabling the 
     investments in productivity. The strong dollar and stock 
     market have made up for the low U.S. savings rate--among the 
     lowest in the world--by encouraging record levels of foreign 
     investment, year in, year out.
       Finally, the cost of investment capital has been held down 
     because the U.S. government budget surplus takes the U.S. out 
     of the bond market as an issuer competitive with businesses; 
     indeed, the U.S. is now buying back old bonds and liquefying 
     the market. U.S. and European municipalities are also 
     borrowing much less worldwide. These trends force investment 
     funds to be reallocated to the private sector, lowering the 
     cost of capital.
       These are the reasons why some people feel that the old 
     economic paradigm the boom-to-bust cycle, is outmoded. But we 
     have not repealed the business cycle; we have only added 
     significant time to the boom equation. Ultimately, the laws 
     of supply and demand will still have their impact.
       The risks to our economy are apparent, and rising. The 
     Asian economies are recovering. In Europe, unemployment is 
     falling and the pace of economic growth is rising, while the 
     Euro is beginning to take hold and compete for funds. This 
     means that over time there could be no cheap imports to hold 
     down inflation. These factors have expressed themselves 
     already, in conjunction with rocketing U.S. consumption, huge 
     oil price increases, an end to the decline in raw materials 
     prices, and rising intermediate-product prices. And these 
     pressures occur as a dwindling supply of new entrants to 
     the U.S. labor force will begin to push up wages.
       Aggregate U.S. profit margins decreased in 1999, because 
     companies lacked pricing power. But as Asian and European 
     economic recoveries absorb excess worldwide capacity, 
     corporations will regain their pricing power to restore 
     profit margins and pass on increasing costs.
       The Federal Reserve is already intervening, and will 
     continue to raise interest rates. Many have asked why these 
     interventions are necessary when there is no current sign of 
     rising inflation. One reason is that the Fed's actions 
     generally take about 18 months to filter through the economy. 
     But there are other justifications.
       The first is labor. We have seen how labor has been able to 
     get real standard of living increases without large wage 
     increases, due to low inflation. But if labor anticipates 
     inflation from the causes discussed above, it will build 
     protective wage increases into multi-year settlements, in 
     order to hedge its potential loss of buying power. This would 
     accelerate the wage-price spiral that itself fuels further 
     inflation. Thus the Federal Reserve is signaling labor of its 
     determination to fight inflation.
       Second, the Fed is also signaling Congress not to cut taxes 
     or increase programs using the budget surplus, thus putting 
     further pressure on available resources. The Fed's moves seem 
     to indicate that it wants the national debt repaid and Social 
     Security and Medicare funded.
       Third, the Fed wants to dampen consumption due to the 
     ``wealth effect,'' the stock market gains which are 
     responsible for about 25 percent of the growth in U.S. GDP. 
     Currently, over 50 percent of American households own stocks, 
     with increasing numbers borrowing to carry them. People are 
     spending based on presumed wealth from the stock market, a 
     major difference from the time when consumption was directly 
     linked to more predictable earned income.
       Nobody knows how fast or how steep a fall in the stock 
     market might be, given high debt levels, but consumption 
     would certainly be affected. When the Japanese bubble burst, 
     the stock market never recovered from its 50 percent loss, 
     and no government program has succeeded in reviving the 
     shocked Japanese consumer.
       Fourth is the housing market. I expect housing starts to 
     decline by 6 to 8 percent in the second half of 2000 due to 
     rising mortgage rates, which will also affect existing 
     housing prices. At a time of historically minuscule savings 
     rates, how will the stock market investor and consumer react 
     when both his storehouses of wealth--stock and homes--start 
     to fall?
       I expect that stock prices will recover during the first 
     quarter and perhaps the first half of 2000, as profits 
     reflect the high productivity investments already made and 
     consumption continues unabated. But the risks touched on 
     above will become increasingly evident, and the second half 
     should begin to anticipate and express them in declining 
     stock prices in the U.S. And the Federal Reserve will 
     continue to increase interest rates.
       Nobody can reliably predict when a stock boom will end. But 
     this one seems to operate in an atmosphere of growing threat, 
     and from lofty heights. NASDAQ has an unprecedented 178X 
     multiple, which might be justified for a few companies but 
     cannot be sustained for an aggregate, 4,700 entities. So how 
     will it end?
       Probably very suddenly, as other bubbles have burst; and 
     they often take years to recover. On May 4, 1990, Christie's 
     Evening

[[Page S8193]]

     Auction failed to attract bids; art prices tumbled 50 percent 
     and the market evaporated. The price of gold reached a peak 
     of 665 in September 1980; in January 1981 it was at 505; in 
     March 1982 it had fallen to 320. The stock market plunged 
     from a peak of 2650 in October 1987 to 1770 two months later. 
     In Japan, the stockmarket collapsed from a peak of 39,000 in 
     December 1989 to 21,000 in September 1990. And Russia 
     defaulted on $2.5 billion of debt in August 1998, just two 
     months after borrowing it.
       What does this mean as a practical matter? Anyone who 
     anticipates needing refinancing should do it sooner rather 
     than later. Those who wish to liquidate some of their 
     concentrated stock holdings should act now, to protect their 
     future lifestyles. Corporate strategies that are based on a 
     fast burn rate of cash, and that plan to get new money to 
     reliquefy, should modify these plans to slow the burn rate in 
     case refinancing is not easily available. And those who need 
     refinancing should cultivate venture capital sources in 
     Europe, where economic growth and an appetite for U.S. 
     venture opportunities should provide a fertile alternative to 
     a more subdued U.S. market.
       Now I would like to turn from these dry ruminations on the 
     economy to more value-oriented thoughts on building a 
     business, based on my personal experiences as an 
     entrepreneur. Creating an enterprise for nothing should be a 
     reflection of your own values, fears, experiences, 
     intellectual insights, and sense of what is important--
     becasue you, as the entrepreneur, must feel comfortable with 
     running it. There is no single formula, but certain 
     observations might prove applicable to your own situation.
       Professor Bhide wrote in Harvard Business Review: ``Several 
     principles are basic for successful start-ups: get 
     operational fast * * * [and] don't try to hire the crack 
     team. * * *'' These precepts are not supported by my own 
     experience. The professor's recommendations place a huge 
     premium on the exclusivity and value of an idea, and the 
     notion that others could beat you out if you delay. These 
     beliefs are responsible for a large number of helter-skelter 
     business-launches-as-preemptive-strikes, premature 
     introductions that fail due to poor product quality, weak 
     delivery systems, inadequate customer support, or inadequate 
     internal financial controls.
       Every shoe-shine man will freely share his ideas with you. 
     However, what counts is the implementation of an idea by a 
     quality team of people. My products were carefully crafted 
     and tested over two years, altered and risk-adjusted through 
     examining results. A crack team was put together, with the 
     first hire being Salomon's top accountant--because I wanted 
     to know the limits of my dream before I acted beyond my 
     resources, capacity, or risk profile.
       Simply to the point: was it Prodigy's innovations, or 
     Lotus's being first in the market, that won the software 
     battle? Or was it Microsoft's better preparation for meeting 
     and servicing customers' needs that won the day? You 
     generally have one shot at the marketplace. And credibility 
     depends on predictability. Make sure everything is carefully 
     prepared in depth, no matter how long it takes, so that the 
     product and its supports work as promised. Getting started is 
     not the goal; permanency is!
       Building many products and applications can be exciting in 
     concept, but it is difficult in terms of financial and 
     physical resources. I build my products narrowly and very 
     deeply, so that we could equal any competitor in a specialty 
     area. Editing out the many other opportunities is vital for 
     concentrating resources and talent on the very few things 
     that you can do best. Choose your product, refine it, and 
     continuously monitor it based on experience. I chose 
     specialty products that did not require muscularity of 
     distribution, capital, and related support inputs, all of 
     which favor existing large corporations. By developing a 
     few intellectually rich products at the beginning, we 
     weren't forced to compete head-on with the big boys, and 
     therefore we could get profit margins and cash flow that 
     provided fuel for further expansion.
       I believe that many Internet retailers go into commodity-
     oriented businesses in which price is the key determinant, 
     only to find that success means bigger losses and that old, 
     dominant players can enter internet distribution at will and 
     grab market share. Time is the most precious capital, so a 
     business should only enter growing markets with a superior 
     service or product, where decent profit margins are available 
     over a long period of time.
       It was my experience that becoming a brand name quickly is 
     extraordinarily difficult. It requires a long period of 
     exposure and in-depth, sustained advertising. Few newcomers 
     have the necessary financial staying-power, so avoid spending 
     money on ineffectual ads. If your business strategy requires 
     you to promote the product enormously, then maybe it is the 
     wrong product choice. Remember that it is easier for GM or 
     Toys R Us to learn how to use the Internet than for you to 
     gain their brand images. And, conversely, once the 
     speculative fever recedes, why would anyone pay 9 times 
     earnings for Macy's and 1,000 times revenues for a wannabe 
     whose aspiration is to maybe become the Macy's of the Web?
       It is also important not to gild the lily technologically. 
     Think of the customer's technical competence and how he will 
     actually use your product. My biggest recent error was 
     listening to a tech analyst who told me not to buy AOL at $26 
     a pre-split share, because there were technically superior 
     products. The mix between technology and user friendliness is 
     vital. After all, do you use Betamax or VHS?
       In building a business, it is crucial to put emphasis on 
     becoming an institution. I found that it takes two years for 
     a person to feel comfortable in a corporate culture, so it is 
     better to build a team in anticipation of growth than in 
     response to it. Invest early and heavily in support systems, 
     in the areas of client service, electronic information, and 
     financial controls. Let everyone know what is expected of him 
     or her through clear communication, so that employees are 
     moving in the direction of corporate goals. My company has 
     never been star-oriented, in a star-studded industry. Good 
     organization creates a whole that is more than the sum of its 
     parts.
       Relationships are key to success, and that means knowing 
     the people in your arena. Biotech executives should know the 
     important people in the FDA, the universities, and the 
     pharmaceutical companies. And relationships should be 
     maintained for the long term. Remember, credibility equals 
     predictability; long relationships allow people to judge you 
     based on past interactions. It's too late if you only meet 
     people when you need them.
       Personnel turnover is a significant problem today. The 
     mantra everywhere is stock options, the chance to get rich 
     quick. This leads to high turnover if a company has actual or 
     perceived problems, or, on the other hand, if it is too 
     successful and young people get rich quick. In my company, 
     which is family owned, we have low turnover. We build loyalty 
     in three important ways. First, all employees share in 
     profits; we have a flatter compensation scheme than many 
     technology companies. Second, there is justice in allocating 
     rewards over long periods of time. Our people know that we 
     have permanency; we give them a long-term horizon, with 
     expectation of growing rewards over time.
       Third, our people feel safe. There are no politics, few 
     layoffs, and no acting out; people check their egos at the 
     door. We breed loyalty through civility. People are trained 
     and moved around the company to keep the interest level high, 
     and promotions are made internally. The culture is kept 
     strong by outsourcing and a small number of hires. And 
     finally, there is a single decision-maker; everyone has 
     input, but I make the final decision based on careful 
     research and many individual inputs. There is no ranting 
     or screaming by anyone; instead, there is a free flow of 
     ideas, tentative acceptance, and thorough investigations, 
     so that all communication moves back and forth.
       A great business idea, or a great scientific idea, does not 
     just come about through hard work and incremental advances. 
     It is more like poetry. It is about having the imagination 
     and heart to strike out on a path that others didn't dare to 
     follow, or didn't see in its entirety. Implementation, 
     management skills, and the ability to anticipate customer 
     needs are built on a knowledge of how human beings react. 
     These types of imagination and understanding are more likely 
     to come from wellness than from frenzy. I don't subscribe to 
     the continuous-all-nighters, no-personal-life recipe for 
     success. For a super-successful entrepreneur, having broad 
     horizon--through reading fiction and biography, appreciating 
     art, and interacting socially with a variety of people--is 
     more important than working yet another Sunday.
       But there is more at stake than business success. You want 
     to be a happy person, a good father, a community builder. I 
     find that I can only eat one tuna-fish sandwich at lunch, no 
     matter how many millions I have earned. Money can give you 
     time, and how you spend that time is key. And wise 
     expenditure of personal time on human development can also 
     help you make money, because knowledge, experience, and 
     wisdom are usually the key to the ``poetic'' business idea.
       Young people are leaving college to make quick money, like 
     a gold rush. But life is about more than money or success or 
     technical achievement. It is critical that people see the 
     world in vibrant colors and in multiple shades. To raise 
     children, face the death of parents, appreciate beauty, even 
     make love well, people need emotional and intellectual depth. 
     These come from being exposed to the collective experience of 
     civilization, which is transmitted through books and a 
     liberal education.
       In the scheme of your success, it will not make a 
     difference if you leave school two years early; but it could 
     alter your life greatly. Absorb the intangibles, not just 
     because they will give you the imagination to come up with 
     ``poetic'' business ideas to help you deal with customers, 
     but also because they will give meaning to the life you lead, 
     whether you succeed materially or not. After all, living life 
     well, in all its dimensions, is what it's all about.

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