Election Imperils New Economy Stocks
Election Imperils New Economy Stocks
By Hal Plotkin
Silicon Valley Correspondent
A number of leading Silicon Valley business leaders say this November’s presidential election poses increased risks for investors, particularly those holding so-called New Economy stocks in emerging Internet, communications and high-tech markets.
Business supporters of both Texas Governor and Republican nominee George W. Bush, who are pulling for the GOP to hold on to the legislative reins of power, and Vice President and Democratic presidential candidate Al Gore, who hope the Democrats regain control of the House of Representatives, say the economy and investors face potential ruin if their preferred candidates don’t emerge victorious.
“The stakes in this election are very, very high,” says Steve Levy, director of the Center for the Continuing Study of the California Economy, based in Palo Alto, Calif. “This could be a turning point for the federal government that would have a big impact on California and Silicon Valley technology companies.”
Prominent Silicon Valley backers of Bush say his oft-stated opposition to excessive government regulation and his promise of deep tax cuts are exactly what is needed to keep the high-tech boom going. If Bush is elected and the GOP maintains control of Congress, they say, stock market investors will benefit from a steadily shrinking federal government that poses less and less of a drag on the private sector.
Business supporters of Gore, however, say his promise to preserve more of the federal budget surplus and to continue using it for governmental purposes, including paying down more of the national debt, put him and his Democratic allies in Congress in the best position to preserve the rare and delicate economic balance that has led to nearly a decade of sustained growth.
“I don’t think a lot of people realize what the risks are,” says Bush supporter Floyd Kvamme, a partner at Kliener Perkins, Caufield & Byers, a leading venture-capital firm based in Menlo Park, Calif.
Kvamme’s firm has helped put dozens of New Economy companies on the map, including firms such as Amazon.com Inc. {AMZN}, Genentech Inc. {DNA} and Juniper Networks Inc. {JNPR}.
Kvamme says the prospect of Gore as president, coupled with a Democratic Congress, could do considerable damage to the high-tech sector and, in particular, to Internet companies.
“I know it’s become a joke, about how Gore invented the Internet and all,” Kvamme says. “But I really do think they have this sense of ownership over it. They seem to think it was something the government created, and that it’s something the government should control.”
Kvamme says that there are now more than 100 different regulations aimed at the Internet working their way through Congress. He says a Democratic congressional majority coupled with a Democratic president won’t be able to resist the temptation to enact many of those regulations, at least some of which could have unintended consequences.
“In a regulatory sense, dramatic changes could take place,” Kvamme adds.
Even seemingly innocuous-sounding reforms, such as attempts to ban spam, or unsolicited e-mail, could backfire and end up hurting the high-tech economy, Kvamme says.
“I can’t get the post office to stop delivering mail addressed to “occupant,” Kvamme says. “Now I’m no fan of spam — I’m not defending it — but maybe it makes sense for us to think a little more before we rush in and put regulations in place on the Internet that could end up doing more harm than good.”
In addition, Kvamme says Bush has made a promise to him and to other Silicon Valley business leaders that his administration will loosen federal controls on the export of some technologies, including advanced encryption software that makes it harder for government law-enforcement agencies to conduct Web-based wiretaps.
“He’s told us that he won’t prevent us from selling technology that is already available from other sources outside the United States,” Kvamme notes. “That’s certainly a big difference between the two candidates. Bush understands reality and is willing to deal with it. A continuation of the
Clinton-Gore policy on technology exports would hold our companies back from competing and give the edge to foreign competitors.”
Although the Clinton-Gore administration has partially relaxed some technology export controls, including those related to encryption, those moves have been slower in coming and less comprehensive than many in Silicon Valley would have preferred, Kvamme says.
Kvamme adds that Bush’s policy proposals, which include larger tax rebates, increased defense spending and allowing some Social Security funds to be invested in the private sector, would provide the fuel the economy needs to keep moving forward.
But others disagree.
“I think that’s just dead wrong,” says Steve Westly, senior vice president of online-auction giant eBay Inc. {EBAY}, based in San Jose, Calif. Westly, whose stock in eBay is worth north of $100 million, will serve as a Gore delegate at the Democratic convention in Los Angeles next week.
He agrees that the future of Silicon Valley firms is at stake in the coming election. But he says a Gore victory, preferably with a Democratic takeover of congress, is more likely to keep the economy moving in the right direction.
“If we were in Texas and this was a question of which candidates understand the oil industry better, it would be no contest,” Westly says. “But when it comes to technology and the New Economy, there has never been a candidate better informed and more knowledgeable on those issues than Vice President Gore.”
Westly says Bush’s attempts to win support among Silicon Valley business leaders by promising to pump more money into Defense Department contractors shows a lack of understanding of how the high-tech economy has changed over the years.
“It’s not based on defense anymore,” Westly says. “I don’t know a single person, not even among my Republican friends, who think that what Silicon Valley needs is higher defense spending. That’s just irrelevant in this economy.”
Westly adds that sharply higher defense spending, particularly if it is unrelated to any real-world threats, leads to the boom and bust cycles that characterized the American economy, and Silicon Valley in particular, prior to the
more-recent era of prosperity.
“We saw companies such as FMC and Lockheed, which once dominated the Valley, shrink very dramatically and throw a lot of people out of work. It was a disaster for many people, and not a pattern we should look to repeat,” Westly notes.
In addition, Westly says that he fears that Bush’s proposal to return more of the projected budget surplus to taxpayers might roil financial markets and put the federal government back on the path to the huge operating deficits that helped hobble the economy in the 1980s.
“I’d be very worried if the outcome of the election is a return to policies that proved to be an utter failure the last time they were tried,” Westly says.
Michael Boskin, who served as chairman of the council of economic advisors during the Bush Administration, says those who give the current administration credit for the long economic boom are forgetting where it started.
“The recovery began in March of 1991, a full two years before Clinton took office,” Boskin says. “Obviously, the economy did not derail on his watch, but the Republican congress had a lot to do with that.”
Boskin is currently a senior fellow at the Hoover Institution at Stanford University in Palo Alto, Calif., and an economic policy advisor to Governor Bush.
Boskin says significant differences remain between the Democratic and Republican approaches to governing, and that those differences could translate into very different futures for investors after the election.
“Democrats in general want to see a larger government and Republicans would like to see a more limited government,” Boskin says. “That’s important now and will be important in the future. There are always risks. We’ll have recession sometime in the future, and there is also the risk of inflation. The effect of what Gore would like to do on the environment could also be a very serious impediment to the economy in the long run.”
Boskin adds that Bush, if elected president, is more likely to put forward policies that protect the environment without doing unnecessary damage to the economy, as compared with a Gore administration.
The Bush economic advisor also says that despite the current hands-off approach, leaders from both political parties are eventually going to have to come to grips with finding ways to tax online commerce or, if not, be willing to make large, wholesale cuts in government spending.
“When it comes to the Internet, we have three conflicting goals,” Boskin says. “We want the lowest possible taxes, neutrality between online and offline purchases and we have a need for revenues to support government services. One way or another, we’re going to have to have some kind of a rationalization of those mutually conflicting goals.”
Over the short term, Boskin says Bush favors maintaining the current moratorium on federal taxation of the Internet. He also suggests that it might make sense to allow old-line bricks-and-mortar stores to put Internet kiosks in their establishments so their customers can receive the same tax breaks available to online purchasers.
“There is, however, the concern that over time the reduction in sales-tax revenues could put pressure on the states to increase income taxes, which is something we would not like to see,” Boskin says.
For that reason, Boskin leaves the door open to taxing the Internet at some point in the future. “I don’t suppose 25 years from now we’ll still have all three conflicting goals,” he says. “I myself would put a lot of stock in looking for ways to lower the overall tax burden.”
High-tech entrepreneur Ed Zschau, a former GOP congressman from Silicon Valley and a co-founder of the American Electronics Association, who also founded several Silicon Valley high-tech companies, says he is encouraged that policy debates on basic matters of economics are no longer as polarized as they were a decade ago.
“I would not want to say the election does not matter; clearly it does,” says Zschau, who currently sits on the boards of three publicly traded companies and also serves as a professor of business and engineering at Princeton University. “But my sense is that, compared with 15 years ago when I was in Congress, both candidates and both parties are trying to sing the right tune as far as the high-tech economy goes.”
Zschau was an early proponent of deficit reduction and targeted tax cuts to assist the development of high-tech industries. He says both parties have moved to the middle of the road on economic policy matters in recent years.
“There are some differences remaining,” Zschau says. “But we’re not arguing any more about whether deficits are good or bad or whether we should have balanced budgets. I think those issues have pretty much been settled.”
Zschau adds that it would be hard for either political party to stop the economic juggernaut brought about by advances in technology and globalization.
“I have no doubt the best is yet to come,” Zschau says. “We haven’t even begun to see the impact of the human genome project yet, or assessed what the impact will be of virtually free and unlimited data storage and communications. “I tell my students they have the great opportunity to be embarking on their careers in the most exciting time in the history of the planet.”
Zschau says that doesn’t mean all stocks will follow the overall upward trajectory of the economy, regardless of which side wins the coming election.
“Stock prices for certain properties continue in my view to be inflated,” he says. “The basis for some of those investments may not really exist, and people will lose money in the market. But that is not related to the election. It has more to do with the fundamentals of those individual businesses.”
