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Technology, Immigration: The Gilder Bubble Bursts
[Peter Brimelow writes: In another life, I write about investment letters and am thus in a position to report that a stock portfolio based on George Gilder's recommendations would have lost 92.2% of its value since February 2000, according to the count kept by the Hulbert Financial Digest. It's sad, because Gilder is a nice man – and in person he was curiously undogmatic about immigration. He just hadn't thought about it much. All he wanted, he told an investment conference I was moderating in mid-2000, was an assured supply of cheap computer programmers – other than that, he didn't care. And he thought all immigrants ought to be able to speak English. At this last remark, the entire audience of fat cats, obviously uneasy about our argument, burst into loud applause. There's hope for fat cats, and the immigration debate, yet.]
"I don't think Internet valuations are crazy, I think they reflect a fundamental embrace of huge opportunities. Virtually all forecasts estimate something like a thousandfold rise in Internet traffic over the next five years. That means that if you are an Internet company today, you are dealing with only a tenth of 1 percent of your potential traffic in just a couple of years. In 10 years, at this rate, there would be a millionfold increase."
George Gilder, Wired Magazine, 9/1999
"Without immigration over the last 50 years, I would estimate that U.S. real living standards would be at least 40% lower."
George Gilder, Wall Street Journal, December 18, 1995
A few weeks after I took up the then-lonely cause of criticizing immigration policy in VDARE.COM back in February of 2000, the NASDAQ index hit 5,132. At the time, George Gilder enjoyed a more socially acceptable gig. According to the Wall Street Journal, he was a man whose "slightest utterance can move stocks." His newsletter, the Gilder Technology Report, which specialized in puffing telecommunications stocks like the now bankrupt Global Crossing, pulled in $20 million in annual revenue.
Gilder personified the telecom and dot.com bubbles – while contributing more than his share to the wrong-headed dominant thinking on immigration. In fact, the two were related. In early 2000, when Gilder's technotopia predictions seemed like solid common-sense, it was very hard to get anyone to think critically about American immigration laws. After all, the only way sky-high stock prices could possibly be justified was if every single U.S. government policy was perfect - including immigration.
If you're so smart, Sailer, how come you're not rich like George Gilder? QED.
Well, guess what? The NASDAQ has since fallen over 70%. Gilder's favorite stocks, the telecoms, lost trillions in perhaps the biggest wipeout in market history. And Gilder says he's broke and has a lien on his house. His ownership of The American Spectator magazine has proved too expensive and he has given control back to R. Emmett Tyrrell.
Gilder now says, "I knew that it was going to crash, I really did." Unfortunately, he forgot to mention it in his newsletter.
Still, I can hardly wish Gilder ill. Although they say there are no second acts in American life, Gilder has already lived through about four acts that have been, by the normally dull standards of public intellectuals, of particular drama. I can only hope he enjoys a happy fifth. (Of course, if you had invested your life savings based on his advice, you might think differently.)
When Gilder's father was killed in WWII, he became, like a character in a Victorian novel or in a superhero comic book, the ward of vastly wealthy banker David Rockefeller. He started his career as a liberal Ripon Society Republican, working in Nelson Rockefeller's campaigns.
But surprisingly for someone from such a genteel Establishment background, in the 1970's he became one of the era's most insightful—and thus most furiously-denounced—writers on sex and race. His refutations of feminist theory, Men and Marriage (originally Sexual Suicide) and Naked Nomads: Unmarried Men in America, have stood up exceedingly well over the years.
"I guess I'm a disciple of George Gilder, in many respects. In 1973, with Sexual Suicide, he set out, at a time when it was extremely unpopular, a whole set of propositions about the role that marriage plays in socializing men and also socializing the next generation of children. If you have very high rates of illegitimacy—which is the worst form of single parenthood —that brings social chaos."
In 1978, Gilder published his masterpiece, Visible Man: A True Story of Post-Racist America. It was a semi-novelistic retelling of the year he spent hanging out with a charming homeboy from the Albany ghetto who—rendered economically unnecessary by the easy welfare money available to the women in his life—passed his days doing nothing much except committing the occasional felony.
Unfortunately, Visible Man sold only 800 copies initially - a financial disaster for a man with a big family to support.
Then, in 1981, Gilder's Wealth and Poverty became a surprise best-seller, partly because it was thought to explain Ronald Reagan's supply side revolution in economic policy, a big mystery to America's political and intellectual elite. It lifted him from, well, near-poverty to near wealth.
But with the easy life of the celebrity pundit finally at hand, Gilder did something strange and even heroic. He dropped everything to learn science and engineering so that he could write intelligently about high tech. (Here's a 1996 profile of Gilder by the fine novelist Po Bronson.)
Gilder's wonderfully enthusiastic nature and deep faith (he's a director of the Discovery Institute, one of the leading promoters of Creationist thinking) combined to make him America's #1 cheerleader for the technobubble. He became so popular that he was seduced into starting an investment advisory newsletter, with catastrophic results.
Gilder cost his subscribers uncounted millions because, for all his brilliance, his analysis of telecom suffered from the same blindspot that he and so many others brought to their pronouncements about the economics of immigration.
The problem wasn't just Gilder's penchant for making Unscientific Wild-Ass Guesses disguised as hard facts. (See the two quotes at the beginning of the article. Note that Gilder's Wild-Ass Guess about the net aggregate benefits of immigration to native-born Americans was not only offered without any support evidence whatever, but it actually contradicts a significant economic literature that finds the benefits to be nugatory).
No, Gilder's deepest problem was he just didn't get the Law of Supply and Demand. In the wonderland of the New Economy, who needed to study the old dismal science, economics?
We are repeatedly assured by many who ought to understand economics – hello, Wall Street Journal Edit Page - that foreigners, in Gilder's words, take only "jobs that Americans would not perform." Yet, as I recall from Econ 101, there is no such thing as a job that Americans wouldn't perform. There is always a market-clearing wage. It just will never be as low as the employer, or as high as the worker, would wish. As numerous studies have shown, the economic impact of immigration is largely to shift wealth from working class Americans to both immigrants and wealthier Americans.
Gilder's huge blunder in assessing the stock market potential of fiber optic companies was not technical. In fact, he was admirably prescient about just how rapidly bandwidth technology would increase. No, the problem was implicit in the title to his 2000 book, Telecosm: How Infinite Bandwith Will Revolutionize Our World. While Gilder's mantra of "infinite bandwidth" was clearly marketing hype, the hypergrowth in fiber optic capacity over the last decade meant that infinite bandwidth came a lot closer than just about anybody other than Gilder had predicted.
But remember Econ 101. Without infinite demand, an infinite supply of anything equates to a price of zero. And that's roughly what happened to your telecom stocks. Egged on by hyper-optimists like Gilder, companies spent hundreds of billions laying and upgrading fiber optic cable for long distance Internet bandwidth. But demand never came close to catching up. Further, competition was so fierce that none of the telecoms could achieve the monopoly power that could possibly have justified the stock price of a single one of them.
Well, that era of delusion is over. And a new era of realism has begun – both about finance and immigration.
August 22, 2002