It's the noon hour at Lever House, Park Avenue's ultratony new restaurant, and the house is packed. Players from New York's music, publishing, real estate, and finance elites are wheeling, dealing, and dishing as they wash down $22 lobster tempura appetizers with $10 splashes of Charles Schleret pinot blanc. Around the room, platinum cards are flashing. Egos are swelling. Swagger, it would seem, is back in style.
Look around. Nearly everywhere there are signs that the prodigal economy is staggering home from its three-year slough of despond. Last year, punctuated by a blistering December, was the best for new housing starts since 1978. Thomson Financial reports that 2003's corporate deal volume rose 20% to $525 billion, a rate last seen in 1995. West Coast tech icons—Intel, Yahoo, Microsoft, and Apple Computer—are weighing in with vigorous profits.
By some crucial psychic measures, too, the mood out there is buoyant—buoyant! It's not just the stock market, though that joint surely is jumping. Coveters of Mercedes's new $350,000 Maybach sedan can expect to wait up to six months for delivery. Sales at Links of London, a high-end purveyor of jewelry and accessories, tripled over the holidays from the year before, as bankers lavished clients with leather card cases and $150 silver-plated mini hard drives. And just look at hemlines, the ultimate leading indicator: A recent Macy's ad for "flirty spring skirts" featured a Betsey Johnson striped mini that stopped so short it constituted a moving violation.
So if we all feel so good, then why don't we feel, well, better? Why isn't capital investment soaring? Why are all the big ideas and bold innovations mostly stuck in organizational purgatory? The financial economy has the Big Mo, but the "idea economy," if you will, remains mired in ambivalence.
(Unofficial) Harbingers of the Prodigal Economy:
Initial public offerings: +113% (4th quarter)
Porsche sales in Palo Alto: +34.5%
For every tech exec who mouths off about things "looking good in the pipeline," there's another selling his company's stock: In January, the ratio of insider sellers to buyers among tech execs was 18 to 1, according to Thomson. And there's yet another who refuses to authorize new hiring: A DBM study of 150 companies revealed that just 12% plan to take on new employees "aggressively" this year. Productivity, cost-cutting, caution—that's still where our heads are.
Surely, innovation isn't dead: Just look at Philips's energy-efficient flat-screen TV, ArrowVision's fingerprint identification door lock, or Genentech's cancer drug, Avastin, now fast-tracked for FDA approval. Not to mention Pizza Hut's breakthrough "4ForAll" pizza. Yet last year, venture capitalists invested just $18.2 billion in 2,715 companies, down 15% from a depressed 2002 and the fourth consecutive annual decline, according to the MoneyTree Survey.
Why this lingering caution? Chalk it up to the very justifiable expectation that we're not yet through the economic and political turbulence. Harvard Business School historian Nancy Koehn likens what we're seeing to the economy of the 1880s, a decade shaped by bursts of innovation (then, in railroads) followed by stock market speculation, outsize wealth creation, bankruptcies on an epic scale, and corporate scandal.
Except this time, Koehn warns, the dynamics are far more complex. "This is the story of an environment in large-scale ecological transition with lots of different shocks to the system. It's an economy in which billions of actors are all trying to make sense of massive change, to adapt in a biological way. We've come through three chapters of big shocks, but it's a 10-chapter novel."
Koehn foresees another burst of tech innovation on the horizon, plus new initiatives in biotechnology, information processing, and financial services. But for the first time in our history, Americans must also build global uncertainty into the calculus. "Businesses are now operating on two screens—the bottom screen being some geopolitical disaster. That has to be factored into the liabilities side of the economy, since it could change the whole damn ball game. And that's new."
The resulting conservatism presents liabilities of its own. Satyam Cherukuri is CEO of Sarnoff Corp., the Princeton, New Jersey- based innovation R&D house. Three years ago, Cherukuri says, his commercial business was driven by American and European customers. Now companies in the Far East are far outstripping their Western counterparts in innovation spending. "They have shown us that they're more forward-looking," he says.
Cherukuri observes that, when it comes to knowledge, U.S. companies no longer enjoy any advantage over rivals in Shanghai or Bangalore. Access to information, to business models, and to capital has become universal. "We need to find a new paradigm for innovation," he says. "Those who can't cope with the new globalization of knowledge will not succeed."
Ultimately, the question is the same as three years ago: How do we learn to take risks again? We're limited now not by lack of capital but by lack of nerve, by the inability to see the global economy as a glass half full. The world is indeed dangerous and unpredictable—and it's time to get over that, or risk losing more advantage still. Time to let the prodigal economy come home.