Strong Medicine Needed

Government and industry leaders were in a funk as to how to remedy the situation, for which there seemed to be no end in sight. Things got so bad that the Carter administration rolled out its ludicrous "Whip Inflation Now" (WIN) program and proposed that people wear buttons with the word WIN on them to show their support. (You might still be able to find one of these buttons in a memorabilia store somewhere.)

Strong action, not talk, was needed, and that's exactly what happened in the early 1980s. The Federal Reserve, led by Paul Volcker, choked off money supply growth (which was helping feed inflation), pushing interest rates to sky-high levels. The prime interest rate peaked at 21 percent, while mortgage rates hit 18 percent (nearly triple what they are now). In addition, the Reagan administration cut income taxes by an unprecedented 25 percent over a three-year period in a bold effort to restore badly shaken consumer confidence.

These actions helped spark the huge budget deficits of the 1980s and led to the worst economic recession since the 1930s, with unemployment peaking near 11 percent. But the backbone of the inflationary spiral was broken. Oil prices stabilized as demand cooled, and interest rates began to come down. By 1984, the U.S. economy was steaming ahead once again, with GDP growth of more than 6 percent.

Returning to the present, I made the argument in a previous column that a government bailout of the technology sector might be justifiable on economic grounds. But by no means was I arguing that such a bailout should actually take place.

Indeed, what is needed to shake off the doldrums is another dose of strong medicine. On the economic side, this includes helping to restore investor confidence by jailing executives who cooked their companies' books and instituting tough new laws to put an end to fast and loose business and accounting practices.

For the technology sector, this remedy includes major consolidation in a maturing industry that may not grow as rapidly in the future as it has in the past, which means more pain for the companies that fail and the people that work for them. But as the deadwood is cleared away and industry standards are more clearly defined, we set the stage for long-term growth.

The automobile industry underwent such a consolidation early in its history. As consumers made their preferences clear and industry standards emerged, the most efficient and forward-looking companies prospered while the rest were absorbed or failed outright. The number of companies producing cars plunged as a result, but the auto industry went on to become one of the mainstays of the U.S. economy, a place it has held for decades now.

And so it will be with technology. Strong medicine might hurt at first, but with the right prescription, the patient ultimately feels better and stronger than ever.