Hi John,

Thanks for your well-reasoned and informative comment. I did some additional digging and discovered that the reality might have been more nuanced and that each of us has a claim on being right. Here are some responses to your points.

1. Investment capital spike didn’t start until late ’99. In fact, the Heritage Foundation claims that it was tax cuts in ’96 that sparked the boom.

Heritage is good at pinning any good news on the most recent tax cut but a closer exam of the 1996 cut shows that it was primarily oriented towards capital gains, a critical part of the story that I omitted but a smaller piece. The tax increase of late 1993 went into effect in 1994 and provided the fuel and oxygen while the capital gains cuts later provided the match. As a practical matter increasing the marginal rate on all taxpayers is a bigger deal than reducing the capital gains, much of which was oriented toward home sales and increasing the child deduction.

As early as Q2 1995 the data on the graph ticks up. I know it’s easy to get excited about the total investment amount but the thing to pay attention to is actually the number of deals. New investments in startups began a relentless upward climb in Q3 1995. You are right that things really got going in late 1999 well after the match was struck on capital gains. But I am prepared to say in both the tax increase and the tax cut, that a healthy, and I would say normal, lag period ensued as the markets tried to figure out the best things to do under the new circumstances.

Remember venture capital was not the household word then that it is today. Silicon Valley had a tech hardware focus, software was still mostly done on the East Coast, a lot of it in the 128 beltway where I was employed.

So I think the rapid acceleration in 1999 represents a confluence of both the tax rate increase of 1993 and the capital gains cut later, and something else (see below). If you graph the number of deals vs. investment capital rather than overlapping them as in the green graph, you’ll see a pretty typical S-curve found in many boom and bust cycles.

2. You mention the dot com boom but not the new industry that sparked it, (i.e. hardware.)

Hardware companies had their boom in the 1980s two big ones make the point. DELL initially went public in 1988, later went private and recently came back to the public markets. Gateway was founded in 1985 and IPO’d in 1993.

A story from the New York Times, from October 1993, indicates Gateway Computer’s intent to IPO. Again this was before the Clinton increases were passed and signed into law but the writing had been on the wall. I doubt the capital gains cut was on the horizon yet.

Also another story from the Times in March 1993 “Wall Street; Going Gaga Over High-Tech I.P.O.’s”precedes the tax increase and cut but lends some insight through a quote from an institutional investor.

“It’s unprecedented bullishness over small companies,” Mr. Shaffer said. “The institutions are getting into these little stocks, and when institutions get into these, they just splash the water out of the pool.”

This shows that the early dot-com boom was driven by institutions, VC’s came later.

This was well before the capital gains cut and even before the Clinton tax increase. It doesn’t support the contention that either the increase of the cut took a major part in the boom up to that point. We also need to keep in mind that IPOs are a late stage in a company’s journey whereas VC investment is rather early. It is quite reasonable to imply that institutional appetite for IPO’s was additional fuel for VC’s stepping up their activity. But also keep in mind that VC’s have to solicit (i.e. raise) a pile of money before they can invest it. This helps account for the lag between tax increases and cuts and investments.

So, keeping in mind the lag period between raising a fund, early investment and IPO and adding the tax increase of 1993 it is reasonable to see a spike in investment later in the decade (1999), but I’d say that that represents a period of irrational exuberance; the smart money got in much earlier than 1999.

3. The IT revolution of the 90’s sparked huge gains in productivity, the global capital market, “just in time” supply chains, and massive new pools of capital that needed investing somewhere.

Yes. But also keep in mind that the productivity gain happened not from placing a PC on everyone’s desk, that was done in the 1980s with little effect. The boom in question was about networking, connecting the PC’s in the building with each other and connecting the buildings with the world via the Internet. It was a 1990’s phenomenon. I think we agree.

4. The Green New Deal may be the kind of juice for the economy that was the IT revolution. Our economy is nowhere near functioning “at capacity”. We have corporate trillions on the sideline not willing to chase production investment in a production stock that can easily meet demand. We have essentially flat wages and the increase of low paying jobs that continue to weigh down demand. It’s possible that the large investments in an energy paradigm shift could draw this capital out of essentially non-productive “investments” in asset ownership and back to Main St. to pay Americans first to rebuild our energy and usage infrastructure into a green model, and then of course the globe’s.

Totally agree!