ORPHANS OF THE STORM by Michael S. Malone

 I’m constantly amazed, and appalled, by what little actual wisdom I’ve actually gained in my more than half-century in this world.  But if there are three things I have learned, they are:

1. Never trust luck to get you through.
2. Don’t assume the best-case scenario.
3. The laws of economics, like the laws of chance, always triumph.

The economic news this week, like most recent weeks, is mixed but mostly bad.  The good news is that the economy appears to have grown in the most recent quarter – at least in comparison to the miserable first half of this year.  The growth in unemployment seems to be slowing.  And, of course, the stock market has enjoyed one of its fastest run-ups in recent memory.

The bad news is that much of this third quarter growth was already predicted from the artificial juicing of the economy from the Stimulus, Cash for Clunkers, and inventory replacement by manufacturers.  Take those away, and you’re down to about a 1 percent improvement over the disastrous second quarter – positive, at least, but hardly grounds for cheering. 

Meanwhile, the stock market rally may have peaked, and the indexes have begun sliding – with little indication whether this is the beginning of a second downturn or just a temporary hiccup.  As for unemployment, its growth may be slowing because we’ve already reached historically high levels (especially if you measure real unemployment) and we’re running out of people to lay-off – and those who are laid-off are giving up looking for work.  Perhaps most dispiriting are the studies that suggest that other than paying off some campaign debts to unions, the Stimulus generated few jobs – meaning that hundreds of billions of dollars of taxpayer money were spent on . . . nothing.

In other words, about the only conclusions that you can draw from all of this is that, the Administration’s cheerleading aside – and that, of course, is their job – there is still no clear indication whether the U.S. economy is actually recovering, sinking into a double-dip recession (or worse), or sliding into the malaise of a ‘70s style stagflation.

What does seem obvious is that the economy wants to recover.  I can see it everywhere around me here in Silicon Valley – companies (notably the PC makers) putting out great new products, entrepreneurs writing business plans, talented people anxious to get back in harness.  And I sense that’s true almost everywhere else in this country.  Even the stock market rally seemed like a bull banging against a gate waiting to be unleashed.

But while we all may be ready to get back into the race, Washington – in whose hands our collective fate now sadly rests – may not be ready to let us.  And it’s all because they seem to have forgotten, or never learned, those three hard-earned pearls of wisdom with which I began this column.

For example, inside the Beltway they seem to be pixilated (the old definition) these days with Magical Thinking.  Both the White House and Congress somehow believe – despite all evidence that big, top-down and bureaucratic initiatives no longer work in our Web 2.0 world – that they can grab entire sectors of our economy and impose on them a whole new regime that will magically work without any unexpected and catastrophic side-effects.  No business in America, from the corner dry cleaners to a Fortune 500 company would ever contemplate something this crazy, at least not without preparing the most detailed road map imaginable and getting every employee on-board – not passing massive and sweeping laws that nobody has read, whose consequences are unclear, and the majority of the citizenry is against.

By the same token, the lesson I’ve learned from thirty years working in a volatile place like Silicon Valley is to pray for the best-case scenario, but prepare for the worst.  The smart companies around here scale up fast during the good times, but are always worriedly looking ahead for the next downturn.  That’s why, Cisco’s John Chambers told me a few months ago, he hoarded cash during the last boom – just so Cisco would be able to navigate through this current crash, keep its employees and outrun its weakened competition.

The best-case scenario for this economy right now is that the Stimulus (or the proposed second one) actually works, the U.S. economy rights itself, and grows sufficiently fast over the next five years to absorb all of this new debt and produce enough new jobs to bring unemployment down to reasonable levels.  And it is upon this best-case scenario that we are now preparing to embark on one of the most sweeping eras in government-run social engineering in our nation’s history.�

Leaving aside any doubts you and I may have about this War on the Status Quo, what happens if the best-case scenario for this economy doesn’t come true?  What happens if the economy stagnates or falls off a cliff again right when we’re saddling it with trillions of dollars of more debt, we’re dismantling the insurance industry, driving thousands of doctors and other professionals (except lawyers, of course) out of their careers, and real unemployment is hovering at about 17 percent?

I’ll tell you what happens – and that’s life lesson #3.  Back during the dot.com bubble I was running a magazine (Forbes ASAP) that was riding right on the crest of the boom.  Everyone in the Valley was getting rich, at the magazine we couldn’t write enough copy to keep with all of the advertising pages, and I was paying my junior staffers extravagant salaries.  I remember that we older folks on the masthead became increasingly (and properly) nervous that what we were seeing was a Bubble on the brink of bursting.  I also vividly remember one of my junior editors laughing at my concern and saying, “You’re just old-fashioned, Mike, you need to understand that the old business rules – you know, ‘profits’ and all of that – are obsolete.”

As we soon learned, no they weren’t.  And they aren’t now.  And no amount of magical thinking or betting on luck or assuming the best-case scenario is going to keep those laws from re-asserting themselves.  You can’t print and spend mountains of money without creating massive inflation.  You can’t keep raising taxes and assume that people will continue to work just as hard or that they won’t find a way to hide their earnings – or they won’t move away.  You can’t dictate pay rates and not have the best and brightest jump to somewhere else where they are properly rewarded.  You can’t force companies to compete against government-run competitors who get to write the rules of engagement and expect the private competitors to stay in the game.  And you can’t expect private industry to save you after you’ve wrapped it in chains of regulation, crippled it with taxes and excoriated it as criminal.

I stopped gambling when I realized that no matter how long a win streak you enjoy that eventually the laws of chance reassert themselves.  The same is true with the U.S. economy today:  we’re stretching it now and a nasty snap back lies in our future. 

Another storm, I fear, is heading our way – and we risk being orphans caught within it.  But I’ve learned one more lesson, this one from David Packard and Bill Hewlett (and Thomas Jefferson):

1. Trust in the ingenuity of everyday folks.

The American people will get us out of this mess.  Through the election process, of course, but I’ll leave all of that political stuff to the pundits.  What I mean is that people like you and me are already figuring out ways on their own to get through these hard times.  Much of it has to do with technology.  Why pay to rent an office when you can run your business off a laptop and a Blackberry?  Why pay for cable and phone in the age of Skype and Hulu? 

How many people out there are building small enterprises off Facebook, eBay and Craigslist?  Or marketing with Twitter?  Or designing apps for the iPhone or Android? 

Meanwhile, the tools are in place to form small (150 people or less) sub-markets in which you buy and sell – or barter — from each other, or team up to buy common items at discount.  Or to team up and sell your services around the world virtually.  Or move somewhere else where the taxes aren’t so onerous, and still keep your current clients.

And why keep working past the point when the government takes it all away?   Why not use the remaining time – and a good network on some place like LinkedIn – to try your hand at entrepreneurship and build a virtual start-up company?    And when inflation hits, you may find you make more money sitting at home at your computer arbitraging and investing the wealth you have than actually working for an ever-less valuable paycheck.

In other words, even if Washington no longer believes you can make intelligent decisions for yourself, it doesn’t mean you can’t make them anyway.  And even if our leaders have chosen to be foolish, it doesn’t mean that you can’t choose to be wise.

[For a decade of Michael S. Malone’s columns about business and high technology, please visit www.abcnews.com]