The Dawn of Video Games and the Last Hope for a Debt-Free America

On this day in economic and business history...

Millions of children in two successive generations -- the Boomers and Generation X -- first experienced "computing" technology through video games. Credit for that cultural legacy is owed largely to Atari, which did more to popularize the first video games in arcades and on consoles than any other company. It all began on June 28, 1972 , when Nolan Bushnell and Ted Dabney founded the company in California.

Atari's first hire, 24-year-old Al Alcorn , was assigned to work on an arcade knockoff of the Magnavox Odyssey's tennis game, which Bushnell had seen in demonstration a month earlier. The Odyssey, despite becoming the first home game console in history when launched that August, was not a great commercial success. Atari's knockoff, however, became legendary. You might have heard of it; it's called Pong (click the link to read more about Pong and Atari).

Pong established Atari as the preeminent video-gaming company in an industry it more or less created out of nothing. This early success forced Atari to expand rapidly. By mid-1974, it was up to 39 employees, but employee number 40 is the one that went on to the greatest success. Al Alcorn met the kid in Atari's lobby, and he later recounted the incident to video game historian Steven Kent :

He was this real scuzzy kid. I think I said, "We should either call the cops or we should talk to him." So I talked to him. I figured, this guy's gotta be cheap, man. He really doesn't have much skills at all. So I figured I'd hire him.

And that's how Apple (NASDAQ: AAPL  ) founder Steve Jobs got his start in the tech industry. Jobs would later sneak old pal Steve Wozniak in to Atari's offices to work on the design for the Breakout arcade system. Alcorn later mused that "Jobs never did a lick of engineering in his life. He had me snowed." Two years after Jobs started working at Atari, he partnered with Woz and Atari employee Ronald Wayne to found Apple. The rest, of course, is history.

Five years after Pong, with several arcade smash hits under its belt, Atari launched the 2600, which succeeded where Magnavox failed. Development of the Atari 2600 was incredibly lengthy and expensive by the standards of the day, having begun in 1973 after the purchase of an engineering start-up and eventually costing Atari $100 million  to complete. The high development cost, paired with Atari's worsening operating conditions in an industry already saturated with knockoffs, pushed Bushnell to sell the company to Warner Communications (now Time Warner (NYSE: TWX  ) ) a year before the 2600 launched. Atari's arcade division would remain part of Warner until 1985, although it divested the console division a year earlier.

The Atari 2600 launched at a cost of $199 (equal to about $750 today) in the fall of 1977. The console's first two years on the market almost sent it the way of the Osyssey, since Atari managed to sell less than one million units by the end of 1978 . However, Fairchild Semiconductor's (NASDAQ: FCS  ) decision to abandon console gaming in 1979 (it had actually beaten Atari to market with the Channel F in  1976, but sold fewer units than the 2600), coupled with the launch of a Space Invaders cartridge for the 2600 in 1980, gave Atari a clear path to huge sales. Two years later, the 2600 had reached ten million households, and console gaming had a foothold. Atari was briefly the crown jewel in Warner's entertainment empire, but this success wouldn't last.

Atari is gone now, and a major reason is the video game crash of 1983. Overproduction and consumer apathy left Atari with millions of unsold cartridges, and the division caused steep losses for Warner. Hemmed into a corner, Warner sold Atari, which faded from the video-gaming landscape just as the next generation of consoles began to emerge. Although the 2600 was soon surpassed by these newer consoles, it remained in production until 1992, which makes its 14-year production run the longest in industry history. With an estimated 30 million sales , the 2600 also ranks higher on the console sales charts than many other systems, including both the original Xbox and the GameCube.

Surplus shenanigans
There was a time, not too long ago, when the United States faced an entirely different budgetary problem, which was what to do with all the money it was taking in. On June 28, 1999 , President Bill Clinton offered a radical proposal that had not been considered for over a century: pay off the national debt. The proposal relied on some pretty incredible surplus projections, which Clinton outlined at a press conference on the White House lawn:

When I took office the national government had a record deficit of $290 billion, projected to increase indefinitely. Last year, for the first time in 29 years, we balanced the budget. In January of this year, we projected a surplus for this year of $79 billion. Today I am pleased to report that in fact the budget surplus for 1999 will be $99 billion, the largest as a share of our economy since 1951.

For next year we now project a budget surplus of $142 billion, a surplus of $5 billion, not counting the receipts from Social Security.

In fact, improvements in the outlook since February have added $179 billion to the projected budget surplus over five years, half a trillion over 10 years, and a trillion over 15 years. ...

In the 12 years before I took office, reckless fiscal policies quadrupled our debt, bringing us higher interest rates, higher unemployment, higher inflation. By balancing the budget, we have begun to reduce the debt. But today, our national debt still totals $13,400 for every man, woman and child.

If we maintain our fiscal discipline, using the surplus to pay down the debt and using the savings to strengthen Social Security, America will entirely pay off the national debt by 2015.

At the end of 1999, the U.S. national debt stood at $5.6 trillion, or 61% of GDP . As Clinton had promised, the following year saw the first reduction in the national public debt (that is, debt not held in federal accounts) since 1969. However, things tend to work out a bit differently than we often expect. Rather than continuing to decline, the national debt exploded after Clinton left office. With two years left to go before Clinton's 2015 target, the national debt now stands at $16.7 trillion, or $55,100 for every single person living in the United States , and there is no clear path back to zero.

The inability of government to pursue Clinton's goal has more than tripled the national debt, which is now higher as a percent of GDP than it has been since just after the close of World War II . In the 14 years since Clinton projected a debt-free America, financial markets have seesawed without much long-term gain for patient investors. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has grown just 2.5% per year over those 14 years, a rate that barely keeps up with inflation . In contrast, Clinton's tenure -- during which time the national debt-to-GDP fell by six percentage points , produced one of the longest and strongest bull markets in American history.


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