Wall Street wants to blame the crash on Washington--especially on the budget deficit and on protectionist legislation pending before Congress--and Washington is trying to oblige.
The President and congressional leaders have agreed on budget cuts totaling $30 billion this year and $45 billion next year. Meanwhile, the Democrats are having second thoughts about their trade bill.
But our national goal should not be to restore the confidence of Wall Street but instead to restore the American standard of living. They are not the same.
The economic "crisis" that Wall Street tells us we have experienced since Oct. 19 is no different from the slowly gathering crisis that existed before that date. Of course, some Americans may now feel themselves poorer than they were, but their apparent prosperity in the halcyon days of the bull market was largely illusory--a paper prosperity. The real economy had been unraveling for years.
America had busily been consuming more than it produced, and at a rapid clip. In 1986, for example, the nation generated about $800 billion more in goods and services than it had in the recession year of 1982, but it spent about $900 billion more. We were able to ignore our profligacy only because foreigners kept lending us money, buying our corporations and purchasing our real estate.
Same Share of Investment
Our indebtedness to the rest of the world would have been no cause for alarm had all the money we borrowed been invested in our future productivity, but such was not the case.
Net investment in plant and equipment, as a percentage of the nation's gross national product, has been no higher than in the perilous 1970s, supply-side predictions notwithstanding.
Meanwhile, the government has been cutting back on public forms of investment--notably in education, training, commercial research and development, and in all the roads, bridges, ports and tunnels that make up the nation's "infrastructure."
Spending to upgrade and expand the nation's infrastructure dropped to 0.4% by the early 1980s from 2.3% of GNP two decades ago. Total public and private-sector spending on commercial research and development dwindled to below 2% of GNP, far lower than in previous decades, and significantly lower than that of our trading partners. Partly as a result, productivity gains in the 1980s dropped to only 1% a year from 3% a decade before. Not even a lower dollar has been much help to American producers trying to regain their market share from foreigners.
The anomaly was the Wall Street bull market, which continued to surge upward in seeming disregard of the underlying decline. The reason: Stock prices were responding not to the real economy but to takeovers, or threats of takeovers, which prompted corporations to do whatever was necessary to raise their share prices in the short term.
Often this meant purchasing their own shares and thus going deeply into debt and jettisoning long-term projects (hence, one reason for the lackluster investment in plants, equipment, and research and development). The new debt ballooned by more than $700 billion between 1982 and 1987, about the same amount by which share prices tumbled last month. This new debt made corporate America much more vulnerable; interest payments alone soaked up almost half of last year's available earnings.
Then the balloon popped.
In light of this recent history, there is something vaguely unseemly about Wall Street's new demands. Of course, the budget deficit needs to be tamed. But the deeper problem is not the budget deficit per se, it is the nation's chronic unwillingness to reduce its overall consumption and increase its total investment--both public and private.
Should Boost Investment
What we need to do is what we should have been doing all along: scale back aggregate consumption by, for example, spurring the growth of personal savings through expanded individual retirement accounts and Keoghs, hobbling hostile takeovers and leveraged buyouts, taxing Social Security and Medicare receipts, reducing farm supports, getting our allies to foot a larger portion of the defense bill and cutting back on weapons systems so exotic that they are likely to fail to perform as planned.
But this is only half the agenda. We should simultaneously attend to the investment side of the ledger by, for example, inducing more private sector spending on plant and equipment (restore the investment tax credit) and increasing government spending for education, retraining, child nutrition, research and development and infrastructure.
These investment strategies are more important to our long-term economic health than any short-term budget fix. To focus singularly on reducing the federal budget deficit distracts us from this more fundamental agenda, which long predates Black Monday.
Wall Street's other demand merits similar skepticism. America's drift toward protectionism is dangerous, but no more dangerous today than it was last month or last year.