Short-Term Fixes Won’t Solve Long-Term Woes : It’s Too Easy to Blame Washington for Market Crash When What’s Really Needed Is Salvage of U.S. Standard of Living

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.

Regardless of what happens to the Democrats’ trade bill (probably nothing any time soon), the political reality is unaltered: Without new jobs for our industrial workers, whose present jobs are threatened by cheaper foreign goods, and without opportunities for them to train for such jobs or get help in finding them, demands for protection will continue to mount.

To make matters worse, there are no longer clear international ground rules for what constitutes fair trade. Technological changes and ballooning service sectors in all advanced economies have rendered irrelevant much of the General Agreement on Tariffs and Trade.

Every government, including our own, is subsidizing and protecting its major industries. The very absence of global agreement about what sorts of government intervention is now permissible further invites distressed workers and communities to claim unfair injury at the hands of foreigners. Here again, the longer-term agenda--in this case, to ease workers out of older industries and to reach a new understanding with our trading partners about fair trade--is no more or less urgent than it was before Oct. 19.

Wall Street’s goals and America’s goals are fundamentally different. Wall Street wants to restore stock prices to their levels before the crash and to the upward trajectory they were on before last August.

But our more basic goal is to rebuild our economy and restore productivity gains to the levels they were at more than a decade ago.

If America were to accept Wall Street’s perceptions of the current economic crisis and Wall Street’s immediate fixes, stock prices might well rise once again to record heights. But the underlying economy would continue to deteriorate, thus inviting another pop of the balloon.