Economics Goes Only So Far in Dealing Out Wise Policy

Does philosophy affect the stock market or, put more precisely, is there a connection between the end of the New Deal, announced loudly in Washington last week, and new highs in stock prices?

Yes there is, but in examining that connection we should keep in mind that economics goes only so far in affecting the issues confronting America. And there are no miracle cures today, just as there were none in the 1930s.

It’s a good time to ask such questions, because the Senate last week passed a welfare reform bill that ends federal guarantees of assistance to needy families by passing responsibilities back to the states.

Also, angry arguments broke out in Congress over measures to reform Medicare to forestall galloping deficits in the program.

Supporters and opponents saw the end of an era. “We are closing the book on a six-decade system that may have been well intentioned but which failed the American taxpayer and those it was designed to serve,” Senate Majority Leader Bob Dole (R.-Kan.) said of welfare, which had its origins in the 1935 legislation that created Social Security.

Sen. Daniel Patrick Moynihan (D.-N.Y.) saw the connection with foreboding. “I fear we now are commencing the end of the Social Security system,” he told the Senate.

Rhetoric aside, most Americans would recognize the attitudes. People are skeptical of old government programs today. A surprisingly large cross-section of voters back market solutions, not helping hands. Conservative economics rules the public discourse.

And that shift of political philosophy is a cause of the bull market, says economist Edward Yardeni of C.J. Lawrence Inc., a New York investment firm. “The stock market has been going up since 1982, when Ronald Reagan gave assurances that government wouldn’t continue to grow,” Yardeni says. “Taxes have come down, businesses can make earnings here.”

Still, philosophy and the stock market are more ambiguous than that.

“The New Deal [the catch-all name for government programs that nursed the stricken economy in 1933] was good for the stock market,” says economist Albert Wojnilower of the Clipper Group, an investment advisory firm. “Especially after World War II, because its supports gave an assurance that the Depression wouldn’t come back.”

So, one way or another, if a government gives people confidence, the stock market goes up.

Today Americans broadly feel they can dispense with government supports. The question, however, is whether the economy is strong enough to sustain itself or whether kicking away the supports makes it vulnerable to new recessions, even Depressions.

That remains to be seen. One certainty is that a deregulated economy will need strong growth to spread prosperity to the great mass of Americans.

But another challenge goes beyond economics, to the need to handle reforms of welfare and Medicare with political courage and wisdom.

There are no miracle cures. On its face, welfare reform resembles political buck passing, with the federal government giving the states money and responsibility. The problem, as Sen. Moynihan points out, is that poverty conditions have changed from even a decade ago. Two-thirds of the 14 million people on welfare are children, the result of an extraordinary increase in births out of wedlock and single-parent families.

That has little to do with economics but a lot to do with a change in American mores, in what society accepts as moral and right. It is a very complex problem and one that will challenge local communities and political leaders.

And they won’t have money to spare, explains economist Barry Bosworth of Washington’s Brookings Institution. “Block grant money won’t keep coming to the states,” Bosworth says. “In the real world, politicians at one level won’t continue collecting money for other politicians to use.”

Medicare, too, needs reform if it is not to balloon from $155 billion to $234 billion in the next three years and to incomprehensible levels after that. But again, money measures are only part of the solution.

The Republican proposal issued last week would raise premiums based on incomes and impose fee limits on hospitals and doctors, among other things.

But experts saw loopholes immediately. A catastrophic-illness plan that could become massively expensive; incentives for physicians and private clinics to make a bundle. There are always loopholes.

What neither party proposes is explaining to Americans of all ages that medical care is not an unlimited right. The system, which now rations haphazardly, needs honest thinking about subjects like rationing.

The payoffs for reforms done well could be huge: in welfare, millions of Americans restored to a promising and productive life; in Medicare, millions of Americans saved from fear and uncertainty. Not to mention the billions of dollars used more productively.

Again, political courage and wisdom, moral virtues, are needed more than economic analysis to do the job.

Where are such virtues to come from? They arise even in unlikely times. One of the myths Americans should get over is that in the 1930s people were united and hopeful. The opposite was true. There was despair, working people left on boats for Europe, even signed up for work in the Soviet Union, historian William E. Leuchtenburg) tells us.

People so lost faith in politicians and government that many proposed Congress be closed. Yet from there, spurred by phrases like “The only thing we have to fear is fear itself,” the country recovered its confidence and its economy.

Today stocks are up, the economy is ticking along, but worry is widespread. Congress is scorned and the budget deficit feared. But the deficit, $160 billion this year, can be eliminated in seven years by cutting less than $25 billion a year from government spending. That’s a trifle in a $7-trillion economy.

Rather than fearing the deficit, we should see to measures to spur economic growth here and abroad where increasingly markets for U.S. goods will be. As new presidential candidate Malcolm S. (Steve) Forbes Jr. put it last week, we need growth “to enable the two-income family to get ahead of the curve instead of feeling they’re on a treadmill.”

Maybe a bit less of “You’re on your own” and a bit more “We’re all in this together” is the philosophic push the economy needs now.