Black Monday, 1987: Wrong Medicine

Wrong Medicine: Pundits’ Prescriptions and Why They Won’t Work
November 3, 1987

The rule of thumb in the con­sensus industry is that it takes a week or so for the process of opinion formation to work its magic. But within hours after the sun set on Black Monday, pundits re­vealed their instant decoding of the market’s bleak mes­sage. They’re wrong, of course — danger­ously wrong. But let’s inspect their con­sensus before skewering it.

The villains were quickly identified: the “twin tower” deficits — trade and bud­get — and program trading. All that is needed is a good dose of austerity. We’ve been living beyond our means for years, mortgaging our children’s future. Cosmo­politan types like Flora Lewis provide the international dimension: Japan and Ger­many, two countries who’ve profited nicely from our trade deficits, should renounce their stingy ways and stimulate their economies. Germany should forget its obsessive fear of inflation (born in the Weimar era, when it took a wheelbarrow full of marks to pay for a haircut) and embrace monetary ease. And Japan should get cracking with its frequently announced (and frequently deferred) public works program. Said stimuli will keep the world afloat while we tighten our own belts.

There are differences of shading, of course. The Beltway consensus, shared by the Times editorial page and Sam Donaldson, says fiscal prudence demands spending cuts and tax increases. The ever-sharp presidential mind worries that increasing taxes might depress the econo­my — so spending cuts should do the en­tire job. All the markets require is a signal of Washington’s good intentions. Once we get our fiscal house in order, it’s years of smooth sailing ahead. After all, the economy is in fine shape; business conditions are “fundamentally sound,” as they said in Herbert Hoover’s day.

Let’s look at each of these points.

• Program trading. Computer-driven strategies may have intensified the market collapse, but they didn’t cause it. Mechanized trading allows machines to do the same things humans do, only faster; the silicon traders were programmed to act on the same criteria as the flesh-­and-blood variety.
• Trade deficit. Everyone agrees that this is a major problem; how to solve it is another matter. Many Democrats feel their arguments in favor of a protectionist trade bill have been strengthened — ­never mind the disastrous consequences of the Smoot-Hawley tariff in the 1930s. Wall Street and orthodox Republicans are coy about admitting it, but their solu­tions involve a good dose of austerity, which would cut imports by slowing the U.S. economy, and more cost-cutting in industry, which would improve our com­petitiveness. But in all their talk about the balance of trade, mainstream pundits miss the real point — the volume of trade. As that old graybeard, Karl Marx, put it: “What appears in one country as exces­sive importing appears in the other as excessive exporting, and vice versa. But excessive importing and exporting has taken place in every country,… i.e. overproduction, fostered by credit.…”
• Budget deficit. Without the U.S. budget deficit, Japan and Germany would not have those enviable surpluses. Indeed, the whole world economy might well have gone down the tubes in­ the early 1980s without Reagan’s massive deficits. In fact, the deficit declined from $220 billion in fiscal 1986 to about $150 billion in fiscal 1987, which, according to the conventional wisdom, should have cheered the markets. Further cuts in the deficit would be positively Hooverian. Using the crash as an excuse to cut Social Security and medicare — as banker Peter Peterson recently recommended — would be criminal.

The real time bomb in all this is the high level of corporate and personal debt, a problem to which the chorus of thumb­suckers has yet to address itself. (Third World debt is a whole untouched story in itself.) Even though the cumulative feder­al debt doubled in the Reagan era, when measured against GNP, it is still propor­tionally lower than the debt accumulated during the New Deal and World War II. Private debt, however, is at unprecedent­ed levels. Instead of taking advantage of the bull market to sell wads of new stock, companies have bought back their stock, often on credit. In the 1920s, however, corporations sold tons of new stock to a gullible public — relieving the public of a good deal of its wealth, but cushioning corporate balance sheets against the shocks of the Depression. Now, corporate balance sheets have lost all their spring. A cascade of private debt defaults is the likely mechanism whereby Wall Street’s crisis will spread to Main Street — though it might take a year or two.

Immediate silver linings are few — aside from the fact that Mort Zuckerman may never get his chance to deface Columbus Circle. While it’s tempting to celebrate exuberantly the demise of yuppie culture and all the other horrendous phenomena of the Reagan/Thatcher/Koch era, capi­talism is not notable for its equitable division of pain.

Still, there are openings for the left here — practical ones, utopianism aside. The first casualty of Black Monday is the entire ideology of laissez-faire. The left should make this point in a pure and forceful way: unregulated markets tend toward crisis, not equilibrium. This isn’t an excess that needs to be controlled — it’s in the very nature of markets. Despite their populist disguise, most regulations have been devised largely to protect vest­ed interests. Over the next few years, as the crisis unfolds, we must press for regulations that amplify social control over capital.

Second, we must resist all the calls for austerity. “We” as a nation may have been living beyond our means, but for every BMW-driving yuppie, there’s a host of folks for whom the ’80s have been no party — the homeless, factory workers, farmers, blacks and other minorities, not to mention the old American middle class. The great crime of the Reagan defi­cit is not its existence, but that it’s been wasted on weapons and tax cuts for the richest. Redirecting that spending to those most in need makes good economic sense and satisfies the demands of social justice. If and when the political spec­trum shifts to the left, we can let our agenda get more ambitious.