Prescription for a Slump
PETERSON, WALLACE C.
Perspectives PRESCRIPTION FOR A SLUMP BY WALLACE C. PETERSON In one of his earliest and most successful books, The Affluent Society, John Kenneth Galbraith coined the phrase "the...
...Even if it happens to be correct when first articulated, it is often made obsolete by the march of events...
...The October stock market crash provides a good illustration...
...He too thought the best response to a market crash was to balance the budget...
...Now we are being asked to believe that the market (always spoken of as if it had a life and a mind of its own in the arcane world of finance) abruptly decided on Black Monday that the folks in Washington were not going to do anything serious about the deficit—once touted as the sparkplug that got us out of the 1981 -82 recession, more recently decried as a menace to the country's economic health...
...In either of these cases, prescriptions based on it can turn out to be more dangerous than the conditions they are meant to cure...
...So they began to get out of the market...
...Whatever their popular appeal, neither of these propositions has much empirical warrant...
...Foreign capital streamed into the country to finance our import binge...
...It has since become part of the language, signifying ideas and views that are widely accepted despite a dearth of evidence in their favor...
...Why should a reduction in the Federal deficit, deemedahappy development by the conventional wisdom, be followed by a crash...
...And the Federal deficits, in Keynesian fashion, sustained the boom...
...Those who are at present urging new taxes and spending reductions would do well to reflect on theexampleof Herbert Hoover...
...The economy is always vulnerable to belt-tightening, and these days, with the vast overhang of consumer and business debt, it is more vulnerable than ever...
...They might just as plausibly have reached the opposite conclusion...
...The conventional wisdom is that the continual failure of the United States to get its trade accounts and government budget in order was the cause of what happened on Black Monday...
...All the while the bull market raged on unchecked...
...The problem with the conventional wisdom is that it is frequently false...
...Consider the relation of the budget deficit to trends on Wall Street...
...The way to restore confidence and prevent the Dow from slipping further, it is held, is to bring down the Federal deficits...
...In the five years from 1982-86 the Federal deficit climbed to enormous heights, averaging nearly 5 per cent of the country's Gross National Product...
...Consumption surged as households borrowed at a much greater rate than their incomes rose...
...From this it should be clear that attempting to restore confidence on Wall Street by fiscal or monetary austerity is a recipe for disaster...
...Indeed, figures for the fiscal year 1987, which ended September 30, showed a deficit of only $ 139 billion—a decline of 32 per cent from the $205 billion 1986 shortfall...
...As the word spread, the retreat became a stampede...
...Since 1969 there have been four recessions, and every one of them has been preceded by either sharp budget cuts, tight money, or both...
...The smart people on Wall Street know that a weakening fiscal stimulus from Washington means slackening demand and reduced profitability down the road, their lip service to the notion of a balanced budget notwithstanding...
...The market collapse came on the heels of this news...
...This is especially true in economics...
...If the market digests and reflects information that signals the future of the economy, as the experts say, then the October collapse was logical...
...Because it foreshadows tougher times ahead, that's why...
...For better or worse, the relative prosperity most of us have been enjoying since 1982 has been debt-driven...
...Nevertheless, it is widely promulgated by intelligent and apparently sincere econnomic and financial experts...
...One wonders in particular why the Democrats, who had such an easy time trouncing Hoover back in 1932, now seem determined to imitate him...
...Wallace C. Peterson is the George Holmes Professor of Economics at the University of Nebraska, Lincoln, and the author of Our Overloaded Economy...
...The aggregate value of all shares traded on the New York Stock Exchange jumped 158 per cent between 1982-86, far outstripping the economy's real growth of 22 per cent in that period...
...This explanation for the market's October nose dive strains credulity...
...Perspectives PRESCRIPTION FOR A SLUMP BY WALLACE C. PETERSON In one of his earliest and most successful books, The Affluent Society, John Kenneth Galbraith coined the phrase "the conventional wisdom...
Vol. 70 • November 1987 • No. 18
