The Crash of '87

A good friend of mine works on Wall Street. He's not a whiz-kid trader. He's a computer programmer, well-paid, but still a wage worker. My friend is not particularly religious and through most of the time I've known him, he's been basically apolitical. But a couple of years ago, he told me that working in the Wall Street environment had turned him into a socialist. He didn't read Marx. He just had a gut-level revulsion from witnessing the conspicuous accumulation of unearned wealth alongside New York City's equally conspicuous army of the unemployed and homeless.

Moral and ideological considerations aside, my friend also once told me, "These people [the marketeers] don't know what they're doing. They just go along from day to day predicting the future on the basis of whatever happened last week." Armed only with common sense, an inquiring mind, and a measure of ironic detachment, he saw early on that the much-vaunted Reagan-era prosperity was only a speculative house of cards.

On October 19,1987, the deal went down and the house of cards folded. But even now, in this first phase of the post-Reagan era, short-term thinking (based on whatever happened the previous week) and detachment from the needs and aspirations of ordinary Americans are still woefully abundant in official diagnoses and prescriptions for our gravely ill economy.

The conventional wisdom from the sages of New York and Washington is that the problem is the federal deficit. We need decisive action against the deficit to restore investors' confidence in the economy. The official analysis of the crash holds that the deficit-induced need to lure foreign investors was driving up U.S. interest rates. High interest rates mean tight money for businesses in need of refinancing and reduced consumer purchases of big-ticket items such as houses and cars.

Also, U.S. allies around the world don't like to see their productive capital siphoned away to finance our profligacy. A few days before the crash, the West Germans retaliated with higher interest rates of their own. Meanwhile, the president and the Congress twiddled their thumbs, and the stock market went on strike.

In this analysis, the crash represented a warning from U.S. investors for their government to get off its duff. The unforeseen severity of the "correction" (dwarfing the Great Crash of 1929) was the unfortunate by-product of new computerized trading practices that allow an enormous volume of simultaneous trades and thus exacerbate the up-or-down trend of any given moment.

That's the official story as told on the network news. And it is a fairly accurate account of "what happened last week." But it tells you nothing about the real reasons why the stock market crashed or why the crash is indicative of a larger, deeper, and worsening economic crisis.

First of all, the deficit is not the problem. Its size and growth rate during the past five years is a problem. But until very recently, the deficit has been President Reagan's short-sighted solution to the economy's long-term ills. To understand all that, though, you have to look further back than last week and further ahead than the next election. The real problem with the U.S. economy is a long-term state of stagnation and decline that began in the early '70s, created the neo-depressions of '75 and '82, and has yet to be addressed.

AS I WRITE, there are a few charts on my desk which, taken together, go a long way toward explaining late 20th-century America. One shows unemployment figures from World War II to the present. It's a jagged line with lots of sharp ups and downs, signifying the cyclical nature of our economy. But during the 40-year period, there is a clearly discernible trend upward. The unemployment levels for the best years of the Reagan recovery match the worst recession figures of the early 1960s.

There isn't enough work to go around in America. Permanent, structural unemployment is now in the neighborhood of 7 percent. People without work don't buy houses and cars, or much of anything else for that matter. That puts auto workers, construction workers, and myriad others out of work as well. Unemployed people use government services but are unable to pay for them. If you're unwilling to tax the rich, this feeds your federal deficit. And the machine winds down.

Another of my favorite graphs shows the percentage utilization of U.S. manufacturing capacity since the postwar peak year of 1965. Not surprisingly, this one is a mirror-image of the unemployment graph, with a steady, stair-step progression downward. Among other things this chart reflects the toll taken by the shift of manufacturing operations to cheap labor markets overseas.

The third graph shows the bread-and-butter consequences of stagnation for most Americans. It charts the path of average real (inflation-adjusted) weekly wages from 1947 to the present. Here the trend is even more markedly downward. There's a steep ascent through the '50s that reaches a mountain top with the consumer society in the late '60s, and then starts the toboggan ride to lowered expectations.

During the high point of the Reagan recovery, average wages only recovered to the level of the early '60s. This reflects the impact of higher permanent unemployment rates (competition among workers drives down wages). The lower average wage also indicates a long-term shift away from higher-paying industrial work to lower-paying service jobs, and from full-time permanent jobs to part-time and temporary work. One recently released study, commissioned by the AFL-CIO, found that 60 percent of the new jobs created between 1979 and 1984 provided incomes of less than $7,000 a year.

This long-term downward trend is the result of an international economic order created to benefit multinational corporations and investment institutions, with little consideration for workers at home or abroad. As the charts show, the reconstruction program after World War II was such a powerful economic engine that it pulled almost everyone along behind it for a while.

But then the rebuilding job was over. West Germany and Japan became America's economic equals, and a second tier of less-developed countries entered manufacturing in a big way. In a capitalist economy, investment goes where the return is highest. Increasingly, that meant offshore. The United States ceased to be the world's factory and became its banker and, in good times, its consumer market. But the sheer size of the U.S. economy is still such that mismanagement of this domestic transition could send ripples of economic distress throughout the capitalist world.

And mismanagement is the mildest word available for what's happened. Here we return to the deficit. President Reagan's quick-fix solution to economic stagnation was economic stimulation through tax cuts and deficit spending. Despite the administration's ritualistic devotion to free-market ideology, it engaged in the same kind of government intervention in the economy as did its Democratic predecessors from Carter to FDR.

But there was one major difference. When the Democrats threw money at economic problems, they mostly directed it toward lower- and middle-income people with the aim of stimulating consumer demand. The Reagan plan was to throw money at rich individuals and huge corporations, with no strings attached, through tax cuts aimed at corporations and the wealthy, and through red-ink defense spending.

DEFICIT SPENDING IS NOT in and of itself a bad thing. Just as a family goes into debt right now to buy a house that will serve them for decades, the government sometimes has to go into debt to carry out long-term goals for the society at large. Deficit spending as an economic strategy was pioneered by Franklin Roosevelt during the Great Depression. But FDR's New Deal spending left the country with paved roads, rural electrification, soil conservation, and dozens of other projects that benefited the society as a whole and opened up new arenas of economic growth for decades to come.

The Reagan deficits, on the other hand, have either gone for weapons, which are economically useless, or have disappeared entirely in an orgy of speculation and conspicuous consumption. In either case the spending did nothing to reverse the symptoms of long-term stagnation and left behind only the vicious hangover that began October 19. The president's touching faith that his rich friends would invest their windfall in putting America back to work was betrayed. They either shipped it overseas, spent it, or indulged in the array of speculative get-rich-quick investment schemes opened up by Reagan's deregulation of the finance industry.

That, of course, is why the prices of stocks soared so high in the last few years. All that new money around was lusting after opportunities to reproduce itself. But the reality signified by those long-term charts didn't go away. And that is why the market was bound to crash. In the real world of goods and services and global competition, stock in U.S. companies simply wasn't worth the hyped-up prices it was drawing in the giddy mid-'80s.

The Crash of '87 wasn't in itself a world-changing event. Instead, it was an event that dramatically crystallized the economic changes that were already under way. Fundamental questions about how the United States will cope with those changes are still before us. The Reaganomics answer would safeguard the profits of the few at the expense of the many. It means accepting lowered living standards for most Americans and shutting off any remaining opportunities for those who are already poor.

For the past six years, that bitter pill has been sweetened with the empty calories of deficit spending. Now the sugar coating is gone. And the field is once again open for economic proposals that would benefit society as a whole by democratically directing resources and investment toward productive ends.

Danny Duncan Collum is a Sojourners contributing editor.