text, fittingly enough, is the editorial page of the Wall Street
Journal. At the top of the page for June 3 is an essay by
Wayne Angell, the former governor of the Federal Reserve. "Over
the past 15 years stock prices in the U.S. have risen at a 15
percent annual rate," he begins. "This long bull market
didn't just happen. There is a rational explanation. Economic
policy has brought the U.S. to a new economic eraan era of stable
money and lower income tax rates."
Inflation is at a reassuring 2.5 percent,
Angell continues. "The market may have already risen on expectations
of a reduction in the nominal capital gains rate." But "if
the Federal Reserve allowed inflation rates to escalate, it would
be a disaster for the equity market. By my estimate, if inflation
rose to 4 percent, the Dow could be expected to fall to 6500.
. . . If inflation were 5 percent, the Dow could plummet to 4500."
There we have it. The economy is, and
should be, run in the interest of the stock market. Moderately
liberal economists from Paul Samuelson to Paul Krugman have long
observed that a little inflation is essentially harmless and probably
even tonic for the real economy. But inflation is poison for the
stock market. Why? Because Wayne Angell's bull market has soared
on the gradual disinflation of the 1980s and 1990s. The lower
the rate of inflation, the higher the reasonable ratio of stock
prices to corporate earnings. Reverse that cycle, and the market
The only problem with this magnificent
bull market is that it has delivered only so-so economic results
for ordinary people. In the postwar boom, when the stock market
turned in a far less stunning performance, average real incomes
doubled in a generation. The growth rate was a robust 3.8 percent,
compared to less than 2.5 percent in the 1990s. If stock ownership
were broadly distributed, ordinary people might be sharing in
the Wall Street boom. But despite claims of a "people's capitalism,"
the top 1 percent of Americans own 40 percent of the shares, and
the next 5 percent own most of the rest.
It is perhaps an exaggeration to posit
an inverse relation between what is good for Wall Street and what
is good for Main Street. But Wall Street's own apostles come pretty
close to making that case. Low inflation and moderate growth make
the stock market boom. Higher growth and higher increases in wages
and salaries might be inflationary. In any case, it would flatten
the stock market.
there any other way to run an economy? Most mainstream economists
agree with Angell that the Fed should resist letting the economy
grow at faster than 2.5 percent, and not mainly out of solicitude
for the stock market [see Alan S. Blinder, "The Speed Limit:
Fact and Fancy in the Growth Debate"]. But might
there be an alternative economics, and an alternative politics?
Evidently not. Here, conveniently situated on the very same Wall
Street Journal editorial page for June 3, is an essay by the
Republicans' favorite Democrat, Al From.
From's subject is "New vs. Old
Democrats." The New Democrats of his narrative are Messrs.
Clinton and Gore, as interpreted by From. What is new about them,
according to From, is that they have sponsored precisely the policies
that Wayne Angell applauds. In addition to making Democrats the
party of fiscal discipline, they have reassured voters on Democrats'
social views by embracing crime control and welfare-to-work; they
have dispatched bad memories of a fractious party in thrall to
special interests, notably the labor movement. "By moving
his party to the 'vital center,' the President ended Democrats'
long dry spell in presidential elections," writes From.
What threatens this achievement, according
to From, is Dick Gephardt and economic populism. "Rep. Gephardt
is attempting to reverse the transformation of the Democratic
Party that President Clinton and his New Democrat allies have
brought about in the 1990s," From warns. "By responding
to the demands of organized labor and other powerful Democratic
constituencies to oppose the balanced budget and to restrict trade,
Rep. Gephardt would have us revert to the old interest-group politics."
So there is neither a prudent economic
alternative to the broad present course (Angell) nor a sensible
political alternative (From). And the politics of Clinton's incumbency
and Gore's presumed succession require a relentless emphasis on
the positive (From: "The policy has yielded terrific results:
more than 12 million net new jobs created in the past 4 1/2 years,"
and so on). Gephardt and the labor movement were bitterly criticized
during the 1996 election by the White House and its pollsters
for trying to rally those who felt excluded from the boom.
Therefore, as our colleague Robert
Reich suggests in his recent memoir, politicseven relatively
liberal politicsboils down to the twin imperatives of cutting
public outlays and appeasing the Federal Reserve and Wall Street.
The bipartisan premises of the budget debate (balance at all cost,
no tax increases) require that there can be no serious conversation
about social investment. Validation takes the form of the rising
stock market and falling unemploymentnever mind the job insecurity
and the static wages. Actual public policy debate involves fairly
trivial decisions around the margins: how much to take from Medicaid
with one hand to give health coverage to poor, uninsured children
with the other; whether to restore disability aid to 50,000 or
100,000 legal immigrants, half a million of whom were rendered
ineligible in the 1996 welfare reform that the President signed.
In this context, the occasional liberal victories are mostly defensive.
Avariant of this dilemma afflicts all of the left-of-center parties
throughout the West. In America, the budget crisis is more or
less contrived. In the 1980s, Republicans created unsustainable
deficits. Instead of reducing them to more normal levels and then
moving on, Democrats, led by the White House, have played into
a permanent Republican game of tax cuts followed by matching cuts
in outlays. The current budget resolution, with $85 billion in
net tax cuts in the first five years, and many hundreds of billions
more after 2002, makes this politics permanent.
In western Europe, the hammer is not
the legacy of conservative-sponsored fiscal deficits, but the
German Bundesbank and the politics of European monetary union.
Europe has long had higher levels of social spending than the
United States. The strategy of broadening prosperity by raising
public expenditure is not an option. In Europe, economic union
under the stewardship of the Bundesbank punishes the country that
tries to grow faster than its neighbors. Left and right are arguing
not about how much growth, but how much austerity.
Fiscally, the universal task is to
rein in deficits. That means slow growth and reduced public borrowing.
Voters don't like austerity, and have little appetite for tax
increases to finance public spending, which are seen as just another
form of belt tightening. So the strategies that served center-left
parties well a generation ago are now inoperative.
Left-of-center governments have just
won elections in London and Paris. But in London, as Stanley Greenberg
recounts ["The Mythology of Centrism: Why Clinton and Blair
Really Won"], much of the Blair government's task
is constitutional and political reform and the prevention of the
further erosion of the British welfare state. For the most part,
the Thatcher revolution has been accepted as a baseline. In Paris,
Lionel Jospin's Socialists are somewhat more unreconstructed;
they want a 35-hour workweek and public works to create jobs.
But much of their project is also defensiveto renegotiate European
monetary union on slightly less deflationary terms.
What, then, is left?
the articles in this issue suggest, part of the answer is restoring
the promise and possibility of faster economic growth. Central
banks and their defenders simply cannot be above politics. Anyone
who suggests that a healthy stock market requires the stagnation
of wages is making a political statement. Unless we want to trade
in our political democracy for a tight oligarchy of central bankers,
we need to hone a real debate.
Another answer is reviving institutions
of popular participation. In America that means getting big money
out of politics and breathing more life into the labor movement
and other movements of mass participation. In Europe, it means
modernizing the institutions of a stakeholder society. For Britain,
where labor relations have always been fractious, such a society
must be built almost from scratch. On the continent, the last
generation of social Christian and social democratic parties did
a commendable job of devising institutions of social partnership.
But in a climate of high unemployment, these social buffers create
a new, often generational, fault line of haves and have-nots.
People with good jobs and job historiesusually the middle-aged
and the retiredstill members of a functioning social compact.
They have decent benefits, and tolerable security. Newcomers to
the job market are on the outside, looking in. No wonder so many
of Europe's Generation Xers are either looking to the individualist,
entrepreneurial vision of a good society, or hanging out in cafes.
A third strategy is the approach promoted
inside the Clinton administration by Robert Reich, and long advocated
by social democrats in northern Europe: human capital policies.
Invest serious money in making workers more productive, and even
the most austere central bankers will allow the unemployment rate
to drop. Earnings will rise because productive employees add value.
If wage subsidies and other social transfers have reached their
limits, the best strategy for creating good jobs at good wages
is to make young workers more attractive to hire and reward. This
is no less a social outlay than an unemployment-compensation check,
and a rather smarter one.
Several of Europe's smaller economies
have long coupled a social compact between industry and labor
with significant social investment in the quality of workers.
Austria, the Netherlands, and Sweden all have significantly lower
unemployment than the rest of Europe, thanks to this approach.
All have trimmed, but not scrapped, their social supports and
have modernized them into institutions that facilitate labor-market
transitions rather than just paying for idleness.
brings me full circle to the booming stock market. In 1965, Sir
James Meade wrote a brilliant book titled Efficiency, Equality,
and the Ownership of Property. Meade laid out three possible
strategies for broadening equality: a strong labor movement, an
expansive welfare state, and a "Property-Owning Democracy."
An overly strong labor movement, Meade thought, would be inflationary
(he was right in the British context, wrong about Nordic trade
unions). A welfare state sufficiently broad to counteract the
inherent inegalitarian tendencies of capitalism would require
too high a tax rate. This was prescient. For Meade, the superior
way to reconcile equality and efficiency was broadly diffused
property wealth. He wrote:
Extreme inequalities in the ownership of property are in my view
undesirable quite apart from any inequalities of income which
they may imply. A man with much property has great bargaining
strength and a sense of security, independence, and freedom. .
. . He can snap his fingers at those on whom he must rely for
income; for he can always rely for a time on his capital. The
propertyless man must continuously and without interruption acquire
his income by working for an employer or by qualifying to receive
it from a public authority. An unequal distribution of property
means an unequal distribution of power and status even if it is
prevented from causing too unequal distribution of income.
Jefferson, no statist, would have concurred.
There is, of course, a conservative version of this vision: Everyone
should just become an entrepreneur. The conservative vision also
includes privatization of Social Security, so that everyone will
get a nest egg of property wealth. It includes tax-favored IRAs
and 401 (k) plans. But in the conservative blueprint, the size
of the nest egg is a function of one's personal savings from earnings.
Low-wage workers get to put aside a pittance; the gap between
property haves and property have-nots remains.
There is also a progressive version.
One concrete plan was proposed in these pages by Sam Beard ["Is
There a Social Security Crisis?" January-February 1997].
A portion of payroll taxes would underwrite nest eggs, but the
structure of financing would be highly redistributive. A progressive
version of Meade's Property-Owning Democracy might also include
universal pensions, as well as subsidized first-time home ownership,
as well as profit sharing and employee-owned firms. Share-the-wealth
populists in America are as old as Jefferson's system of land
tenure and the Homestead acts, and as modern as Federal Housing
Administration loans and employee stock ownership plans.
is not a bad four-part program for raising both earnings and democratic
engagement: faster growth, intensive investment in workers, stakeholding
corporations with more avenues of participation, and broader diffusion
of property wealth. But all of this requires a politics. And none
of it is likely to happen if political remedy seems blocked and
voting turnout, rationally, keeps dwindling.
Such a politics also requires a rekindling
of what our European friends call solidarity. Voters, especially
American ones, resist programs of explicit redistribution, such
as Aid to Families with Dependent Children. But they are highly
supportive of institutions that redistribute via inclusion, such
as Medicare, Social Security, and the GI Bill. Middle-class taxpayers
will support a new round of inclusive social initiatives only
if they seem likely to offer broad opportunity and security for
all. But this vision requires, above all, a self-confident progressive
movement and not a tamer version of Thatcher and Reagan.
A cautious centrism, insisting that little can be
done and offering only symbolism as a source of animation, is
not likely to revive such a politicsor much of a politics at
all. What will fill the vacuum is rugged individualism at best,
and antipolitical hatred at worst. If the menu is limited to economics
a la Angell and politics a la From, we might as well just give
up the democratic pretense and let the Fed run it all.
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