O ur 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 era-an 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 tumbles.
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.
I s 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, politics-even relatively liberal politics-boils 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 unemployment-never 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.
A variant 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 defensive-to renegotiate European monetary union on slightly less deflationary terms.
What, then, is left?
A s 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 histories-usually 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.
T his 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.
T his 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 politics-or 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.
