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© 2002 Copley News Service, 7/23/2002
American equity markets have lost $7 trillion in value, approximately 40 percent, since they peaked in late March 2000. The Washington establishment has decided to blame it on a "speculative bubble" caused by foolish investors and to a "loss of confidence" caused by greedy corporate "wrongdoers" who were out to systematically plunder their companies.
In a July 8 press conference, the president said corporate corruption might cause Americans to "lose confidence in the free enterprise system." The next day, in a speech to Wall Street, he said, "At this moment, America's greatest economic need is higher ethical standards" -- which is always true.
The president's straight talk was unfortunately misinterpreted by the rest of the establishment as a signal to make the "evil" businessman and woman the fall guy. Congress thinks the people have lost confidence in the economy because government isn't tough enough on business, and it is in a legislative frenzy to mete out punishment. Fed Chairman Alan Greenspan has joined the witch hunt against American business by preaching about the wages of greed and avarice.
Greenspan offers a misguided "bubble" diagnosis along these lines: "Irrational exuberance" among investors "engendered an outsized increase in opportunities for avarice" and created an epidemic of "infectious greed" that overwhelmed the "guardians" of the economy. Firms vastly overproduced goods and services, especially in the technology industry, which led to "excess supply" and "excess capacity." Too many people became employed, and the economy was running away at an unsustainable pace with too many people getting wealthy.
This hyper economic activity was stoked, supposedly, by people's insatiable greed, their lack of scruples and an incurable myopia. Business executives were cutting corners and cooking the books to loot their businesses and fleece their stockholders, who had thrown due diligence to the wind. The economy inflated because people invested too much money in too many get-rich-quick schemes and then ran amok because government didn't regulate and tax it enough.
This is the same kind of quackery doctors practiced during the Civil War when they had no comprehension of germs or antiseptic technique. Disease and infection were blamed on toxic "miasma" or "effluvia" -- as meaningless in explaining what causes disease and infection as "financial bubbles" and "infectious greed" are in explaining what causes economies and stock markets to rise and fall. Civil War surgeons killed their patients using unsterilized instruments; today's policymakers poison the economy with high tax rates and crushing regulations.
The economy boomed in the 1990s because the Fed maintained fairly stable monetary policy early in the decade, there were technological advancements and resulting productivity gains of historic proportions mid-decade, and in 1997-98 Congress cut the capital gains tax and made other improvements in how the returns to capital are taxed. The economy went into a ditch when the Fed pinched off the flow of liquidity and appreciated the value of the dollar by some 40 percent, Washington became obsessed with budget surpluses and refused to cut tax rates, and government went on a regulatory jihad.
The '90s boom economy wasn't a bubble that popped in an act of divine retribution for hubris, greed and immorality. Business plans and economic projections that made sense under a reasonable policy regime suddenly became unrealistic and unworkable when government jerked the rug out from under them with ridiculous anti-trust actions, anti-competitive price controls and deflationary monetary policy that sucked the oxygen out of the economy. "Excess supply" and "over capacity" came about only after bad government policy crunched the economy.
George Gilder said it best in a recent Wall Street Journal opinion column: "Accounting tricks at WorldCom, Global Crossing or Qwest did not cause these companies to fail. Accounting tricks were a symptom of failure -- the result of a perfect storm of government policy mistakes that led to the deterioration of an industry at an unprecedented pace. No number of accounting reforms, cathartic judicial proceedings or ethical reawakenings will bring back technology and economic growth."
On the day of the president's press conference, the Dow Jones industrial average opened at 9,375. By last Friday, the Dow had fallen by more than 1,400 points, almost 15 percent. Clearly the real "loss of confidence" affecting the economy is the loss of confidence in government.
Rather than collapsing, markets would be soaring if the establishment were considering serious economic reforms, such as reforming the tax code, slashing corporate income tax rates and capital gains tax rates, and allowing companies to deduct dividends paid to stockholders. We could also get serious about deregulating the remaining two huge overregulated bottlenecks in the American economy -- telecommunications and electric utilities.
Until Washington gets serous about such economic reforms, this economy will remain in serious trouble.