Which economy were you in last week?
Maybe you were in the same one as the stock market, counting your winnings as the Dow Jones industrial average soared to an all-time high above 3260.
Or perhaps you were among the thousands of people who lined up in the snow outside Chicago`s new Sheraton Hotel, trying to get one of those $5.75-an-hour jobs making beds or washing dishes.
Chances are you live in neither extreme. Like me, you or someone in your family probably has a job or a steady pension. But you`ve cut back on spending. You`re not about to risk getting overextended until you make some sense out of what you`re seeing on television and reading in the newspapers.
And what you saw and read last week-the stock market rising to an all-time high while so many unemployed Americans are hitting all-time lows-seems confusing in the extreme.
As the recession of 1991 becomes the recession of `91-92, it gets more and more obvious that Wall Street has developed a much rosier view of the near-term future than the rest of us can see from down here on Main Street.
Consider this month`s headline on The Wellington Letter, a fairly respectable stock market tip sheet: ”An interest rate-driven market means the worse the economy, the higher the market.”
Sounds absurd, doesn`t it? How could the market value of our major corporations rise while demand for their products falls, dragging
profitability down with it? How does one explain the anomaly of IBM gaining $3 a share the day that newspapers reported Big Blue was about to post its first annual loss in its 80-year history, and another dollar the day the loss was announced?
In fairness to the Wellington report and other bullish market analysts, there is a method to what many of us view as madness. As interest rates fall, stock valuations tend to rise when judged by their price-to-earnings ratios.
With the average stock still paying dividends of around 3 percent, the equity markets can look good compared to a certificate of deposit or money market account paying a little more than 4 percent. Many investors gladly accept the slightly lower yield because the stock, unlike the note, has the potential to gain substantially in price once the economy turns around.
But when will the economy turn around? That`s where views begin to diverge among those who have bid the Dow to more than 3260, and those-such as myself-who have trouble seeing beyond the litany of layoffs and bankruptcy filings.
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The bulls on Wall Street figure this recession is no different than the eight other cyclical turndowns the economy has suffered since World War II. They also figure that the same medicine-lowered interest rates and tax cuts-will cure the problem, as it has in the past.
Rumors that the Federal Reserve may lower its discount rate again, to 3 percent or less, helped extend December`s stock-market rally into January. So has speculation that President Bush`s growth package will include a sizable tax cut with higher deductions for dependent children and a new one for the purchase of health insurance.
Maybe that will work. I hope so.
But there`s another interpretation about what`s going on in the economy, one that does not support a 3260 Dow. It goes something like this: This is no garden-variety cyclical recession. This is the future.
Not the forever future, mind you, but the future for the next 10 to 15 years … or however long it takes America to come to grips with the fundamental structural problems that have been built up in the last 20 years. By now we have a pretty good idea what some of those problems are: too much debt piled up by individuals, corporations and the federal government;
not enough investment in state-of-the-art industrial plants and equipment;
highly adversarial management-labor relations and attitudes; out-of-control health-care costs; a tort liability system that drives up the cost of products and forces claimants to play courtroom Lotto.
The list grows if you add the ”social” drags on American productivity, such as our failing city schools and the growing urban underclass.
These are not the kind of problems that will clear up by ”late 1992,”
the season most economic forecasters point to when asked when we will shake loose from the recession. On the contrary, these are problems that would take a decade to overcome even if there was a national commitment to solve them, which there isn`t-yet.
This situation didn`t arrive overnight, either. Our bad habits have been creeping up on us for at least two decades, though their presence has been masked by the two-income household, which made us seem better off than we were, and the profits we took by pushing our debts onto the next generation.
There will be a recovery from this recession. There always is. But I`d guess it will begin much later and go a lot slower than the bulls on Wall Street would have us believe.
A sustained recovery won`t occur until we recognize what the long-term problems are, then build a national consensus to solve them.
We`re still in the recognition phase. Perhaps we`d learn more by paying attention to that line outside the Sheraton and not the Dow.