RALEIGH – The Dow is down, the NASDAQ is down, the S&P is down, and the economic recovery that began nationally in early 2002 seems to be weakening. Panicky investors, clueless media commentators, and left-wingers still living in the 1930s have all started making allusions to the 1920s, as if the current downturn on Wall Street is to the 1990s like the stock market crash of 1929 is to the Roaring 20s.
The comparison is apt, though not for the reasons suggested by these Newer Dealers. Like the 1920s, the 1990s (and, for that matter, the 1980s) were a period of rapid growth, of technological change, and of significant gains in the value of the stock market. In both periods, critics of capitalism wrung their hands, decried the success of entrepreneurs, and warned of impending doom. In both periods, their grousing went on for years without dinting public enthusiasm about the market.
Also like the 1920s, the 1990s economic boom combined real improvements in the productive capacity of the nation and speculative excesses funded by monetary growth. Stocks are assets and their prices are inflated, like all prices are, when there is too much money in the system chasing too few goods. During the 1920s, a variety of factors led the Federal Reserve Board to increase the money supply too quickly, and then after 1929 to deflate too quickly. The resulting gyrations in business investment and market performance helped set the stage for the Great Depression (it isn’t appropriate to say that the inflation-deflation cycle caused the Depression, which was also the result of protectionists tariffs and punitive taxes by Presidents Hoover and Roosevelt).
I’m persuaded that part of the current market correction is due to an inflation-deflation cycle in the money supply and stock prices in 1999 and 2000. The Fed pumped money into the system prior to 2000, relying on what turned out to be baseless fears of a Y2K crisis, and then deflated in 2000. Subsequent loosening of the monetary strings helped the U.S. economy avoid a truly deep recession; by historical standards it was a mild downturn (except in inner cities, North Carolina, and the Pacific Northwest, I should say).
There was a lot more going on in the New Economy of the 1990s besides a run-up of stock market prices. Don’t forget: we had sizable increases in productivity, in real compensation, and in economic outcomes such as homeownership and the spread of new, useful, and exciting technologies. And the stock market has still been an excellent place to invest your money, for the most part. Sine the mid-1990s, the S&P 500 index has doubled (delivering about a 10 percent annual rate of return even after factoring in the recent decline) and productivity growth rates have more than doubled.
Child poverty dropped by 10 percent and poverty among seniors dropped by 23 percent. Millions of Americans began to invest for themselves in retirement funds and for such needs as college education and homeownership.
We have big problems in the American economy, including a return to protectionism and an uncompetitive tax structure on the international front as well as weak performance in public-capital formation in such areas as highways and education. In North Carolina, we are particularly uncompetitive, as the recent data show. But let’s not panic, and let’s not believe the anti-capitalism nonsense emanated from the usual suspects – who are convinced that when a stopped clock is right twice a day, that disproves the reality of time.