When Government Joins the Market Frenzy, We All Are at Risk
Stocks: Government speculation with Social Security money could lead to disaster.
By Richard B. Anderson
Los Angeles Times, Commentary Section, January 27, 1997
There's nothing like a really raging bull market for producing both euphoria and angst, a sensation that author George Goodwin described in metaphor: "We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid, no one wants to leave while there is still time, so that everyone keeps asking 'What time is it? What time is it?' but none of the clocks have any hands."
Investors are torn for good reason. While the Dow Jones average has risen more than 130% since 1990, the economy itself has advanced at less than 3% per year. Foreign trade is booming, but not enough to account for a doubling of stock prices. Troubling signs of a speculative market top abound--for example, ConRail takes a full-page ad in the Los Angeles Times to inform stockholders that its stock has appreciated more than 600%; stocks like General Electric and Coca-Cola trade at more than 30 times earnings; the chairman of the Federal Reserve even warns of "irrational exuberance." Nevertheless, the market seems headed for the moon.
Given the stake that Americans have in the market, we may be forgiven for wondering how much of this rise is pure speculation. Our rival Japan, possessor of the strongest export economy in the world, is still mired in the debris of the delirious "bubble economy" of the 1980s, stalled in its tracks by fiscal fallout. The Nikkei, Japan's stock market, fell 64% between 1989 and 1992--the equivalent of a fall of 4,300 points in today's Dow. Such a drop here would be, to say the least, distressing.
Still, markets have fallen before and the country has survived. To the extent that markets are made by free choices among individuals, it's not clear what should or can be done about them. Discussion of stock prices might belong solely in the financial pages, except that individual choices are no longer the only factor in moving prices. Government has recently taken a major role.
Since the early '80s, the government has been actively subsidizing speculation through tax policy. Tax-deferred individual retirement and 401(k) accounts, often matched in some proportion by employers, produced an enormous artesian well of capital, flooding the securities markets with oceans of cash. Most market professionals agree that the tax-deferred funds are a major force behind the exponential growth in stock prices. The government is now proposing to further escalate its efforts by putting some of the Social Security trust fund in stocks. Thus the government is involved in driving up the prices of unsecured equities by tax subsidy and, if the Social Security reforms are enacted, direct investment.
Speculative market manias always end in sorrow. From the tulip mania in 17th century Holland to the latest Japanese debacle, no such market has been able to escape a more or less horrible fate. Morton Biggs, chief strategist of Morgan Stanley, recently commented that in this century, stock market declines of 40% or more have occurred about once every eight years.
The participation of government in the market multiplies this practical risk by political risk. Let's suppose that the retirement funds of Americans are even more heavily invested in the market than they are now and that some proportion of Social Security funds is committed to equities, and then one day the market noses over and heads for the bottom, trailing black smoke of recriminations. The result could make our present fretful dissatisfaction look trivial. The nature of the market practically guarantees that such a day will come.
Beyond political and practical concerns, there lies a more subtle moral risk. When government enters into the enthusiastic, unrestrained greed of a market frenzy, we are all affected. The cynicism and materialism already so prevalent in our culture are given the imprimatur of policy. Suddenly we are all participants, all speculators, gambling, trying to get something for nothing. In risking the future, we are risking some vital part of ourselves as well.
For individuals, speculation is one of life's options, for better or for worse. For a government, involvement in speculation is unconservative, unhealthy, unwise and quite probably suicidal. Both for individuals and for government, there are alternatives to speculation: saving and secured investments. If policy-makers choose to avoid the hard choices and gamble instead on unsecured equities, we can be assured of experiencing the appropriate toll.