One way the experts look at the price of a stock is as the market's estimate of the "discounted present value" of the company's future earnings. What would you pay for a fraction of that company's profits for the indefinite future? That's what you should be willing to pay for a share of stock representing that fraction of the company.
One way to look at the crash of the stock market, therefore, is as a massive revaluation of the future prosperity of the American economy. You might call it the difference between the Reaganite vision and reality. Shares of IBM lost a quarter of their value on Massacre Monday. Obviously IBM didn't lose a quarter of its factories, scientific expertise, marketing network and so on. But the value of those assets depends entirely on what they can produce, and suddenly it seems that what they are likely to produce is worth a lot less.
New York Stock Exchange shares lost $500 billion of value on Monday alone -- closer to a trillion since the market's peak in August. Since the crash cannot be traced to anything peculiar to listed stocks, it is a market judgment on the economy as a whole, of which the stock exchange is just a part. Clearly the "present value" of America's future prosperity has been revalued downward by several trillion dollars.
This calculation puts the paralysis of America's political leaders in perspective. Imagine if the president and Congress had agreed last summer to cut the federal deficit by $60 billion. Let's say they did it through a 20-cent-a-gallon gasoline tax for about $20 billion, trimming middle class entitlements another $20 billion (ending the tax exemption for Social Security payments is almost enough to do this alone), and raising tax rates one percent for another $20 billion or so. That may not be an ideally fair and efficient formula. It's just one of many possible variations on the theme of getting America's appetites back under control.
The point is this: can anyone doubt that such an achievement would have prevented the crash? In other words, can anyone doubt the market's judgment that our inability to make a $60 billion-a-year "sacrifice" is sucking hundreds of billions a year from America's economic prospects? Those who fretted about the dangerously depressive effects of a piddling tax increase can now contemplate the depressive effects of a sudden trillion-dollar loss of wealth.
Instead, our "leaders" agree in principle to cut $23 billion from some fictional budget level, then bicker interminably about the details. Congress insists on declaring four-fifths of all spending sacrosanct, while President Reagan plays Horatio at the Bridge against a $12 billion (one percent of the budget) tax increase.
Although the gloomsayers have tended to emphasize the immensity of the economic challenge facing America, the challenge is really trivial -- which just makes our failure to meet it more appalling. Politicians live in terror of their elderly constituents. How many of those constituents, in retrospect, wouldn't gladly have given up a couple hundred dollars in Medicare benefits to have back the nest eggs they thought they had a week ago?
Of course America's prospects didn't really drop by a third in a week. The market was like Wile E. Coyote in the Roadrunner cartoons, who runs off the edge of a cliff and keeps going straight ahead, until he looks down and then plummets. Conservatives argue that the cause of the plunge is the coming end of the Reagan administration and the fear that a Democratic administration will tear down the magnificent edifice of prosperity he has created. The imminent end of Reaganism is, I think, a cause of the crash, which certainly symbolizes that end. But it's not Reagan's policies whose absence the market dreads. It's his ability to conjure up the Coyote Effect, the willing suspension of disbelief that you can live beyond your means indefinitely and never have to pay up.
The Democrats are not blameless. They make the rules of the entitlement blackmail game Republicans merely play. They shout loudest for ruinous protectionism. But this has been Reagan's era. He's the great leader who has led people into the dream world of lower taxes without lower government benefits, prosperity without the bother of savings and investment, consuming without producing.
The capital of that dream world has been Washington, D.C. Conservatives like to accuse liberals of a "Beltway mentality" -- a removal from the reality that lies outside the golden circle. But inside the Beltway is where the blinding mist of Reaganism has been the thickest. Conservatives actually thought they had abolished the Phillips Curve. That much-mocked concept, which holds there's a tradeoff between avoiding inflation and avoiding recession, also expresses the broader principle that economic policy choices cannot be pain-free. The Phillips Curve is about to boomerang upon us with a vengeance.
For years the doom-and-gloomers have had to endure the taunt: "What do you know that the stock market doesn't?" (Or, "If you're so smart, how come everyone else is getting rich?") Nevertheless, this is hardly an occasion for gloating. The only comfort to be derived from the crash is that it is more a reflection of economic troubles than a cause of them. Reagan's defenders are right: nothing fundamental has changed since last week. At least now we're awake.