The dramatic plunge in the Dow Jones Industrial Average late last October led commentators to worry that U.S. stocks were headed for the same fate as Asian markets. Once Wall Street bounced back, many became convinced that noninflationary economic expansion and heady stock market appreciation would continue into the foreseeable future. I would like to suggest some alternative lessons from the wild rides the world markets have taken in recent months.
1. No market can continue to grow indefinitely at the rates displayed domestically over the last three years. Between February 1995 and October 1997, the Dow Jones doubled. This translates into a growth three to four times long-term historic averages. Over the long run, the value of the market must bear some relationship to the capacity of plants and workers to produce and consume goods and services.
2. In the short term, markets fluctuate far more than changes in the "fundamentals" merit. When the Dow fell 554 points in October, some analysts suggested that it was merely factoring in new information about declining export possibilities in Asia. Yet the nations most immediately affected by the crisis represented about 4 percent of our export markets and a substantially smaller part of our gross national product. The more plausible explanation is the "herd" mentality. Mutual fund managers worried about what their peers were going to do. Betting that others would sell, they didn't want to be left behind. They sold, producing a self-sustaining decline. Paradoxically, this decline would have been far worse if ordinary investors had decided to follow the example of the "pros" and sell their stocks.
3. What's good for Wall Street isn't necessarily good for most of us. The business press tells us that the stock market has become democratized. Two out of five Americans now own at least some stock, but most of the new owners hold very small amounts. Stocks have become slightly democratized, but wealth hasn't. In 1992, the last year for which complete data are available, 1 percent of families controlled 39 percent of corporate stock. Today's figure is probably only slightly better.
4. Jobs and wages are growing more slowly than the stock market. Economic historians chart ten major economic expansions in the United States since World W II. Doug Henwood, author of the superb new study of stock markets, Wall Street, recently pointed out that, by almost every one of the measures -- including rate of job growth, earnings, gross domestic product growth, productivity increases, investments, and even profits -- the current upward cycle "stacks up as mediocre to poor." Seven years into the current boom, real wages remain more than 5 percent below their level in 1989, near the peek of the last business cycle. Federal Reserve Chair Alan Greenspan continues to anticipate a surge in wages occasioned by the low rate of unemployment, but workers today still feel too insecure to make such demands.
5. There is a lot of exuberance and irrationality in the markets. Greenspan is right about that. But the irrationality lies in the imbalance of profits and wages rather than in the threat of wage-based inflation. Whatever one thinks of economic extremes from a moral point of view, they endanger modern market economies. The wealthy often consume a smaller percentage of their income. When workers' wages start to lag way behind, as in the 1920s, …