Friday the 13th: Triple Witching Hour for the Government
VICTOR A. CANTO AND ARTHUR B. LAFFER
Visions of translucent spirits, eerie hollow sounds, slippery slimy sensations, and musky fetid stenches have been enjoined in a journalistic witches' brew as news account after news account relates what happened to the U.S. stock market on Friday, October 13, 1987. The truth, unfortunately, is not so dramatic. But the events of that Friday do expose the culprits and the dastardly deed perpetrated.
Senate Majority Leader George Mitchell single-handedly cost working Americans 7 percent of their accumulated pension benefits and precipitated a market retreat that encircled the earth. If allowed to be carried through, his actions will also cost jobs--lots of jobs--in the months and years ahead and will, his protestations notwithstanding, lead to larger deficits.
On Friday, the thirteenth of October, the Senate killed the capital gains tax cut. The fact that it was Friday the 13th had nothing to do with the fall in the stock market. George Mitchell deserves full credit for that. The decline in the stock market was due to the fact that, in a forward-looking market, events alter investors' perceptions and thereby equity valuations. In our own analysis, we estimated that passage of the capital gains legislation would add between 400 to 500 points to the market. 1 We also estimated that approximately half of the gain was already incorporated in the market. Thus, if capital gains legislation did not materialize, the market would have to decline 200 to 250 points (Figure 11.1).
Financial markets recently have corroborated our view. Earlier during the week, when it became likely that Senator Mitchell, through procedural moves, could block the capital gains amendment, the markets started declining. The