Posted on 07/24/2002 7:44:25 AM PDT by RCW2001
GERALD F. SEIB, and
Wednesday, July 24, 2002
©2002 Associated Press
URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2002/07/24/financial1034EDT0072.DTL
(07-24) 07:34 PDT (AP) --
WASHINGTON -- High-profile companies go bust. Business leaders fall into disrepute. The stock market crumbles. Finally, the political system convulses, rewriting the rules the corporate world must follow.
All that happened to the U.S. in the early 1930s, when a shattered economy, a devastated stock market and revulsion toward the business class produced sweeping changes in the way business and finance were conducted.
Now America faces the possibility of a similar wave of reform, if the economy sours and the political winds shift. Today's economic woes hardly rival those of the 1930s, and Congress's rush to clamp down on corporate misconduct is mild compared with the legislative earthquake that shook the business world then. But the country is beginning to reappraise the celebration of free-market forces that marked the 1990s. And early political tremors of public opinion hint at greater fallout to come.
A new Wall Street Journal/NBC News poll shows that, for the first time since George W. Bush took office, a plurality of Americans -- 42 percent -- believe the country is headed in the wrong direction. Fully 70 percent don't trust the word of brokers and corporations. One-third say they have "hardly any confidence" in big-company executives -- the highest proportion in more than three decades. Confidence in Congress is plummeting, too. Just 34 percent approve of lawmakers' performance, down from 54 percent in January.
Political momentum to restrain government regulation is waning. As they await the government's response to a wave of business scandals, six in 10 Americans say they are worried regulators won't go far enough.
AFL-CIO President John Sweeney calls this the best chance in years "to fundamentally change the way corporate America works." And free-market apostles, ascendant since Ronald Reagan's presidency, fear that even a Republican White House may join a populist stampede. If that happens, "they're going to have a depression on their hands," warns author George Gilder, whose 1981 book, "Wealth and Poverty," is still popular with many conservatives. "If Bush becomes part of the echo chamber, he's going to destroy his party."
The 2002 market meltdown could turn into a historic turning point in American politics and regulation if two significant changes occur.
First, the current crisis of confidence in business and markets would have to turn into a broader economic decline. When Franklin Roosevelt embarked on the New Deal, one in four Americans was out of work, four times today's unemployment rate. The spread of stock ownership means Main Street is feeling Wall Street's pain, but so far, that pain has produced public anger -- not desperation.
Second, the economic shock would have to realign the nation's even balance of political power to give politicians the clear mandate for change that President Roosevelt and his Democratic Party felt. That hasn't happened yet, the new poll shows. Mr. Bush continues to enjoy a robust 67 percent approval rating, and his party is still holding its own in the battle for control of Congress in the November elections. Some 36 percent of Americans say they plan to vote Democrat for the House, while 34 percent plan to vote Republican. That is only a slight change since January, favoring the Democrats.
But sweeping political change doesn't come overnight, as the 1920s and 1930s show. The country knew it was in deep trouble after the stock market crashed in 1929. The Democratic Party gained 53 seats in the House elections in 1930, but Republicans narrowly retained control of the chamber. The GOP also maintained a one-seat edge in the Senate, while Republican President Herbert Hoover looked ahead to the last two years of his White House term.
The political tidal wave didn't hit until 1932, three years after the start of the economic shock. Republicans lost 101 more seats in the House, which as a result, tilted toward the Democrats by a 313-117 margin. The GOP also lost 12 more Senate seats and became a distinct minority there, too. FDR completed the Democratic sweep with his 1932 landslide.
That new political alignment produced, in rapid order, the Securities and Exchange Commission, the Glass-Steagall Act separating the banking and investment businesses, the Utility Holding Company Act restricting the centralization of utility control, and reform of the Federal Reserve. It was the most sweeping change ever in the way America does business, and it created the regulatory framework that still governs business today.
It's that framework that lawmakers are now adjusting in the accounting-reform bill before Congress. "Our crisis isn't of the same dimension" as in the 1930s, says Sen. Jon Corzine, a former co-chairman of Goldman Sachs. But the accounting-reform bill likely to pass Congress next month is "probably as important a piece of legislation for America and the regulatory structure as any since then," adds the New Jersey Democrat. It plugs what he considers the most significant hole left in the 1930s legislation by establishing clear standards and oversight for the accounting industry.
Along with tougher enforcement of existing laws, that step may satisfy for now the public's desire for action. By a 63 percent-33 percent margin, Americans say the president and Congress should focus on prosecuting corporate wrongdoers rather than passing new laws.
But lawmakers may not stop there. Next on the agenda for debate: overhauling pension laws to improve protections for workers. Falling down the priority list, meanwhile, are earlier White House priorities such as partial privatization of Social Security, for which support has fallen along with the sliding Dow Jones Industrial Average.
"We're entering the sort of adjustment in the business-political relationship that comes with a major market downturn," says Kevin Phillips, a scholar of that relationship and author of a new book on the history of American wealth. Whether that adjustment turns into wholesale re-engineering remains an open question.
The first test comes in November, when control of Congress will be decided. Democrats hope to hold their 50-49 edge in the Senate and take control of the House from Republicans by gaining six seats there. If the Democrats succeed, they will be in position to challenge Mr. Bush for control of the economic agenda and set the terms of debate for the 2004 presidential contest.
A Democratic takeover would produce a dramatically different approach, in tone and substance, to the relationship between government and business. The new chairman of the House Energy and Commerce Committee would likely be Rep. John Dingell of Michigan, who supports a national health-insurance program. He is currently campaigning as a staunch foe of corporate misbehavior. The new chairman of the House Financial Services Committee would be Rep. Barney Frank of Massachusetts, who backs reregulation of the cable-television industry. The new chairman of the House Ways and Means Committee would be Rep. Charles Rangel of New York, who has proposed amending the U.S. Constitution to guarantee every American "a right to a home."
For the first time since the early days of Bill Clinton's presidency, activists on the political left say they are on the verge of converting public discontent into vigorous support for activist government. "The disgrace of corporate capitalism is an opportunity to dethrone the role of the market generally," Robert Kuttner writes in the current issue of the liberal American Prospect magazine.
Conservatives who rose to political and intellectual dominance when Mr. Reagan replaced Jimmy Carter say that is precisely the wrong prescription. What the U.S. economy needs, insists Mr. Gilder, is less regulation rather than more, especially in the troubled telecommunications sector. But eroding confidence in American business has, at least temporarily, made that a losing argument.
As a result, says independent Rep. Bernie Sanders of Vermont, the only Democratic Socialist in Congress, the political equation on issues such as trade expansion, the environment and health care has been altered. "People's faith in the ruling class in this country has been shattered," he declares.
Or at least shaken. The Journal/NBC poll shows that 71 percent of Americans believe that profit-hungry businesses cut corners on service and overcharge customers. Amid the economic boom two years ago, a plurality said businesses treat consumers fairly. Six in 10 call corporate wrongdoing "a widespread problem" in "a system that is failing." By a 49 percent-40 percent margin, Americans say the stock market is "no longer a fair and open way to invest one's money."
That unease runs deep enough to extend to Republican lawmakers who themselves have come from the business world. "There's no question that a (business) culture developed, probably over a 20-year period, that was very unhealthy," says GOP Sen. Chuck Hagel of Nebraska, a former telecommunications entrepreneur. "That culture was, `If it's not illegal, it's probably OK.' "
Even so, Mr. Hagel, a potential GOP presidential candidate in 2008, thinks the combination of congressional reform of corporate governance and self-regulation by financial markets can restore public confidence before the fallout becomes too great. "The American people will be conditioned for a generation from what we've learned," he predicts -- but not inclined to turn the economy or politics upside down.
Some believe the proliferation of stock ownership that has spread the pain of the current downturn could also act as a buffer against overreaction to revelations of business misconduct. "In earlier periods of American history, it would have been a much bigger deal," notes Walter Dean Burnham, a scholar of political realignments at the University of Texas. Without far more provocation, the U.S. middle class today is literally too invested in the economic system to support its upheaval.
Mr. Phillips notes an additional "X factor" that didn't exist in President Hoover's day: the power of the Fed. Before Depression-era reforms, the Federal Reserve had only limited ability to modulate economic and market swings -- and, indirectly, the political reaction to them. Now, he observes, the Fed has the power to smooth out bumps by making interest-rate cuts. The Fed hasn't cut rates in months, but it still has a bit more maneuvering room to do so if the stock market's slide pulls the economy down with it.
The current market crisis could turn into a much broader economic and political problem, says Sen. Corzine, if the "reverse wealth effect" of declining market investments begins to seriously contract consumer spending. "I don't think we're over the edge," he adds, "but we're on the precipice."
Provisions in bills expected to become law:
* Create government board to oversee corporate audits, discipline auditors
* Limit auditors' consulting work
* Require CEOs, CFOs to certify accuracy of financial reports
* Force CEOs to give up gains from stock options, bonuses based on false reporting
* Fine and imprison executives who lie to SEC
* Make easier criminal prosecution of executives who destroy evidence or defraud investors, and lengthen maximum jail terms
* Require executives to disclose stock sales within two days. Ban personal loans to top executives of public companies
* Require shareholder approval of option plans
* Boost SEC budget 66 percent, to $776 million for fiscal 2003
* Require that they have majority of independent directors
* Make mandatory that audit committee approves auditors, auditor-consulting contracts, 401(k) plans
* Allow workers to diversify 401(k) plans away from company stock holdings after being at a firm for three years
* Require SEC to make rules on analyst conflicts of interest
Source: WSJ research
©2002 Associated Press
My approach is to restore free markets and wealth production internal to our borders.
Your approach leaves the more oppressive forms of domestic intervention intact.
Incorrect analysis.
Price remains stable with the real estate market in general as government land sales must compete with private land sales. In fact, release of large tracts of government land into the market may actually depress local, private real estate values under certain conditions.
I don't see how it could. There would be major rioting and violence if millions of people living off government programs see their welfare checks or food stamps cut back. I don't see how taxpayers in a depression could continue to pay for these many programs and the so-called poor in this country feel they are entitled to the good life no matter what.
Maybe not now after globalism but before there were third world countries where people lived in poverty and the US and some others where people lived much better.
LOL! Taxes have a significant effect where money flows.
Money flees away from high taxation.
To outright deny that is absolutely absurd.
Raising tariffs and lowering other forms of internal taxation will increase the propensitiy for money to be retained and invested domesticly, where it is "cherished". Furthermore, lower internal tax rates would also attract more foreign investment into our domestic economy.
When I said that laws can't control money, I mean that you can pass all the tariffs you want, but money will flow right around them into other countries (without those barriers), into offshore "duty free" areas, into smuggling, and, most likely, into internet/electronic forms which can evade taxation. Of course laws INFLUENCE where money goes, and taxes do that all the time. But a tariff IS a tax. A bad tax, and a politically-oriented tax.
That is the main reason we are rich and they are poor. Name me one poor country that has, substantially, a free market and open, genuine two-party (or more) democracy, and the rule of law. You can't, because there aren't any. However, you can find plenty of rich countries that are fairly repressive politically but still respect private property rights (Korea, Taiwan, for ex.)
All they acomplish is not letting individuals and businesses get a superior product at a better price.
I can't figure out why you'd interject some idiocy about "export taxes" into the discussion.
As you say, they're prohibited by our Constitution and don't even merit mention.
I disagree that tariff's are met with reciprocity, especially revenue tariffs (which are an indiscriminate, uniform, flat rate on ALL imports).
But if foreign nations choose to "retaliate", so what? They're sovereign nations with every right to establish their own tax policies as they see fit in their own self-interests and that of their citizenry.
In fact, I think Commodore Matthew Perry should be vilified for steaming into Tokyo Bay and demanding that Japan open their market to trade at gunpoint. That's the behavior of a gangster, mobster, organized crime, the Mafia. No nation should be forced to trade if they don't want to.
Frankly, I'm glad our Constitution prohibits taxation of exports. Our merchants should be free to trade abroad if they so please. And I have no problems if our government sends out the Navy to protect peaceful merchants from the thievery of pirates on the high seas, etc. But that's where our Constitutional jurisdiction ends, merchants should be on their own when dealing within the sovereign jurisdiction of foreign nations.
We have our set of rules, they have theirs. No problemo.
And back then, people trusted their elected officials to "do the right thing" for the country ...
Nope, tariffs always were, and always will be, bad. Hamilton was right on a great many things, but not these.
I'm not saying every New Deal project was worthless, nor done poorly---many were exemplary. Dayton still has WPA sidewalks downtown, for example. BUT, as you say, let's regress: the point of the thread and the argument was that the New Deal prolonged the Great Depression in numerous ways. 1) It took private capital out of circulation. Although public projects were built, these ALWAYS came in lieu of other, private spending likely on other things. What things? We don't know---but that is the beauty of the market. Just for the hell of it, say that the money that went to Hoover and other Dams went to better air transportation, and that as a result something of a "boom" in air travel started in the late 1930s as opposed to early 1960s due to lower prices. Imagine, then, that due to that "boom," our Army Air Corps had more modern and efficient planes in 1941, and thus, let's say, WW II ends a couple of months sooner. All hypothesis, but the single fact of free market economics is that when the government is spending the money, the people aren't and a great deal gets wasted in the process.
Second, the argument was that the government via the Fed's massive deflation, even before 1929, and the high taxation, combined with the evil effects of Hawley Smoot (some economists think 5% of GNP after accounting for deflation), absolutely crushed any hope of recovery.
Third, acts such as Glass Steagall turned out to be both WRONG-HEADED and passed based on the WRONG lessons. The "securities affiliates" in fact strengthened the banking system by introducing diversity---another new study just out proves this yet again, as if there was any doubt. The min-wage law likely stopped cold a consistedn drop in unemployment prior to that law taking effect.
So I won't argue with you that some Hoover/New Deal programs didn't have temporary, or even long lasting benefits of some type---but at what cost?
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