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June 30, 2002
David Warsh, Proprietor


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The Ten-Year Toot

Bernie Ebbers; Martha Stewart and the Waksal brothers; Dennis Kozlowski; Gary Winnick; Kenneth Lay, Jeffrey Skilling and Andrew Fastow; Jack Welch and Suzy Wetlaufer — what a cast of characters!

With companies such as Tyco International, Global Crossing, ImClone Systems, WorldCom, Adelphia and Enron coming to grief, who can doubt that the sky is falling on global capitalism? Not even that bastion of respectability the Harvard Business Review is immune.

The view that the current scandals mark some sort of historic turning point is widespread.

“The scope and scale of the corporate transgressions of the late 1990s, now coming to light, exceed anything the US has witnessed since the years preceding the Great Depression,” writes David Wessel in the Wall Street Journal.

But the current mood is something other than depression.

It’s more like widespread disgust — exactly the kind of hangover that you’d expect after the ten-year toot that followed the end of the Cold War.

Even if policy-makers’ worst fears are realized — if a global crash of property values takes hold and delays the resumption of balanced growth for another year or so — it seems unlikely the nations of the world will find themselves enduring years of stagnation.

There’s no model on which this argument is based — just the conviction that we have learned many things about the business cycle since 1929.

It is important to keep events in historical perspective. The present malaise is a phase of a dramatic, worldwide turn to markets that began in the 1970s. That evolution, still mysterious, reversed a tendency to centralization that had been so pervasive and dependable as to be summed up for a century as “Wagner’s Law:” the proposition that an ever-larger share of income would be spent on public and state activities.

That turn towards markets was tested in the late ’80s — and proved out. The industrial economies of the West undertook a far-reaching restructuring and emerged far more competitive. The Soviet Union attempted a similar “perestroika,” but growth all but ground to a halt.

The decade ended in the United States with denunciations of greed unleashed by the asset boom — the savings and loan crisis, insider-trading scandals, the bankruptcy of the Drexel Burnham Lambert investment bank and the jailing of Michael Milken. The Gulf War came and went, amid nervousness about government deficits and recession.

But in fact the boom was just beginning. In Eastern Europe and the former Soviet Union, communism collapsed. Within a few years, the entire world was operating on a single economic standard for the first time in a century.

The ’90s saw robust growth resume, except in Japan. For the industrial nations of East Asia and the West, no longer was there an Enemy. Instead, the former command economies of China and Russia were trying to integrate as rapidly as possible into a world economy that now included such unexpectedly muscular competitors as India, Mexico and Brazil.

Under the circumstances, a taste for experimentation took hold. Almost anything seemed possible in an age when productivity grew nearly twice times as fast as most had expected. There were big bangs and shock therapies. New technologies blossomed overnight — the Internet in particular. Dividends disappeared. Stock options were embraced. Firms shed their pension obligations and retreated from management of the health care system.

Politically, too, there were excesses, especially in the United States. A spiral of overreaching was enabled by the sudden absence of a common foe. The Clintons audaciously attempted to partly nationalize the American health care system. The Republicans countered with their “Contract with America” and the impeachment fiasco.

When that collapsed, all that remained was the Chinese spy hysteria over We Ho Lee. For a few months in 1999, official Washington resembled a drunk at the end of a lengthy bender, emptying the dregs of the last few long-open bottles in the liquor cabinet. Then Clinton set out to bring peace to the Middle East. It was all part of the temper of the times.

With relative prices out of whack, temptations also increased to the class considered to be society’s guardians. Intelligence agencies, caught in the political crossfire, lowered their sights. Banking regulators, struggling with new realities, permitted the market for new issues to accelerate dangerously. Accounting firms turned to strategic consulting businesses to increase their profits. Newspaper and magazines, growing fat on high-tech advertising and dreaming of vast dot.com profits, relaxed editorial standards.

It’s in these late ’90s circumstances of Anything-Goes that the scandalous practices originated. Significantly, almost all the failures are either start-ups trying to make their way in new industries or old enterprises in danger of being eclipsed. There was nothing Solid or Old about Enron or Global Crossing. It’s been a long time since respectable was the first word that came to mind in connection with the high-rolling Harvard Business Review.

But to argue, as some do, that this shows that U.S. corporations are fundamentally corrupt is silly. Or that heavy-handed re-regulation the answer. Mainly what it shows is that the Cold War ended and it took ten years to find a new foe in Terrorism. It won’t be easy, but what we need now is to re-form the ethical and political center.

The first step is, of course, to send a bunch of CEOs and CFOs to jail. The next is write new regulations for the accounting profession and the securities industry without making matters worse.

A good place to start would be for President Bush to appoint a blue-ribbon bipartisan commission to quickly recommend a full slate of technical reforms. Such a commission headed, by Nicholas Brady, investigated the October 1987 break and strengthened the financial structure in time for the ’90s boom.

The monetary authorities must reassure the markets that they will maintain a steady hand. The 76-year-old Alan Greenspan’s fourth term as chairman expires in January 2004. He may not choose to serve it out.

The real action will come with elections, starting with the Congressional mid-terms in the fall. Only a relative handful of seats are truly up for grabs. But it is easy to imagine that the Democrats will recapture control of the House of Representatives and retain the Senate. In that case, new leadership will emerge.

Then the real work of repairing America’s frayed social contract can commence.

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