Wall Street jolt fails to trigger hard decisions

Is one Wall Street shock enough? As the Reagan administration and Congress negotiate behind closed doors to reduce the budget deficit, there are indications that US government leaders and the American people have not yet fully awakened to the severity of the challenges facing the country.

The word from Capitol Hill so far is that the negotiators are having trouble achieving a deficit reduction of even $23 billion for fiscal '88 - the symbolic minimum thought needed to send a signal that Congress and the President are working together in a spirit of bipartisan cooperation. Many economists believe the ``signal'' must be even larger to carry weight in the still-volatile financial markets.

``I'll be disappointed if it's only $23 billion,'' says Alice Rivlin, former director of the Congressional Budget Office. ``This is an opportunity to do more - $40 billion to $50 billion.''

Dr. Rivlin, a Brookings Institution economist whose analyses command wide respect, warns that today's shrinking economic world calls for bold, concerted action. She draws an analogy to the impact of nuclear weapons.

``We realize the world is small when we have nuclear weapons,'' she says. ``But the economic forces today are very dangerous and are moving around the world rapidly. That will take a lot of economic cooperation.''

The American public, for its part, appears not to have been traumatized by the events of ``Black Monday.'' According to news reports, Americans in general feel isolated from developments on Wall Street and view the market gyrations as removed from their own problems.

Yet there is a heightened sense that the US economy needs attention. According to a national poll by the World Policy Institute to be released next week, the American voters' perception of ``national strength'' has shifted from military power to economic strength. Most Americans ranked economic problems as the greatest threat to the nation's future. They also said that improving the economy is the best way to boost American influence in the world.

Some economists say that the plunge in the financial markets on Oct. 19 was a relatively benign shock, a warning across the bow of the ship of state to come to grips with the fiscal and monetary problems endangering global stability. Alternatively, there could have been a sudden withdrawal of foreign money from the United States, a collapse of the dollar, defaults on third-world debts, or a recession. These all are still possible, financial and other experts warn.

While the dissimilarities between the present crisis and that in 1929 are being cited as cause for not panicking, prominent Washington figures who lived through the Great Depression are disquieted by what they see as a lack of determined action at the top.

``The similarities to 1929 make me very uneasy,'' says Clark Clifford, a lawyer who held high posts in several Democratic administrations. ``We have not felt the shock of Black Monday yet. In one week's time over $1 trillion was lost by the listed securities, and that is an enormous setback. It will take a while for the fallout to work itself to the surface, but we are in for a very, very difficult time.''

The persistent message to Americans is the growing interdependence of economies, a point driven home by the fact that the early-morning news from Hong Kong and Tokyo influences what happens in New York City. And, while the administration is pressing Japan and West Germany to stimulate consumption to boost American exports and bring down the trade deficit, there will continue to be resistance to such moves until the US puts its own house in order.

``Everyone in the world sees this completely absurd economic posture we have gotten ourselves into,'' says Mr. Clifford.

The solution lies in more than reducing the budget deficit, analysts say. It goes to the heart of the nature of the US economy and Americans' habits, marked by almost compulsive consumption, a reluctance to save, and the conspicuous greed that affects segments of the corporate and financial world. The fact that President Reagan urged Americans to go out and buy more after the market slump is viewed by economists as irresponsible.

``That was an incredible statement,'' says John Palmer of the Urban Institute. ``We've been on a consumption binge for the last five to six years and we've gone into debt to finance that consumption. Wall Street is a manifestation of the realization that the piper has to be paid.''

The need, Dr. Palmer says, is to place less stress on government and consumer spending and more on an expansion of business investment and labor productivity. ``Bringing the deficit down to reasonable levels will help stimulate savings,'' he says. ``Lower deficits plus lower interest rates will lead to more investment. That's the key.''

What Americans may not understand, experts say, is that the Federal Reserve Board is walking a tightrope because it has so little flexibility in using monetary policy to stimulate the economy. It cannot expand the money supply too much, an action that brings down interest rates, because there has to be enough differential in interest rates to attract foreign capital to the US to pay for the debts Americans are piling up. Any movement on US interest rates and monetary policy ripples throughout the world. ``We're on the knife's edge,'' says Palmer.

In the view of some analysts, it may take two or three market shocks to jolt the government and public. If the US market stabilizes over the next few weeks, this could create a feeling of false euphoria and relieve the pressure on the President to swallow his ideological beliefs and accept tax increases, they say.

In any case, the budget negotiators on Capitol Hill are expected to put off the hard choices until future years because reductions in entitlements for farmers, veterans, and other constituents are too hard to make in an election environment.

``They'll hope to reassure the markets without offending the constituencies,'' says Amitai Etzioni, a visiting professor at the Harvard Business School. ``If you see the surveys, people aren't panicking. Main Street America is saying this is Wall Street's problem.''

At its deepest level, the sociologist suggests, the dilemma is a moral one. Most Americans are preoccupied with pursuing individual wants to the neglect of collective, common purposes. The fundamental problem, Dr. Etzioni says, is a leadership vacuum.

``We need to tighten our belts, and that can be done through superinflation or through courageous leadership. But who will tell the people this? The President's pulpit has lost its power, even if he had the right message,'' Etzioni says.

To some, the budget negotiations on Capitol Hill are important less for the amount of deficit cut than for the psychological impact of seeing the President and Congress exercising leadership at a time of economic uncertainty.

``It's important to see that they can work together,'' says Brookings Institution economist Robert Reischauer. ``If they get only $23 billion but do it harmoniously and it lasts into future years, that's worth a lot.''

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