Black Monday
On October 14, 1987, the Dow Jones average fell by 95 points. It fell 57 points the next day, and 108 points, a new record, the following day. For the week of October 12, Newsweek reported, all shares traded on U.S. exchanges dropped by a "staggering" $490 billion. "Is the Party Almost Over?" that magazine asked.[50]
By the time that issue hit the newsstands, the answer seemed obvious. On Monday, October 19, the Dow fell by 508 points, losing in one day 22.6 percent of its value. To give that number perspective, compare it to "Black Tuesday," the market break of October 29, 1929, which to many minds signaled the Great Depression; on Black Tuesday, the Dow fell by only 11.7 percent.[51]
The New York exchange then stabilized or, rather, gyrated wildly from moment to moment only to end up above the nadir of Black Monday. That good news beat the alternative, but hardly would erase fears of a
further rerun of 1929 and what followed. As The Economist pointed out, the markets recovered in early 1930 as well—"do not be too reassured by a bounce back over the next few weeks."[52]
The panic was worldwide. Tokyo and London also endured record sell-offs. The market fall's possible causes, as is always the case, were far too numerous for anybody to be sure of their relative weights. They ranged from new technology—computer-generated program trading—to old-fashioned market psychology. Some blamed Dan Rostenkowski because he had sponsored a bill to limit corporate takeover actions. Some blamed Treasury Secretary Baker for criticizing the West Germans for not lowering their own interest rates enough. The most obvious explanation for the size of the slump, though not for its one-day occurrence, was that stocks were overpriced. "Two weeks ago," The Economist explained, "investors were buying shares at dividend yields averaging only 3% in London, 2.6% in New York, and 0.5% in Tokyo…. The gap between cost and yield was double its normal size in the three previous decades."[53] Unless interest rates came down, stock prices would have to, eventually.
Amid all proposed causes, one had prominence: the federal budget deficit. The logic was:
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Thus The Economist editorialized that
Either the budget deficit is slashed, or interest rates will have to rise a lot; the second path leads to recession, the first could just avoid it…. Some people have long argued that the White House and Congress would not tackle the deficit until they were faced with a crisis. This week the markets have been shrieking that crisis-time has arrived.[55]
Newsweek added that "to avoid another disaster, the Reagan administration must show progress toward curing its budget deficits."[56] The calls
for deficit reduction were very loud.[57] Robert Samuelson pointed out that "blaming the U.S. budget deficit for all the world's economic problems is simplistic." Yet "blaming the stockmarket crash on the budget deficit," he added, "makes the crisis understandable and manageable." It made choices, although unpleasant, obvious. He thus identified the dynamic that directed more attention to the deficits than might be wise.[58]
Donald Regan had been booted out as Chief of Staff due to the Iran-Contra mess. He was replaced by Howard Baker, who now joined with Treasury Secretary Jim Baker in advising the president to agree to negotiate a deficit-reduction package with congressional leaders. Ronald Reagan was dragged there, metaphorically, kicking and screaming, continually expressing doubt of the wisdom of any new taxes. The president was reviled for not taking the crash seriously enough; only a fool, even an inattentive fool, could fail to see the signs of imminent disaster. (Presumably, the doomsayers are still looking.) His Republican allies divided into two groups: those who did not want any new taxes (the Kemp faction) and those who would take new taxes as part of a really big deficit-reduction package (the Dole faction).[59] Democrats, too, expressed skepticism. "You've got boxers that have been throwing punches at each other for ten rounds," Leon Panetta commented, "and now you expect them to get together?"[60] Amid calls for much bigger deficit cuts than the $23 billion promised by the revised Gramm-Rudman, Tom Foley, chairman of the negotiations, worried that "the best is the enemy of the good"; $23 billion would be hard enough. The crash, after all, did not prove to any one side that it had been wrong. Rather, it showed that the other side's intransigence was just as stupid and dangerous as charged. The crash meant the other guy should give in.
After nearly four weeks of negotiations, the participants announced their agreement on November 23—promptly derided as, among other things, a "budget mouse"[61] to be greeted with a "chorus of Bronx cheers."[62] The "summit agreement between the president and the joint leadership of Congress" promised $30.2 billion in deficit reduction in FY88 and $45.85 billion in FY89, mainly as a result of the first installment. The FY88 figures included $11 billion in new revenues, $5 billion in defense cuts, $6.6 billion in domestic cuts, and $7.6 billion in other categories, mostly asset sales and lower debt service. It allowed repeal of the GRH sequester, which began on November 20.
The summit agreement kept the squeeze on both defense and domestic spending but avoided the more severe Gramm-Rudman cuts. Its "gimmickry," through asset sales, for example, was widely derided. The summit was not, however, a budget solution; it was a truce, and on those terms it may have been a success.
The 1987 summit provided targets for discretionary domestic, defense,
and international affairs spending for both FY88 and FY89. Going either above or below those numbers would violate the agreement. It was also assumed that compliance with the package would be shown by wrapping everything together in two big boxes, a CR and a reconciliation, at the end of the 1987 session. The appropriations committees adopted new procedures, redoing their 302(b)s so the House and Senate plans matched, and provided far more information to OMB than was their previous custom, attempting to document compliance with the terms of the agreement. The FY89 targets were enacted in the reconciliation bill, thereby settling the most contentious issue of the FY89 budget resolution process before it ever began.
There would, of course, be plenty of problems. The discretionary targets were too low to accommodate popular increases that the Reagan administration requested (for science research, space, and the war on drugs) without cutting programs Congress wished to protect. Congress resorted to some gimmicks, reclassifying some discretionary accounts as mandatory to make more room for what was left. As summer 1988 began, it was not clear whether the administration would go along. Yet appropriations bills were moving quickly; talk about the budget seemed to have died down; and the media was even consciously deemphasizing the issue. At the beginning of 1988, the New York Times chose to pay less attention to the budget.[63]
Was the budget issue gone? No, it still constrained all other issues, and what Lawrence Hass called "The Deficit Culture" was deeply entrenched in Washington. But it was an election year; Ronald Reagan would be gone at its end. The battle could be resumed when there were new players. The presumptive nominees for president—Vice President Bush and Massachusetts Governor Dukakis—agreed that deficits should be reduced. Both were vague about how they would do so. Dukakis's main disagreement with Jackson appeared to be over not whether tax increases were necessary but whether the party platform should say so out loud. Rejecting all tax increases except user fees, desiring at least to maintain the current level of defense spending, and doing a bit more on social welfare, Bush was hardly a model of consistency. Why is the deficit too hard for the politicians?