Time for more taxes

Well, where to begin? The problem being to find the news today, good or bad, that will be the same tomorrow. So unpredictable are the games being played in the Kremlin and on Wall Street that even the columnists and editorial writers on the daily papers wake up to read their shrewd explanations of yesterday's big move, only to find it's gone into reverse overnight.

When, as a blushing 15-year-old, I was being taught to dance in preparation for the school's Christmas soirée, the only time that tactile with a girl would be approved by our rather frightening headmaster, I remember being most embarrassed by the polka. It was ridiculous! Dancing was supposed to be carefree and continuous, but here in the form we learned, you had to take one step forward, two steps backwards, then two steps forward and one step backwards. It was invented, my history master told me, by the Poles – a hesitant race. Later I learned it's a Czech word.

Well, Mr Gorbachev who wants a summit, then he doesn't want a summit, then he does, seems, as I talk, to be dancing the polka. Wall Street is doing a vertical polka and one morning's headline cheers, 'Market Rallies'. Next day deplores, 'Market Slumps Again'. By the time listeners in India and Australia hear these wise words, we'll either be in the pink or in the red. Only one comment from the government and from Wall Street can be depended upon – whenever the market rallies for even a day or two, we're assured that the market correction is over, has been made.

I talked last time about some of the similarities and differences between October 1987 and October 1929. We won't pursue that morbid exercise any further, but I noticed that when, six months after the 1929 Wall Street Crash, the stock market recovered more than 50 per cent of its value, President Hoover and all the leading bankers of the day breathed a sigh and announced that the long overdue adjustment had been made. 'Adjustment' was the word then. After the slumps and recessions of the early Seventies and the early Eighties, the phrase was 'a healthy shake-out.' What we call a slump now is or afterwards, 'a correction'.

The other day I called a man who's been in finance – in the most conservative and responsible way, I ought to add – for 50 years. I called him and said, 'How healthy is the shake-out?' He said, 'I don't know anything any more, but if you're off to the links, don't buy any golf balls, they'll be down to ten cents tomorrow.' In a serious moment, he confessed to knowing one thing, 'This is no longer an investors' market. It's a speculators' market and somehow, somebody has to correct it.'

I ought to say now that I appreciate there may be many people who'll be surprised that we should talk about Wall Street two weeks in a row. Let me say that I've been surprised this week to see one or two English and European newspapers in which the news of the stock markets has already been relegated to the inside pages as something of interest only to those monied men who read what are called the financial pages.

Not so in the pages of New York, Bonn and Tokyo who, together, in the months to come, could hold the fate of all of us in their hands, and by us, I mean the ordinary householder, farmer, shopkeeper, nurse, manufacturer, secretary, waiter, bricklayer, everybody who is, at the moment, as we say, gainfully employed.

Already, in New York city, Mayor Koch, preparing for a winter of discontent, has frozen all hiring of city workers from policemen to secretaries, frozen wages, frozen pensions and he's only the first of many political leaders across the nation who have felt compelled to translate into human terms the sudden financial losses that have hit the states and the cities.

Sadists will take some satisfaction from the news that a famous brokerage house here has sacked 150 of its 2,000 employees and the average income of each of the people fired was between 80 and 120,000 dollars.

Let me say, simply, that the general sense in Washington and in the state capitals is that we are already launched on hard times and it's made the stock market consequences far more important in the short run of a year or two than any Soviet-American summit. All right! In the past ten days or so, I've watched, listened to, at least a score of discussions about the stock market and its effect on the American economy, world trade, Western prosperity. Not journalists spouting their opinions, but men at the centre of the crisis.

Last Sunday, for instance, there came together the president's chief economic adviser, the chairman of the New York Stock Exchange, the presidents of two leading investment houses, a former secretary of the treasury, the chairman of the Senate Finance Committee and the chairman of the House Appropriations Committee and that last pair, of two men who can have a decisive say in any legislation that affects the budget and the economy. Also, the secretary of state, Mr Shultz.

None of these experts was ready to give a single cause of the sickness on Wall Street though they were reluctantly agreed that human beings were as much to blame as computers. In particular, a group we call 'the glory boys' – young investment bankers who jumped out of business school into starting salaries of 80, 100,000 dollars a year who have little sense of the traditions of their profession, who are interested wholly in the... the quick merger, in current shareholder values, in 'the deal'.

The people around the table agreed that the market had been dangerously over-inflated for some time and that on the Tokyo exchange especially the relation between true value and market value was preposterous. One leading director of a brokerage house said that one thing we've learned is that a stock certificate whose value fluctuates with the consensus of the people in the market now doesn't have even that wobbly value. Now its value is decided by what the Tokyo consensus is.

And this led Secretary of State Shultz to comment – and remember that for most of his life before he was secretary of state, he'd been an economics professor, an industrial economist, secretary of labour, then secretary of the treasury – Mr Shultz said we must learn and act on the knowledge that there is no longer a New York market and a London market and a Tokyo market and a Hong Kong market, there is a world market.

Certainly, most people agreed that last Monday's 150-point drop in the Wall Street market was a reaction to the drop, in the middle of our night, in the Hong Kong market. So far, nobody has told us how this reflex can be arrested. How can one market stop reacting to another market's reaction?

Well, now, when all the doctors have done diagnosing the sickness and saying they expected it all along, we've had to come this week to deciding on the operation that will cure it and who is to perform the operation. Well, financiers and politicians, at home and abroad, members of both parties in Congress, economists, the lot, have had no doubt about the root disease – the American budget deficit – and who the head surgeon is to be.

He's Ronald Reagan, who finally had to give up bawling over the noise of his helicopter that all was well or the correction had been made or that he would never raise taxes. This week the president sat down around the table with his own men and with the leaders of the opposition. He finally conceded that he was ready to discuss any cure, invade any issue – except social security.

Now trying to cut the national deficit and exempt any one huge outlay presents an obvious problem at the start. The budget deficit is now $148 billion. Social security has a current annual outlay of 214 billions. In short, between social security and defence, together they represent exactly one half of the national budget. Social security 21 per cent, defence 29 per cent.

By the way, under President Kennedy, defence gobbled up 49 per cent of the budget. Odd that nobody at the time accused him of being a war-monger.

Well, if the problem were as simple as this choice implies – cut social security or defence – then the battle would be on. Defence has already been cut from a year ago and a majority in both parties is not disposed to trim it by more than a few billions. The question is how to increase government revenues and here it comes down to whether raising taxes is the answer.

This year's Nobel Prizewinner for Economics says, 'We must put an end to this nonsense of saying taxes will be raised over my dead body' – an old, brave quotation from Ronald Reagan – and even the recently retired chairman of the Federal Reserve Board, in financial circles around the world the almost sainted, Paul Volcker, says the same thing.

But there are equally knowledgeable doctors who say raising taxes would aggravate the sickness rather than cure it. It was done after the '29 crash, with by 1932 a doubling of the income tax rate and the result was disastrously to restrict private spending and precipitate a rapid deflation of prices and a depression.

This time, I don't think anyone is talking about income tax. The pressing proposals are for consumption taxes – petrol, more and stiffer excise taxes. Whatever president and the Congress agree to do together, it's pretty generally agreed that if the taxes were too little or the budget was otherwise cut only slightly, Washington would be seen to be doing too little, too late.

If the taxes were too high, that would cripple consumer spending and trigger a serious recession. Whatever the solution is to be, there is a growing, almost a yearning, in Washington, Bonn, London, for strong leadership now, which can come only from the President of the United States.

This transcript was typed from a recording of the original BBC broadcast (© BBC) and not copied from an original script. Because of the risk of mishearing, the BBC cannot vouch for its complete accuracy.

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