Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/011392/0113200.000

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                vä                                                        ╚BUSINESS, Page 34

COVER STORIES

Why We're So Gloomy



The longest recession since the 1930s may pass by summer, but
it will take years to rid the economy of debt and rebuild America

By JOHN GREENWALD -- With reporting by William McWhirter/Detroit,
Jane Van Tassel/New York and Richard Woodbury/Houston


    "I haven't really been able to sort out exactly why there
has been this degree of pessimism."

    -- George Bush, Dec. 26, 1991


    Well, why are Americans so gloomy, fearful and even
panicked about the current economic slump?

    At first glance the numbers don't seem so bad. The stock
market went on a record-breaking rampage last month, finished
1991 at an all-time high, and kept setting new highs in the
opening sessions of 1992. Inflation is at the lowest level in
five years, and home mortgages are available at interest rates
not seen since 1974. They may fall even further, thanks to the
Federal Reserve's dramatic cut in the discount rate last month
to a 27-year low. The official unemployment rate is nowhere
near as severe as it was at the depth of the 1981-82 recession,
and the contraction in the gross national product (so far 1.4%)
has been far less sharp. "Ten years ago we would have thought
this was paradise, and now we're whining about it," says David
Wyss, chief economist for the consulting firm DRI/McGraw Hill.

    "Whining" hardly captures the extent of the gloom
Americans feel as the current downturn enters its 18th month.
The slump is the longest, if not the deepest, since the Great
Depression. Traumatized by layoffs that have cost more than 1.2
million jobs during the slump, U.S. consumers have fallen into
their deepest funk in years. "Never in my adult life have I
heard more deep-seated feelings of concern," says Howard Allen,
retired chairman of Southern California Edison. "Many, many
business leaders share this lack of confidence and recognize
that we are in real economic trouble." Says University of
Michigan economist Paul McCracken: "This is more than just a
recession in the conventional sense. What has happened has put
the fear of God into people."

    In one of history's most painful paradoxes, U.S. consumers
seem suddenly disillusioned with the American Dream of rising
prosperity even as capitalism and democracy have consigned the
Soviet Union to history's trash heap. "I'm worried if my kids
can earn a decent living and buy a house," says Tony Lentini,
vice president of public affairs for Mitchell Energy in Houston.
"I wonder if this will be the first generation that didn't do
better than their parents. There's a genuine feeling that the
country has gotten way off track, and neither political party
has any answers. Americans don't see any solutions."

    Americans are so uneasy because they feel economic turmoil
on two levels, one relatively superficial and the other much
deeper. The surface layer is the most immediately painful one,
a garden-variety recession of the sort that comes along every
few years with the ups and downs of the business cycle. This one
has brought the familiar pattern of layoffs and weak profits.

    The deeper tremors emanate from the kind of change that
occurs only once every few decades. America is going through a
historic transition from the heedless borrow-and-spend society
of the 1980s to one that stresses savings and investment. In the
short run, this helped trigger the cyclical recession, which is
likely to run its course in the next few months. But when it's
over, America will not simply go back to business as usual.

    The underlying change in the way American consumers and
business leaders think about saving and spending will make the
recovery one of the slowest in history and the 1990s a decade
of lowered expectations. Many economists agree that the U.S.
will face at least several years of very modest growth, probably
in the 2% to 3% range, as consumers and companies work off the
vast debt they assumed in the 1980s. But there is much to be
gained. Increased investment and long-term thinking, if it
endures, could help rebuild the competitiveness of American
industry and bring back the kind of prosperity not seen since
the 1960s.

    The slump has galvanized Democratic hopes of regaining the
White House this year and has confronted Bush with a tough set
of choices. Mindful that the economy has expanded an average of
just 0.3% annually since he took office, the worst performance
under any postwar President, Bush would dearly love to ignite
growth through tax cuts or other incentives to bolster his
chances in No vember. Yet at the same time he fears worsening a
budget deficit that is expected to exceed $350 billion this
year.

    Nearly paralyzed by the dilemma, Bush departed last week
on a nakedly political tour of the Pacific Rim to beseech Japan
and other countries to buy more U.S. products. He left top
aides feverishly at work on the much ballyhooed growth package
that he plans to present in his Jan. 28 State of the Union
message.

    The economy is by far Bush's weakest spot. In a TIME/CNN
poll conducted Jan. 2, only 24% of those surveyed think the
President is doing a good job handling the economy, which is up
from a nadir of 18% in late November but still lopsided.
According to 84% of those polled, the recession is still going
on in the area where they live. A ray of hope has emerged in the
past month, though, possibly tied to interest-rate cuts and the
stock-market rally. Those who think the economy will improve in
the next 12 months have grown to 36% of respondents, up from 26%
last November. Even so, 36% think the economy will be
unchanged, and 25% say it will get worse.

    The conditions that led to today's transition economy go
back even further than the Roaring '80s. Americans have
suffered a long-term stagnation of their earnings. The median
income of U.S. families has virtually stood still since 1973,
rising from $24,345 in inflation-adjusted dollars to $25,830
last year. That marks an annual gain of just 0.3% a year. From
1959 to 1973, by contrast, incomes grew a robust 2.7% a year.

    The deterioration took place in several stages that
provoked surprisingly little protest from most Americans.
Notably, the rise of the two-income family tended to obscure the
fact that individual workers were falling behind. The oil shocks
of the 1970s led to double-digit inflation and slow economic
growth, which eroded incomes in a process dubbed stagflation.
Then buyouts and corporate downsizing in the 1980s created a
huge exodus of workers from high-paying manufacturing jobs to
less lucrative service-sector work. While the U.S. created some
18 million new jobs in the 1980s, many were in such industries
as banking and retailing, which are now frantically shedding
workers. "The 1973 period marked the beginning of the decline
of the American standard of living," says Allen Sinai, chief
economist of the Boston Co. "The Reagan years interrupted that
trend by borrowing and spending, which led to the retrenchment
that has deepened the current slump."

    The 1980s binge took place on a colossal scale in every
sector of the economy. Runaway federal deficits have more than
tripled the national debt since 1980, to $3.1 trillion; interest
on that sum eats up $286 billion a year and accounts for the
third largest expense in the budget. Meanwhile, consumers
increased their IOUs from $1.4 trillion in 1980 to $3.7 trillion
last year. And U.S. industry raised its debt from $1.4 trillion
to $3.5 trillion over the same period.

    The reckless borrowing made a reckoning inevitable. "You
can't spend eight years priming the pump and getting all your
growth through debt in the private, corporate and public sectors
and expect to come out of it overnight," says John Bryan,
chairman of Sara Lee. "We're not going to get any momentous
return to growth anytime soon." Concurs an Administration
economist: "People are smarter than we give them credit for.
They've known we couldn't keep borrowing our way to prosperity
forever." Asked in the TIME/CNN poll whether Americans today can
enjoy the same standard of living as recent generations, 62%
said no.

    To make matters worse, much of the corporate debt was
splurged on paper-shuffling buyouts and grandiose real
estate projects rather than on factories or production machines.
The vast oversupply of office buildings, shopping centers and
other projects led to the bankruptcy of real estate developers,
then to the widespread failure of the banks and thrifts that
financed the deals. In what some business leaders view as an
overcorrection, many of the surviving banks have slammed shut
their lending windows to all but their best-heeled customers,
depriving the economy of sorely needed money for recovery.

    The 1980s were so pumped up with debt that most people
thought a deep recession would hit after the market crash of
1987. But by sheer momentum, the economy managed to keep growing
for a year or so, much like Wile E. Coyote running off a cliff
and standing for a few seconds on thin air. In 1989 and early
1990 the economy was growing so slowly it might as well have
been motionless. Then Iraq's invasion of Kuwait in July 1990
sent oil prices above $40 per bbl. and pushed the U.S. into a
bona fide slump.

    When the recession arrived, it triggered the kind of
layoffs that occur in any slump. But it has also accelerated a
wave of firings that can only be attributed to longer-term
structural changes, including a drastic shakeout in industries
that were overbuilt in the 1970s and '80s. Among the worst hit
is retailing, which is undergoing a painful adjustment to the
frugal '90s. Just last week Zale, the largest U.S. jewelry-store
operator, said it would close 400 of its 2,000 stores and lay
off 2,500 workers. "We are looking at the historic restructuring
of the American economy," says Dan Lacey, an Ohio-based
employment consultant. "It's not just decline; it's turmoil.
Even those people who are still working have lost faith in their
ability to stay employed. The memory of what's going on is not
going to be erased from today's workplace any more than the
memory of the 1930s was erased from earlier generations."

    While some economists have described the current slump as
a near depression, that phrase overstates the case if it is
taken as a compar ison with the period 1929-33, when the U.S.
economy contracted by nearly a third. The D word becomes more
valid, especially with a small d, when it is used to compare the
growth rate of the 1930s, which averaged 0.5% a year, with the
expected sluggishness of the 1990s, which some economists
predict will see an average growth rate of 2%.

    In some respects, the current recession is more painful
than the numbers show because this slump is so different from
most. The current unemployment rate of 6.8%, for example,
appears to be well below the level reached in the 1981-82
recession, when joblessness peaked at 10.8%. But experts say the
comparison is misleading because the labor force is growing far
more slowly today than a decade ago, which means that fewer
people are seeking jobs. Among other things, the slowdown
reflects both an aging U.S. population and a decline in the
number of people ages 18 to 24 who are embarking on careers.
Moreover, 1.2 million discouraged workers have given up looking
for jobs, up 25% from a year ago. In the TIME/CNN poll, 23% of
those surveyed said they had been unemployed, not by their own
choice, at some point during 1991.

    In a perceptual sense, the gloom is deeper because this
time unemployment has hit an influential and vocal class of
managers and other white-collar workers. "So many of us are
seeing our peers thrown out of work," says John Rogers, who runs
his own Chicago investment firm. "That's what's so frightening."

    Another factor that has aggravated unease in this
recession is that there has been no sense of leadership, let
alone prescience, from Washington. Consumers were blindsided by
the failure of the White House and most economists to foresee
the length of the downturn. "Everyone was told it was going to
be mild," says Stephen Levy, director of the Center for the
Continuing Study of the California Economy. "Coming out of the
gulf war, people thought it would last just two quarters." But
while the economy did manage gains of 1.4% in the second quarter
and 1.8% in the third, few experts doubt that the U.S. has
become mired in a double-dip slump that for all practical
purposes never really ended. "Everything was set for a typical
recovery," says economist Gordon Pye, who runs his own New York
City consulting firm. "But when employment did not increase and
the waves of layoffs and restructurings continued, that really
inhibited it."

    The downsizing has dismayed recent college graduates, who
have found it difficult if not impossible to land a good job.
"I'm beginning to think it wasn't the best financial decision
to go to law school," says Kathy Woods, who is still seeking
work after graduating from the University of California's
Hastings law school last spring. "I was a waitress over
Christmas," she says. Laments a jobless graduate of the
Georgetown University School of Foreign Service who has lived
at home since he left school last May: "Of the 30 or so people
I graduated with and am closest to, I know of just three who
have professional jobs. Others are receptionists or doing things
like waiting tables. A lot are going to graduate school because
there is nothing else to do."

    Hard times are forcing some people to turn their back on
the American Dream. In El Monte, Calif., Julio Toruno, the son
of a Nicaraguan immigrant who prospered in Southern California
after World War II, watched the revenues from his print shop
nose-dive 20% last year. "I don't have the opportunities my
father had," he says. Strapped by high housing costs, steep
taxes and a declining income, Toruno and his wife recently
bought land in Nicaragua and plan to move there in the spring.

    For now, many economists are counting on the Federal
Reserve's cut in the discount rate from 4 1/2% to 3 1/2% to set
the stage for a mild recovery that could start by summer. The
sharp reduction was significant because the discount rate, which
is what the Fed charges banks for borrowing money, is a
bellwether for interest costs throughout the economy. The
average rate for a 30-year, fixed-rate mortgage last week was
8.24%, the lowest in 18 years. At the same time, election-year
pressures are likely to push Washington into enacting a few
modest tax breaks to stimulate growth.

    But consumers will have to open their wallets before any
recovery can get rolling, and that is by no means ensured. Says
Stephen Roach, a senior economist at Morgan Stanley:
"Interest-rate cuts are a very constructive stage setter for
economic recovery, but we need an improved sense of job security
to allow the effects of the cuts to work their way through the
system."

    So far, though, no reprieve from layoffs is anywhere in
sight. Economists say U.S. companies will shed more than 1
million jobs in 1992 in fields ranging from banking to
aerospace, a pace even faster than last year's. "It's become
almost like a poker game to see who can cut the most," says
employment analyst Lacey. "There's a kind of corporate frenzy."

    That would be worrisome even if downsizing were a magic
bullet that could swiftly restore the competitiveness of
American industry. But while layoffs will cut expenses and boost
corporate profits, they cannot by themselves turn companies
around. GM's plans to close 25 plants by 1995 and cut 74,000
jobs, or 19% of its work force, scarcely addresses such problems
as why it takes the company up to a year longer than the
Japanese to redesign its cars.

    At the very least, the current malaise has raised the
public's consciousness about the need for real leadership and
accountability in both Washington and corporate America. People
are smart enough to know when they are being squeezed. Their
pain reflects economic woes that have piled up for years.
Correcting those problems will take vision in the White House
and Congress, and long-term planning in the executive suite.
Americans are unlikely to feel much better until they see that
their well-founded concerns are at last being recognized and
addressed.