TIME: Almanac 1993/TIME Almanac 1993.iso/time/010190/01019007.000

Text File | 1992-09-23 | 12.0 KB | 238 lines

                                                                                BUSINESS, Page 76

Freed from Greed?


The past decade brought growth, avarice and an anything-goes
attitude. But the '90s will be a time to fix up, clean up and
pay up

By Otto Friedrich


    "Greed . . . is good. Greed is right. Greed clarifies, cuts
through and captures the essence of the evolutionary spirit .
. . Greed -- mark my words -- will save . . . the U.S.A."

    -- Gordon Gekko in Wall Street

    Remember those old jokes about the good news and the bad
news? Well, the good news on the economic front is that most of
us survived the money-money-money decade of the 1980s very
nicely, thank you. The bad news is that we face appalling bills
to be paid in the 1990s. That is not a joke.

    The good news is that the U.S. gross national product
doubled during the 1980s, from $2.7 trillion to $5.3 trillion.
The bad news is that much of this was done by borrowing. The
national debt tripled, from $909 billion to almost $2.9 trillion
(interest alone now amounts to $165 billion a year, roughly the
equivalent of the budget deficit). Corporate and personal debts
both soared. All in all, the U.S. consumed $1 trillion more than
it produced in goods and services.

    The good news is that lots of people prospered. This was
the age of financial wizards making fortunes in their 20s, and
roughly 100,000 Americans became millionaires every year.
Michael Milken, the junk-bond king at Drexel Burnham Lambert,
set the record by earning $550 million in 1987. The bad news is
that while the top 20% of American families' earnings rose more
than $9,000 (after adjustment for inflation), to an average of
nearly $85,000, the bottom 20% dropped by $576, to a hungry
$8,880. The Government estimates that 32 million Americans --
12.8% of the population -- live in poverty, compared with 11.4%
a decade ago. And Michael Milken has been indicted on 98 counts
of fraud and other misdeeds.

    The good news is that the New York stock market recovered
quickly from its worst one-day crash in history (a free fall of
508 Dow Jones points in 612 hours on Oct. 19, 1987) and climbed
back to its pre-crash high of 2722. The bad news is that if
adjusted for inflation, the Dow would have to reach 3900 to
match where it was as far back as 1966.

    The good news is that 20 million new American jobs were
created during the 1980s. The bad news is that these new jobs
did not come in the FORTUNE 500 companies, which actually cut
their work forces by 3.5 million; many of the new 1980s jobs
were low-paying service positions.

    The good news is that booming international trade is
spreading wealth around the world. The bad news is that the U.S.
was the world's largest creditor in 1980 but went into the red
in 1985, and has become the world's largest debtor. Its trade
deficit runs about $150 billion a year. Foreign holdings in the
U.S. now amount to $1.5 trillion, compared with $1.2 trillion
in U.S. assets abroad. And meanwhile, the grinding poverty of
the Third World, by now $1 trillion in debt, has not improved
in the least.

    The good news is that the Berlin Wall has crumbled, and the
cold war seems to be over. That offers the possibility of
immense cuts in the $300 billion defense budget and immense
investment opportunities in Eastern Europe. The bad news for
Americans is that the Pentagon is still clinging to every
dollar, and the investors pouring into Eastern Europe are mainly
the West Europeans, who are in the process of uniting into an
economic superpower.

    How does it all add up? Where have we been, and where are
we going? Listen to some expert voices atop the Tower of Babel:

    "The '80s have been a significantly good decade," says
Malcolm Forbes, 70, the ebullient magazine publisher whose $2
million Moroccan birthday party for himself epitomized the
decade's love of self-indulgence. "Critics point to the
glitterful excesses and the greed, but, God, they miss the
point," says Forbes. "This was the decade that saw the triumph
of U.S.-led free enterprise. Rebuilding the economies of Eastern
Europe now offers huge opportunities, and it will be done in the
next decade."

    "We have to do more in the 1990s than gloat over the demise
of communism," says Felix Rohatyn, the Wall Street investment
banker. "That demise may be due to our ideas, but the way we are
now exploiting those ideas is not making us competitive with
the Europeans and the Japanese. Our cities are really falling
apart; our educational system is in great disarray; and in order
to finance our budget and trade deficits, we're selling more and
more of our businesses. Our Government is unable to govern
because it has no money, or it is using the fact that it has no
money as an excuse not to govern. Meanwhile, the Japanese and
the Europeans are pulling together, accumulating capital and
being very single-minded in their pursuit of a world in which
military strength counts for less and less, and intellectual and
economic strength counts for more and more. It is inevitable
that the U.S. will be less of a major player."

    "Why the devil should you be quoting Felix Rohatyn, who has
an absolutely failed record of doomsday predictions?" asks
Milton Friedman, Nobel-prizewinning economist at the Hoover
Institution at Stanford. "The U.S. economy is fundamentally very
healthy, and there's no reason why the '90s shouldn't be just
as good as the '80s, or better. There's no reason why we
shouldn't have a decade of rapid growth and relatively low
inflation."

    Maverick billionaire H. Ross Perot doesn't buy that. "The
'80s is the decade that we gave away our industrial lead and
acted totally irresponsibly in wrecking some of our big
corporations through leveraged buyouts," he says. "We felt
affluent because we were living off borrowed money. We've got
to clean up education, clean up the deficit, clean up the drugs,
clean up the justice system, clean up industry. But right now
it's like Lawrence Welk music: it's just wonderful, wonderful,
wonderful. And nobody will fix it before it breaks."

    Despite these violent disagreements about the future, there
is at least some agreement about the past decade. It began in
a distinctly gloomy atmosphere known as stagflation:
double-digit inflation combined with growth rates of 2% or less.
Cigar-chomping Paul Volcker, then the Chairman of the Federal
Reserve Board, is generally credited with breaking the inflation
by reining in the money supply in 1980-81. That also touched off
the worst recession of the postwar era, bringing unemployment
rates of more than 10% (25% in some areas and industries).
President Reagan helped end the downturn by cutting taxes in
1981, which created huge deficits but also launched a record
boom that hasn't finished yet.

    Along with tax cuts, Reagan insisted on deregulation (a
program actually begun by Jimmy Carter in airlines, trucking and
banking). He regarded that as "getting the Government off
people's backs," and it involved not just a reduction in
official regulations but also a relaxation in law enforcement
ranging from antitrust to safety regulations. That may have been
beneficial, but it enabled lots of sharp characters to make lots
of money in lots of sharp ways. The most extreme example is the
savings and loan scandal, which features fraud, bribery,
favoritism and freewheeling incompetence. Some 800 of the 2,600
remaining S&Ls are now insolvent or nearly so, and the bailout
will ultimately cost the taxpayers at least $150 billion to $200
billion and possibly a good deal more.

    The atmosphere of the 1980s, along with actual crimes,
spread a general sense that anything goes. Get rich, borrow,
spend, enjoy. Not only Gordon Gekko said greed is good; so did
Ivan Boesky, the dapper king of arbitrage, before he ended up
going to prison (Gekko presumably landed there too). And the
close of the decade was symbolized by Boesky not just going to
prison but also emerging on leave in a long white beard that
made him look like some reincarnation of the Ancient Mariner or
King Lear.

    There does seem to be a spreading sense that too many rules
have been bent and too many watchdogs asleep. And too many
debts left unpaid. "What epitomized the 1980s was, Spend now,
pay later," says David Colander, economics professor at
Middlebury College. "What will epitomize the 1990s is, Pay now."
This involves not just all the credit-card loans or the interest
on the leveraged buyouts but also a lot of ignored problems.
"Domestically, we have bulldozed so many things into the
future," says Robert Hormats, vice chairman of Goldman Sachs
International, "that now we are going to have to deal with
them." For example:

    The entire U.S. infrastructure is becoming dilapidated. It
will cost an estimated $315 billion in the 1990s to put
American highways in the condition that existed in 1983. Bridge
repairs could run to another $72 billion. The
air-traffic-control system needs $25 billion.

    The environment needs intensive care. The bill for
nuclear-waste disposal stands at $50 billion; for clean water,
$24 billion; for hazardous wastes, $15 billion.

    Social Security reserves are being drained. The Government
has been making up for the budget deficit by selling notes to
the Social Security Trust Fund ($56 billion this year alone),
i.e., borrowing money that is supposed to be accumulating for
the years when the baby-boom generation wants to retire.

    Quite a few business leaders look toward both past and
future with considerable misgivings. "The costs of all this are
going to be horrendous in the 1990s," says Donald Clark,
chairman of Household International. "We just overlooked major
problems like drugs and our schools." Elmer Johnson, a former
executive vice president of General Motors, says, "The financial
wizards of wheeling, dealing and acquisitions brought their bags
of tricks, but they turned out to be a lot of hogwash. The main
concern should have been, Who's minding the store?" Observes
William Weisz, vice chairman of Motorola: "The kind of issues
we have are survival issues. The competitive environment is
going to get much tougher. Tremendous battles will have to be
fought. If we don't succeed, America will just end up as a
nation that rents hotel rooms and sells hamburgers to each
other."

    The imagined enemy in these competitive wars is usually the
Japanese. Their GNP is still only third largest in the world,
but it is growing much faster than those of the U.S. and the
Soviet Union. And in certain symbolic things Japan has already
become No. 1. In 1980 six of the world's ten biggest banks were
American; today eight are Japanese and only one American. In
that same decade, the Tokyo stock market passed the New York
Stock Exchange in total value. Average Japanese per capita
income climbed past the U.S. figure. And then the Japanese
bought control of Rockefeller Center, Columbia Pictures
Entertainment and much of Waikiki Beach.

    Such things fill some Americans with a resentful sense that
the Japanese are taking over the country, if not the world. But
far bigger investments in the U.S. are those of the Europeans,
who now face a gigantic opportunity in the collapse of East
European communism. In theory, the European Community is
supposed to complete its basic economic merger in 1992, when it
will have free movement of capital, open borders, no trade
barriers among the member nations and a common tariff on outside
goods. Some now see difficulties in the new possibility of
German reunification and an economic opening to the East.
Leaders of the European Community are convinced, however, that
the answer to that possibility is not to delay the Western
merger but to speed it up. "Time is short," European Commission
President Jacques Delors declared in an address at the College
of Europe in Bruges. "History is accelerating, and we must
accelerate as well."

    That may provide some of the best news of the 1990s. As for
the bad news, remember Chicken Little.