TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/83/83capeco.1

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                                                                              ╚January 2, l984

ECONOMY

Cheers for a Banner Year


As growth surges and inflation stays low, companies slim down
and shape up


For the first time in a long time, Americans will be able to
toast the new year with the feeling that it will bring greater
prosperity and brighter prospects. With unemployment falling,
incomes rising, inflation at bay and shoppers crowding into
stores, the economy is entering 1984 on a roll rather than in
a rut. Looking back, business and consumers can celebrate 1983
as a year of rebound and turnaround. For many industries and
labor unions, it was also a year of transition and turmoil that
will permanently reshape the economic landscape. Serious threats
to growth remain, most notably the ballooning federal deficit
and the formidable challenge of foreign competition.
Nonetheless, millions of revelers will ring out 1983 this
weekend with a rousing and heartfelt cheer.

The year marked the centennial of the birth of John Maynard
Keynes, and the tonic that jolted the U.S. out of recession was
just what the famed economist might have prescribed: easier
money, lower taxes and heavy Government spending. Ironically,
the chief architect of the recovery had never been known as a
disciple of Keynes'. Ronald Reagan came to the White House
pledging to balance the budget and trim the size of Government.
Instead, his Administration ran up a fiscal 1983 deficit of
$195.4 billion, which is more than the entire budget was less
than 15 years ago. But the President was too pleased with the
results to worry much about whether his policies were
considered Keynesian, monetarist, supply side or all of the
above. Said Reagan in an October speech:  "You know that the
best clue that our program is working is our critics don't call
in Reaganomics any more."

Much of the credit for the recovery, however, belongs to
Federal Reserve Board Chairman Paul Volcker. After squeezing
the money supply enough to reduce inflation from 12.4% in 1980
to 3.9% in 1982, the central bank eased up considerably in the
last half of 1982 and early 1983. The change in policy helped
push down the prime rate that banks charge for corporate loans,
from 16.5% to 10.5%, and triggered an economic upturn last
spring that was much brisker than expected. From April through
September, the gross national product, adjusted for inflation,
expanded at an 8.6% annual pace. The economy was so exuberant,
in fact, that the Reserve Board decided to tighten slightly in
late spring, and the prime rate later rose a notch, to 11%.
Government figures released last week showed that G.N.P. growth
slowed to a more sustainable 4.5% pace in the fourth quarter and
that consumer prices rose in November at a modest 3.6% annual
rate.

The recovery defused much of the public criticism aimed at
Volcker, who has often been accused of bringing on the recession
to take inflation. He stopped receiving two-by-fours in the
mail from homebuilders protesting his policies. In a
congressional hearing, Republican Senator John Heinz of
Pennsylvania told Volcker that "the only things I can think of
that you haven't been blamed for are herpes and giving up the
Panama Canal."  But the Senator added, "We're lucky to have you
as a chairman."

Volcker's term in office was scheduled to end in August, and
the questions of whether Reagan would reappoint the chairman
generated more excitement and suspense than Billy Martin's fate
as manager of the New York Yankees. For a while, Presidential
Counsellor Edwin Meese and Treasury Secretary Donald Regan urged
Reagan to choose his own man to replace Volcker, a Carter
appointee. The anti-Volcker group, though, never came up with
a serious candidate, and the business community rallied around
the chairman because of his record as an inflation fighter.
Finally on June 18 the President interrupted a radio address
with what he called a news flash:  "Give me the city desk. I've
got a story that'll crack this town wide open! . . . I have
asked Chairman Paul Volcker to accept reappointment.

The hoopla surrounding Volcker's nomination heightened his
status as the staid financial community's first superstar. At
his congressional confirmation hearing, so many lawmakers,
reporters and visitors were eager to hear the chainman that the
session had to be moved from the Senate Banking Committee
hearing room to the huge Caucus Room, where Senators had once
interrogated the Watergate conspirators. Yet despite his power
and prestige, Volcker retains his austere personal style. He
still lives in a cubbyhole apartment near his office, bums cheap
cigars from colleagues and brags about his watch, which looks
exactly like a $1,500 Rolex but cost him only $60.

In their battle against inflation, Reagan and Volcker had good
fortune on their side. With the world awash in an oversupply
of oil, the once mighty Organization of Petroleum Exporting
Countries could no longer dictate the cost of crude. The
group's new powerlessness moved Mani Said al-Oteiba, Oil
Minister of the United Arab Emirates, to compose a doleful
poem that began:

I am truly troubled and with OPEC distressed, OPEC's major
crisis is no longer suppressed, The market is stagnant, the
price of crude oil depressed.

In January a rancorous OPEC session in Geneva broke up before
agreement could be reached on a pricing strategy, and the group
seemed on the verge of disintegration. Within three weeks, a
price war erupted, led by Britain and Norway, two non-OPEC
producers, and Nigeria, an OPEC member. Finally in March, after
a twelve-day session in London, the bickering band of OPEC
ministers agreed to slash their bench-mark oil price from $34
per bbl. to $29, the first cut in the group's 23-year history.

The dip in petroleum prices and the sharp drop in U.S. interest
rates helped ease pressure on many developing nations that are
struggling under enormous and dangerous debt loads, but their
finances remain shaky. Two weeks ago, the new government of
Argentina requested a six-month grace period for interest
payments on its $40 billion debt. A team of bankers and
troubleshooters from the International Monetary Fund approved
a $10 billion emergency loan package in November that once again
saved Brazil from defaulting on its $91 billion debt, but the
country's economy is deeply depressed and has been plagued all
year by strikes, demonstrations, riots and looting. As a major
petroleum exporter, Mexico was hurt by the oil price decline.
Nonetheless, it is managing to keep up with interest payments
on its $88 billion in foreign loans.

After an uncharacteristically sluggish 1982, the dynamic
economics of the Pacific region surged again in 1983. The U.S.
recovery allowed South Korea, Singapore and Taiwan to boost
exports and achieve growth rates in the 6%-to-9% range. Japan's
economy grew at a more modest 3.5% pace, but the government
unveiled a program to spur consumer demand with tax cuts and new
public works spending.

Western Europe's rebound has been painfully slow. The ten
nations of the European Community have had an average 1983
growth rate of about 1%, and unemployment hovers at 10.5%
Aftershocks of the recession are still shaking confidence. West
Germany's banking system was rocked in November by the collapse
of IBH Holding, a giant construction equipment manufacturer that
was an estimated $300 million in debt. Hellenic Lines, the
largest Greek cargo-shipping company, filed a bankruptcy
petition this month, after defaulting on an $80 million credit
line from U.S. and European banks.

In the U.S., some of the biggest stories were bankruptcies that
never happened. International Harvester, the ailing farm
equipment manufacturer that many on Wall Street had given up for
dead, limped through the year. The company said this month that
its 200 creditors had agreed to a $3.5 billion debt-restructuring
plan that gives the firm hope for survival.

Chrysler moved off the critical list and earned a $582.6
million profit for the first nine months of the year. No one
better symbolized the determination of American businessmen to
turn things around than Chrysler Chairman Lee Iacocca. He saved
the third largest U.S. auto company by revamping its product
line, trimming and modernizing its operations and gaining wage
concessions from workers. In August Chrysler roared past a
milestone by repaying, seven years ahead of schedule, the last
of the $1.2 billion in federally guaranteed loans it had
received as part of the bailout plan that Congress passed in
1979. Beamed Iacocca:  "We at Chrysler borrow money the
old-fashioned way. We pay it back."

Chrysler's survival tactics dramatized several trends that have
been transforming the U.S. economy. Pressed by foreign
competition, such smokestack industries as autos, steel and
rubber have been closing inefficient plants, thinning out their
work forces and relying more heavily on the state-of-the-art
technology and automation. Employment levels in these old-line
fields will probably never return to prerecession levels.
Future job growth will increasingly be concentrated in such
service sectors as health care and the restaurant business,
rather than in manufacturing.

As companies tried to reduce costs in 1983, labor unions lost
clout and suffered pay cuts. For some 20,000 packing-house
employees who are members of the United Food and Commercial
Workers International Union, the average hourly wage dropped
from more than $10 to about $8. Said Union Official Lewie
Anderson: "Workers haven't taken this bad a beating since
before 1935." Greyhound employees staged a bitter seven-week
strike against the bus line. In the end, the workers agreed
last week to a 7.8% wage cut.

Steel was the sickest of the smokestack industries. Despite
the recovery, steel companies lost $1.668 billion in the first
nine months of the year. With 250,000 members on layoff, the
United Steelworkers has felt as if it were pinned under an I-
beam. In March the union took a 9% pay cut, but that did not
satisfy management. U.S. Steel threatened this month to shut
down five plants, either partially or completely, unless
employees accept further contract concessions.

While putting a squeeze on the workers, the steel companies
continued their campaign in Washington for greater protection
from imports, which have captured 19.6% of the American market.
Though Western Europe and Japan have curbed their steel exports
to the U.S., a new wave of shipments is flowing in from Brazil,
South Korea and Mexico. Steel executives argue that these
exports are subsidized by foreign governments and that the U.S.
should retaliate with import quotas.

In its rhetoric, the Administration rejected protectionism.
Declared Reagan: "We and our trading partners are in the same
boat. If one partner shoots a hole in the bottom of the boat,
does it make sense for the other partner to shoot another hole?
There are those who say yes and call it getting tough. I call
it getting wet." In practice, however, the White House too
often bowed to pressure for import barriers. The Government
hiked the tariff on heavyweight motorcycles from 4.4% to 49.4%
to shield the last U.S. manufacturer, Harley-Davidson, and
imposed tighter import controls on textiles.

The U.S. airline industry went through some of its most
turbulent times in 1983. Spawned by the beginning of
deregulation in 1978, cut-rate, nonunion carriers like People
Express triggered fare wars and shot down the profits of the
nine major airlines, which lost $71.8 million in the first nine
months of the year. Frank Lorenzo, who was one of the pioneers
of discount air travel as head of Texas International and New
York Air, came up with a controversial approach to cost cutting
after taking over unionized, money-losing Continental Airlines.
In September he grounded all domestic flights, filed for
reorganization under the bankruptcy laws, put two-thirds of the
12,000 employees on the "inactive status," and started up
service again with workers willing to accept as little as half
of the wages that Continental employees had been making.
Lorenzo said that his maneuver would give Continental an
"opportunity to compete."  Some critics called it union busting.
After Eastern Airline Chairman Frank Borman warned that his
carrier might follow Continental into bankruptcy proceedings,
his major unions agreed to pay reductions and work-rule changes
with $367 million. In return, workers will get 15 million
shares of Eastern stock and control two seats on the airline's
board.

While many industries were shaking off the recession, the
electronics business continued to boom. Americans bought an
estimated 4 million vice-cassette recorders, up 97% from 1982
and 6.7 million personal computers, up 109%. California's
legendary silicon Valley, however, fell  under the shadow of a
colossus. Invincible IBM grabbed the lead in personal computer
sales from Apple Computer, the young Silicon Valley firm that
had been the industry's pacesetter. In just five months the
price of Apple's shares plunged from $63 to $17. Another former
Valley highflyer, Osborne Computer, filed for bankruptcy after
its portable machines encountered stiff competition from such
firms as Kaypro of Salano Beach, Calif., and Houston-based
Compaq. Atari and Mattel suffered hugh losses because of
sluggish sales and fierce price-cutting as the video-game bubble
burst.

No business was more beset by change and uncertainty than the
telecommunications industry, which is anxiously awaiting the
breakup of AT&T on New Year's Day. Telephone equipment
manufacturers were eager to get a crack at selling to the seven
new regional Bell companies, while computer firms were wondering
if AT&T would be a formidable invader of their turf. Many
consumers were bewildered. Fretted Dorothea White, 86, a widow
living along in Los Angeles: "I don't really see why they had
to break up AT&T. It was a good system, and it seemed to be
working." People questioned whether proposed cuts in
long-distance rates would offset expected jumps in the cost of
local service.

While preparing to spin off much of the Bell System, AT&T has
been moving to expand its business overseas. It is taking part
in joint ventures to make and market telecommunications
equipment with Philips, the diversified Dutch company and to
manufacture electronic circuits with Gold Star Semiconductor of
South Korea. In addition, AT&T announced last week that it was
buying a 25% stake in Olivetti, the Italian office equipment
maker, for $260 million. In this new partnership, AT&T will
gain a European distribution network for its products, while
Olivetti will be able to use some of the technology developed
by AT&T's Bell Laboratories.

As the U.S. recovery wound up its first year, some economists
were already raising doubts about the upturn's ultimate strength
and durability. Among them was Martin Felstein, the chairman
of the President's Council of Economic Advisers, who said that
huge budget deficits might push up interest rates and produce
a "lopsided recovery that would be slower paced and more fragile
than a balanced recovery." He repeatedly warned that taxes might
have been raised.

Other Administration officials, however, brushed aside and even
ridiculed Feldstein's concerns. Said Treasury Secretary Donald
Regan: "I wish economists would sit back and relax. This will
be one of the greatest recoveries in history."  At a press
briefing in November, Whote House Press Secretary Larry Speakes
told reporters that the President and Secretary Regan "obviously
don't agree' with Feldstein. He also pointedly announced that
Feldstein had been excluded that day from a White House economic
policy luncheon. Told that Feldstein was, in fact, present at
the session, Speakes quipped, "Maybe he won't make it to
dessert."

The public rebuke fueled speculation that Feldstein might be on
the way out. But The President later tried to downplay the
incident and insisted that there were no substantial
disagreements among Administration policymakers. Nonetheless,
economists like Walter Heller, who served as chairman of
President Kennedy's Council of Economic Advisers, feared that
Reagan was unwisely disregarding Feldstein's warnings about the
need for a tax hike.

The controversy between the President and his chief economist
was disturbingly reminiscent of the dispute in 1966 between
President Johnson and his Council of Economic Advisers. Council
Chairman Gardner Ackley argued that taxes had to be raised to
pay for the Viet Nam War, but Johnson would not hear of it. He
later changed his mind and signed a tax increase bill in 1968,
but the delay was a costly mistake. Many economists believe it
helped unleash the inflationary spiral that U.S. Policymakers
have been battling ever since.

Fears of future inflation and monstrous budget deficits were
not enough, however, to dispel the public mood of relief and
confidence that prevailed as 1983 was drawing to a close. For
many people, the most pressing concern at the moment was how to
fight past the mobs crowding into shopping malls during the best
Christmas season in years. The recovery was rolling, and
Americans were ready to enjoy it.

--By Charles P. Alexander.