TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/86/86capeco.1

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                                                                                January 5, 1987

ECONOMY & BUSINESS

Topsy-Turvy Times


In a year of upsets, the mighty fell and the consumer rode high

In 1986, coming out on top was an experience not just for the
Chicago Bears and the New York Mets but for another bunch of
sometime underdogs:  U.S. consumers. At long last, average
Americans got measures of economic revenge for many of the
indignities they had suffered in recent years at the hands of
everyone from Arab oil sheiks to Wall Street's predatory
speculators. For consumers, who had already been savoring three
years of economic recovery, 1986 was a time of pleasant
surprises and unexpected bonuses.

Every season brought something to celebrate. A breathtaking
slide in oil prices made gasoline cheaper than it had been since
1979. Inflation fell so low that it actually ran backward for
several months. Even the tax system, of all things, changed for
the better when Congress delivered a historic reform law that
will lower rates for most consumers and wipe out many of the
loopholes long enjoyed by businesses and wealthier Americans.
Meanwhile, Government investigators cracked down on Wall
Street's insider traders, who had been reaping outrageous
profits at the expense of ordinary investors.

But not everyone felt inclined to toast the year. Farmers and
oil- industry workers suffered painful contractions in their
industries. Thousands of employees in corporate America lost
their jobs as big companies cut staff and dumped subsidiaries
to limit their vulnerability to Wall Street's rampaging takeover
artists. For Big Business, the attacks by corporate raiders
were compounded by withering charges that large corporations
have become overgrown and afraid to take risks.

Yet when most Americans scanned the business headlines during
1986, they generally found reasons to be pleased rather than
dissatisfied. The best news for everyone was that the economic
recovery persevered through 1986, its fourth straight year, with
no apparent signs of coming to a halt in 1987. The economy
began the year with a robust first-quarter growth of 3.8%. The
stimulus came partly from a short but intense home-building boom
that took off as mortgage rates declined to as low as 9.5%.
Sales of new homes surged 24.7% in March, to an annual rate of
924,000, the highest level on record.

The economy's weakest moments came during the year's second
quarter, when fears began to grown that the recovery might have
run out of momentum. Growth virtually stagnated from April
through June, expanding a measly .6%. A primary cause was
trouble in America's farm and oil-producing states, whose woes
temporarily dragged down the whole U.S. economy. But the
downturn jitters proved unwarranted; the economy bounced back
with a 2.8% expansion in the third quarter and was expected to
perform at about that level during the October- "December period
and all of 1987.

The historic petroleum price plunge of 1986 could be traced to
September 1985, when Saudi Arabia got fed up with its dwindling
share of the world's oil market and decided to reverse
completely its traditional strategy of holding back production
to prop up prices. Oil Minister Sheik Ahmed Zaki Yamani raised
crude output from about 2 million bbls. a day to 4 million bbls.
with the aim of forcing rival oil producers like Britain to cut
back to make room for the Saudis. But when competitors refused
to budge, the world's oil glut rapidly increased and discounting
became rampant. "The price war is here," said Mani Said
al-Oteiba, Oil Minister of the United Arab Emirates, in
February.

The result was a windfall for customers, for a change, rather
than for the Organization of Petroleum Exporting Countries.
Crude prices plummeted from $26 per bbl. in January to below $10
in April and remained under $15 for most of the year. The low
prices distressed the Saudi royal family and provoked anger from
other OPEC countries, prompting the Saudis in October to oust
Yamani as Oil Minister after he had spent two decades as a
leading OPEC strategist. With that, the Saudis abandoned their
price-war tactics. When OPEC met in December, twelve of its 13
members, with Iraq dissenting, decided to cut production and
sell their various grades of oil at fixed prices averaging $18
per bbl. While the pact boosted market prices to near that
level, the group may have trouble keeping them there. In the
past, at least, its members have tended to cheat on such
agreements and undermine their effectiveness.

Falling energy prices for the year as a whole knocked the wind
out of overall U.S. inflation. Economists estimate that prices
rose only 1.8% for all of 1986. During three months of the
year, the Consumer Price Index actually reversed its usual
upward course and registered deflation instead.

Many economists believe that 1986 may have been the turning
point for the most pressing U.S. economic problem of all:  the
trade deficit. That gap was largely the result of a U.S. dollar
that became too strong during the early 1980s and thus made
foreign products overly cheap in the U.S. and AMerican-made
merchandise expensive overseas. The high-flying dollar created
an almost insurmountable handicap for U.S. manufacturers of
everything from earthmoving equipment to microchips. Just as
painful was the situation down on the farm, where growers were
stuck with record grain surpluses partly because they were
unable to sell enough of their crops overseas.

A sharp decline in the dollar that began in early 1985 and
continued through most of 1986 gave exporters hope that their
business would soon revive. "We've got a real chance that
America can compete again," said General Electric Chairman John
Welch in February. But the trade imbalance proved immensely
stubborn until the end of 1986, when economists at last began
to see a moderate increase in U.S. exports. They generally
estimate that the trade gap will hit $170 billion for 1986, a
record total, but could fall to about $140 billion in 1987.

As if to show voters that miracles really can happen, even in
Washington, Congress in September passed the most sweeping
federal income-tax overhaul in more than 40 years. The tax law,
which goes into effect this week, wipes out deductions and
loopholes by the hundreds. It represents a historic change in
tax philosophy, under which the Government will take a far
smaller role in attempting to shape the economy through its tax
code. The law was almost universally applauded as a bold stroke
for economic fairness and efficiently. Most tax shelters were
eliminated, which should encourage consumers and businesses to
seek rational, profit-making investments instead of complex,
wasteful schemes designed to lose money for tax-saving purposes.

For most consumers the tax overhaul will be a boon. It reduces
levies for about 60% of taxpayers and entirely removes some 6
million low-income earners from the tax rolls. The new law
simplifies the tax-rate structure from 15 categories for
individuals to just two, and lowers the highest effective rate
from 50% to 38.5% in 1987 and 28% after that. At year's end
millions of taxpayers scrambled to take advantage of many
loopholes that the new law will eliminate. Some consumers went
shopping for a new car so they could take a sales-tax deduction,
which will no longer be allowed in 1987. Other taxpayers sold
securities or real estate to take advantage of capital-gains
rates that will become less favorable under the new law.

The legislation will reverse a 3 1/2-decade trend in which
businesses were bearing an increasingly lighter share of the
federal tax burden. Over the next five years the tax plan will
shift $120 billion in levies from individuals to corporations,
partly by eliminating some incentives for investing in plant and
equipment. Because of this, many economists predict that the
bill could depress capital spending enough to slow down the
economy somewhat in earl 1987.

It was a bullish time on Wall Street for the fifth year in a
row, but he stampedes became wilder than ever. The Dow Jones
industrial average entered 1986 at 1546.67 and closed last week
at 1930.40, up a total of 383.7 points for the year with three
trading days remaining. While the general trend was delightful,
small-time investors became distressed by the increasing
volatility of the market. On Sept. 11 and 12, for example, the
Dow plummeted 121 points, including a one- day drop of 87, the
worst in history. Individual shareholders and corporate leaders
complained loudly about the increasing tendency of institutional
investors to roil the markets with fast, huge, computer-driven
trades in the pursuit of quick profits.

Stockholders welcomed the sensation-making results in 1986 of
a Government crackdown on insider traders, who make illegal
profits from information not available to the general public.
The Securities and Exchange Commission announced Nov. 14 that
it had nabbed speculator Ivan Boesky in the biggest
insider-trading scam of all time. The SEC charged that Boesky
had earned some $50 million in illegal profits by trading on
inside dope about takeover situations. "My life will be forever
changed," said the chastened Boesky, who had to pay a record
$100 million settlement and will be banned from professional
stock trading in the U.S. starting in April 1988.

As part of his settlement with the SEC, Boesky reportedly had
allowed investigators to tape-record his business conversations,
which implied to nervous Wall Streeters that more culprits were
likely to be snared in the weeks and months ahead. Most
intensely watched was the go-go investment firm Drexel Burnham
Lambert, which had close ties to Boesky and ranked as Wall
Street's leading financier of corporate raiders through
high-yield, high-risk junk bonds.

Since so much insider trading is based on knowledge of
impending corporate raids, the Boesky scandal heated up the
public scrutiny of takeover artists. Economists and other
thinkers wondered out loud whether greed had gotten out of
control on Wall Street. "This is no longer free enterprise.
It's predators on the loose," declared Investment Banker Felix
Rohatyn, perhaps the most outspoken critic of corporate raiding.
Observers began to describe the era as a time of paper
entrepreneurship, in which a lot of stock and money changes
hands but no real work gets done to benefit the economy. "In
America, industry has become the plaything of finance," said
Robert Reich, a lecturer in public policy at harvard's Kennedy
School of Government.

The situation has raised pertinent questions about the role and
performance of giant corporations. Why had once strong U.S.
companies become so vulnerable to raiders and foreign
competition? The atmosphere of soul-searching gave rise in 1986
to several of the hottest business buzzwords of the 1980s. One
was "corpocracy," meaning the Big Business equivalent of
government bureaucracy. The Reagan Administration used the term
in contending that many of corporate America's problems were of
its own making. Richard Darman, the Deputy Treasury Secretary,
stirred the debate in November, when he blasted big companies'
tendency to be "bloated, risk averse, inefficient and
unimaginative."

The Reagan Administration invoked corpocracy as a reason to take
the lead on another fast-rising issue:  industrial
competitiveness. Legislators began picking up that term during
1986, often as a politically palatable way to champion trade
restrictions designed to help beleaguered industries in their
home states. Some of those measures, which Congress is likely
to debate in early 1987, could include export subsidies, import
quotas or other protectionist steps that the Administration
generally opposes. To pre-empt any protectionist bill, the
Administration said in December that Reagan would announce his
own competitiveness-boosting plan in January's State of the
Union address. The Reagan proposal would emphasize increased
productivity at home, probably through greater emphasis on
worker training and research and development.

The need for U.S. business to boost efficiency prompted many of
them to embrace yet another popular concept:  restructuring.
The mild- sounding new term actually meant the radical shedding
of unwanted and unprofitable divisions and the wholesale
trimming of excess employees. A highly visible case was CBS,
whose board of directors dumped Chairman Thomas Wyman in
September and installed as acting chief executive the company's
largest stockholder, Laurence Tisch, a conglomerator known for
wielding a sharp scalpel. At CBS, Tisch proceeded to sell off
publishing divisions, lay off hundreds of employees and chop
such perquisites as limousines and company- subsidized birthday
parties.

Indeed, slimming-down became a major preoccupation of U.S.
corporations. AT&T announced plans in December to eliminate
27,400 jobs, or 8.6% of its work force. One of the companies
most in need of fat trimming was General Motors, which began a
program in November to close ten plants and part of another over
three years, a strategy affecting 29,000 of its 812,000 workers.
But Chairman Roger Smith failed to streamline GM's operations
fast enough to please the company's self-appointed gadfly, H.
Ross Perot, who had joined the GM board in 1984, when the
automaker bought his Dallas-based company, Electronic Data
Systems. Riled and embarrassed by the Texan's public hectoring,
GM's directors tried to quiet Perot in December by removing him
from the board and paying him $700 million to buy back his
stock.

Some of the most radical restructuring--and merging--took place
in the airline industry, in which carriers weakened by fare wars
banded together for strength. Even feisty Donald Burr, founder
and chairman of upstart People Express, agreed in September to
combine his ailing carrier with rival Texas Air. Piloted by the
successful union buster Frank Lorenzo, Texas Air also acquired
Eastern and Frontier airlines in a drive to become the largest
U.S. carrier. Other airlines joined forces as well:  Delta
agreed to buy Western, Northwest took over Republic, and TWA
bought Ozark.

Yet not everyone was preoccupied with restructuring during
1986. Plenty of innovation and entrepreneurship took place.
Ford took a chance on a radically aerodynamic line of autos, the
Taurus and Sable models, and sold some 347,000 of them. Kodak
introduced a revolutionary new, lithium-based battery called
Ultralife, which lasts twice as long as alkaline cells. A
Yuppie tinkerer in Massachusetts started selling little yellow
auto signs that read BABY ON BOARD, thus giving birth to an
overnight industry to produce such whimsical retorts as NOBODY
ON BOARD and EX-WIFE IN TRUNK. Perhaps the most fitting hit
product for the end of 1986 was the five-album set of live songs
by Bruce Springsteen, America's poet of the common man.
Typically priced at only $25, his album found its way under
thousands of Christmas trees and helped consumers ring out an
unexpectedly upbeat year.

--By Stephen Koepp