TIME: Almanac 1995

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<text id=92TT2159> <title> Sep. 28, 1992: The Long Haul </title> <history> TIME--The Weekly Newsmagazine--1992 Sep. 28, 1992 The Economy </history> <article> <source>Time Magazine</source> <hdr> COVER STORIES, Page 34 THE ECONOMY The Long Haul </hdr><body> If the recession is over, why does the pain linger? Because this is no normal recovery. Business is barely moving. And consumers have dug in their heels. But there's good news: if the U.S. gets to work rebuilding itself, better days will come. By S.C. Gwynne/Washington--With reporting by Thomas McCarroll/ New York, William McWhirter/Detroit and Richard Woodbury/Houston If America's economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many voter polls, taken as the economy shudders toward the November election, reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land." The outward sign of the change is an economy that stubbornly refuses to recover from the 1990-91 recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for 1993, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression. That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults, many of them legacies of the 1980s, represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit. "This is a sick economy that won't respond to traditional remedies," said Norman Robertson, chief economist at Pittsburgh's Mellon Bank. "There's going to be a lot of trauma before it's over." How to fix the broken parts of the economy has not only become a central issue of the presidential campaign but is also likely to stand as Topic A for much of the 1990s. Quick fixes will not work, a point that many Americans seem to be accepting. In fact, that is the light at the end of the tunnel. "A lot of good things are going on underneath the surface that will actually work very well for us two and three years out," said Allen Sinai, chief economist for the Boston Co. Economic Advisors. Until earlier this year, the U.S. seemed to be headed for a more normal rebound, thanks to the brisk tempo of export sales. But then the economy began to suffer from yet another new development: America's growing linkages to the global economy, which has gone into a slump. The world's economy didn't grow at all last year, and is expected to expand only 1.1% this year. The currency crisis that swept Europe last week was a profound symptom of the West's stagnation. Germany's relatively high interest rates, run up by the cost of rapid unification, have prevented its major trading partners--including to some extent the U.S.--from lowering their own rates enough to boost their economies. For the U.S., a major effect of Germany's high rates is the damper they put on America's primary export markets. In the second quarter of this year, the U.S. trade deficit zoomed to $17.8 billion, up from $5.9 billion in the previous quarter. "That cut the second-quarter growth rate for the country in half. That's how dependent we are on the global economy," says C. Fred Bergsten, director of the Institute for International Economics. Just as in the U.S., the outlook in Europe and Japan is for a drawn-out recovery. America's structural burdens have hit home most profoundly in terms of jobs. The U.S. workplace is "in a profound, historic state of turmoil that for millions of individuals is approaching panic," according to labor consultant Dan Lacey, publisher of the newsletter Workplace Trends. Official statistics fail to reveal the extent of the pain. Unemployment stands at 7.6%, far lower than the 1982 high of 10.8%, but more people are experiencing distress. A comprehensive tally would include workers who are employed well below their skill level, those who cannot find more than a part-time job, people earning poverty-level wages, workers who have been jobless for more than four weeks at a time and all those who have grown discouraged and quit looking. Last year those distressed workers totaled 36 million, or 40% of the American labor force, according to the Washington-based Economic Policy Institute. Pay has come under assault as well. The much touted job gains of the 1980s were, for the most part, low-wage positions earning $250 a week or less. More than 25% of the U.S. work force now toils in this class of job, up from less than 19% in 1979. Laid-off workers who return to the market often must take huge pay cuts. Carolyn Collins, 49, of Ames, Iowa, who lost a $10-an-hour job running quality-control studies for a plastics maker, found new work as a clerk-typist, at $6.85 an hour. "If this is happening not just to me but to thousands of other people," says Collins, "I don't see how the economy can ever totally recover, because we don't have the spending power we used to." Her hunch is right. After adjustment for inflation, the real incomes of U.S. workers have declined about 13% over the past two decades. The latest recession has hit white-collar workers particularly hard, both in terms of layoffs and slippage in their real wages. "These people can't believe what is happening to them," says Illinois opinion pollster Mike McKeon. "They decided they didn't want to work in factories, so they learned how to use computers. They were rewarded with service-sector jobs in the 1980s, but now they're out on the street and no one wants them." Open season has been declared on corporate bureaucrats. "The middle manager has gone out of vogue in corporate America," says Lacey. "Indeed, the word manager is the kiss of death on resumes." What workers are experiencing is an epochal, technology-driven change akin to the industrial revolution in the 19th century. The displaced workers must now reintegrate themselves into an economy that increasingly rewards only highly skilled labor. The question then becomes: How do they make that leap? The answer is not being provided by either politicians or the economy itself, which leaves the unemployed to stare at the enormous gap between a job as a grocery clerk or some high-skill, high-wage position they cannot dream of getting. What to do with these workers, how to make them productive consumers, is the fundamental dilemma of the American economy. "Every time I lay off 3,000 guys," says Chrysler chairman Lee Iacocca, "I know there are 3,000 less customers who are able to buy our products." Future growth depends upon a solution. Dave King, 54, was laid off last week from his toolmaking job in Troy, Michigan, only two months after finding the position. He fears he will have to take a truck-driving job at $7 an hour, less than half his former pay. "The older people like me are really in a bind," he says. "The younger ones can get retraining. But who's going to retrain you if you've got only five or 10 years left?" The depth of the need for some coherent system of retraining was demonstrated recently in California, when more than 1,000 people arrived at 4 a.m. and waited for up to six hours to enroll in tuition-free nursing and medical-technology training classes at the North Orange County Regional Occupation Program. The bogy behind much of the adverse change in the job market is global competition, the single most powerful economic fact of life in the 1990s. In the relatively sheltered era of the 1960s, a mere 7% of the U.S. economy was exposed to international competition. In the 1980s that number zoomed past 70%, and it will keep climbing. The first and most visible victim of the competition was the automobile industry, which suffered massive layoffs in the late 1970s and 1980s. The latest point of impact is America's service sector, which includes everything from banks to airlines, publishers to insurance firms. "Our service market is now being increasingly populated by deep-pocketed foreign players. The pain of that bears most acutely on the American worker," says Stephen Roach, senior economist at Morgan Stanley. Part of the American competitive response has been technological, driven by the computer chip, which some analysts say has caused more industrial dislocation than any other advance in the history of capitalism. In the early 1980s it arrived in manufacturing in the form of robots and computerized machine tools; in the 1990s it is replacing back-room white-collar clerical workers in service industries by the score. Like the historic shift from agriculture to heavy industry in the 19th century, the advent of a new technology ought to be creating a whole new class of jobs to replace the ones lost. That's not happening: the transition has left too many workers in an economic twilight zone. The good news is that some of America's industries have made huge progress toward becoming competitive. While General Motors is still struggling to become more efficient, Ford and Chrysler now rank as the world's lowest-cost producers of cars and trucks. Product-quality levels have kept pace, as well as fuel economy. In service businesses, the waves of corporate cutbacks have cut so deeply that the worst may be over. Industries like retailing will have largely taken their lumps by the end of next year, paving the way for a modest recovery. "Beyond a certain point, restructuring is really only living off the legacies from the past. After cleaning up our house, we need to move forward and create new opportunities," says C.K. Prahalad, a management professor at the University of Michigan's business school. One major obstacle to efficiency remains: a runaway U.S. health-care system, whose costs are rising at the rate of more than 9% a year and today stand at $2,500 a person, more than twice the level of most of the world's industrialized economies. Such costs add 15% to the price of every new motor vehicle, for example, a margin that single-handedly threatens to eliminate the entire cost advantages achieved by Ford and Chrysler. One legacy of the 1980s simply needs time to work itself out: the debt hangover. The initial stages were painful, wiping out both borrowers and lenders. Bank regulators clamped down on lenders, while borrowers either swore off the credit habit or were deemed bad risks. The result was a credit crunch that has severely hurt businesses, especially small ones. Among the 8 million such companies in the U.S., failures are running at the rate of 240 a day. One of the faces behind the numbers is Joseph Burton, whose plight embodies many of the woes now afflicting small business. In 1974, Burton used his savings to start a home-remodeling company in a Cleveland suburb. The firm thrived by borrowing to finance its work of custom-building homes. But when Burton requested a $25,000 loan last year, he was turned down by seven different banks, although he offered $60,000 in tools as collateral. Last February he was forced into bankruptcy, and 15 employees lost their jobs. "It is not a happy scenario," comments banking consultant Edward Furash. "It's like the 1930s in terms of how long it will take to work the problem out." In big business, the load of $2 trillion in corporate debt is preventing the sort of capital investment the economy needs to remain on competitive footing in the 1990s. But manufacturers are making some headway, having slashed business debt by 12% in the past year alone. Consumers are finally beginning to swear off the habit as well, after running up the average credit-card balance to more than $1,600, compared with less than $500 in 1982. The debt-cutting trend is bad for retail sales in the short run but bodes well for the mid-1990s. Most committed to saving are baby boomers, who want to save money for their children's education and for retirement. "Debt is a dirty word for consumers now," says Robert McKinley, president of Ram Research Corp., which tracks credit-card use. Consumers are unlikely to change their penurious ways until they feel that their debts have reached comfortable levels and their jobs are secure. "Consumers are reacting very rationally to the kind of situation they are confronted with," says Gail Fosler, chief economist for the Conference Board, a business-research group. The real estate bust has added to the insecurity, since many people who urgently bought homes during the run-up in the 1980s now find their equity shriveled. In July the median price of a new home in the U.S. fell 7.9%, to $115,000, from $124,900 in June. Low inflation has almost completely removed the urgency to dash out and buy a house before the price goes up. "Ten years ago, I told my clients to buy the biggest and most expensive house they could afford and borrow every dime they could," said Atlanta C.P.A. Jim Frazier. "Now I tell them to buy only as much house as they need and look at it only as a roof over their heads." The consumer-debt hangover will be far easier to solve than the government's. With the national debt an estimated $4 trillion and this year's budget deficit expected to reach nearly $334 billion, the government is limited in how much it can stimulate the downtrodden economy with the usual recession cure of a quick jolt of spending. Yet a growing number of economists are contending that shrinking the federal deficit is a worthy goal that should be temporarily suspended until the economy is back on track. While the national debt will hamper the economy over the long run, its net effects on growth over the short run are insignificant compared with such problems as unemployment, declining wages and worker dislocation. The other primary slump-fighting tool, monetary easing, has just about been played out. The Federal Reserve Board has cut short-term interest rates 24 times since 1990, bringing them down from 9% to 3%, the easiest credit since the 1960s. But critics have complained that the Fed wasted its fuel by easing so gradually and slowly that the economy never got the swift kick it needed. Now rates are so low that the Fed has little room left to maneuver, and additional interest reductions have been hampered by the need to keep the U.S. dollar from dropping against the overmuscled German mark. The crowning touch to America's economic woes is the end of the cold war, a wondrous development for the country's future but a bombshell in the short run. "This economy has been on a wartime footing for all of our lives, and that's big stuff," says economist Sinai. "Instead of 3.3%-a-year rises in defense spending in real terms, we're going down in defense 5% a year." Besides letting huge clouds of steam out of the overall economy, the military build-down will take a huge personal toll on displaced workers. Says labor expert Lacey: "The people who are being jettisoned by the U.S. defense industry form a particularly tragic group in the U.S. work force right now. Some are high-wage production workers, roughly analogous to ex-autoworkers. As a result, the odds of their finding commensurate re-employment approach zero." That the American economy can withstand all this and not collapse is a testament to its resilience. Many economists are beginning to think the most valuable resource America can have in the first half of the decade is the willingness to tough it out. "We just need more patience," says Texas A&M economist Jared Hazleton. "The economy is on a course to recovery, and part of that is very slow growth. People forget that we've made dramatic strides in the past few years in reducing debt and restructuring. We're much more efficient today in manufacturing and services. If we can keep inflation and interest rates down and keep moving forward, we're looking at a reasonable recovery in 1993-94." But the prospects for a rise in consumer confidence are linked directly to the rate at which the economy can manufacture jobs at decent wages. Those will be hard to come by in the coming years, which will be spent curing these large and unwelcome burdens America is suddenly forced to bear. Slow growth is the curse of the 1990s. But if it is managed correctly, there is no reason to believe American prospects in the long run are dim. They are not. What is required is a collective political will that has been conspicuously absent from the American economic landscape for too long. </body></article> </text>