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                                                                                COVER STORIES, Page 34

THE ECONOMY

The Long Haul


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.