Freed From Greed?

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.

With reporting by Richard Behar/New York, Richard Hornik/Washington and William McWhirter/Chicago