Cover Stories: Why We're So Gloomy

By John Greenwald

"I haven't really been able to sort out exactly why there has been this degree of pessimism."

-- George Bush, Dec. 26, 1991

Well, why are Americans so gloomy, fearful and even panicked about the current economic slump?

At first glance the numbers don't seem so bad. The stock market went on a record-breaking rampage last month, finished 1991 at an all-time high, and kept setting new highs in the opening sessions of 1992. Inflation is at the lowest level in five years, and home mortgages are available at interest rates not seen since 1974. They may fall even further, thanks to the Federal Reserve's dramatic cut in the discount rate last month to a 27-year low. The official unemployment rate is nowhere near as severe as it was at the depth of the 1981-82 recession, and the contraction in the gross national product (so far 1.4%) has been far less sharp. "Ten years ago we would have thought this was paradise, and now we're whining about it," says David Wyss, chief economist for the consulting firm DRI/McGraw Hill.

"Whining" hardly captures the extent of the gloom Americans feel as the current downturn enters its 18th month. The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. "Never in my adult life have I heard more deep- seated feelings of concern," says Howard Allen, retired chairman of Southern California Edison. "Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble." Says University of Michigan economist Paul McCracken: "This is more than just a recession in the conventional sense. What has happened has put the fear of God into people."

In one of history's most painful paradoxes, U.S. consumers seem suddenly disillusioned with the American Dream of rising prosperity even as capitalism and democracy have consigned the Soviet Union to history's trash heap. "I'm worried if my kids can earn a decent living and buy a house," says Tony Lentini, vice president of public affairs for Mitchell Energy in Houston. "I wonder if this will be the first generation that didn't do better than their parents. There's a genuine feeling that the country has gotten way off track, and neither political party has any answers. Americans don't see any solutions."

Americans are so uneasy because they feel economic turmoil on two levels, one relatively superficial and the other much deeper. The surface layer is the most immediately painful one, a garden-variety recession of the sort that comes along every few years with the ups and downs of the business cycle. This one has brought the familiar pattern of layoffs and weak profits.

The deeper tremors emanate from the kind of change that occurs only once every few decades. America is going through a historic transition from the heedless borrow-and-spend society of the 1980s to one that stresses savings and investment. In the short run, this helped trigger the cyclical recession, which is likely to run its course in the next few months. But when it's over, America will not simply go back to business as usual.

The underlying change in the way American consumers and business leaders think about saving and spending will make the recovery one of the slowest in history and the 1990s a decade of lowered expectations. Many economists agree that the U.S. will face at least several years of very modest growth, probably in the 2% to 3% range, as consumers and companies work off the vast debt they assumed in the 1980s. But there is much to be gained. Increased investment and long-term thinking, if it endures, could help rebuild the competitiveness of American industry and bring back the kind of prosperity not seen since the 1960s.

The slump has galvanized Democratic hopes of regaining the White House this year and has confronted Bush with a tough set of choices. Mindful that the economy has expanded an average of just 0.3% annually since he took office, the worst performance under any postwar President, Bush would dearly love to ignite growth through tax cuts or other incentives to bolster his chances in November. Yet at the same time he fears worsening a budget deficit that is expected to exceed $350 billion this year.

Nearly paralyzed by the dilemma, Bush departed last week on a nakedly political tour of the Pacific Rim to beseech Japan and other countries to buy more U.S. products. He left top aides feverishly at work on the much ballyhooed growth package that he plans to present in his Jan. 28 State of the Union message.

The economy is by far Bush's weakest spot. In a TIME/CNN poll conducted Jan. 2, only 24% of those surveyed think the President is doing a good job handling the economy, which is up from a nadir of 18% in late November but still lopsided. According to 84% of those polled, the recession is still going on in the area where they live. A ray of hope has emerged in the past month, though, possibly tied to interest-rate cuts and the stock-market rally. Those who think the economy will improve in the next 12 months have grown to 36% of respondents, up from 26% last November. Even so, 36% think the economy will be unchanged, and 25% say it will get worse.

The conditions that led to today's transition economy go back even further than the Roaring '80s. Americans have suffered a long-term stagnation of their earnings. The median income of U.S. families has virtually stood still since 1973, rising from $24,345 in inflation-adjusted dollars to $25,830 last year. That marks an annual gain of just 0.3% a year. From 1959 to 1973, by contrast, incomes grew a robust 2.7% a year.

The deterioration took place in several stages that provoked surprisingly little protest from most Americans. Notably, the rise of the two-income family tended to obscure the fact that individual workers were falling behind. The oil shocks of the 1970s led to double-digit inflation and slow economic growth, which eroded incomes in a process dubbed stagflation. Then buyouts and - corporate downsizing in the 1980s created a huge exodus of workers from high- paying manufacturing jobs to less lucrative service-sector work. While the U.S. created some 18 million new jobs in the 1980s, many were in such industries as banking and retailing, which are now frantically shedding workers. "The 1973 period marked the beginning of the decline of the American standard of living," says Allen Sinai, chief economist of the Boston Co. "The Reagan years interrupted that trend by borrowing and spending, which led to the retrenchment that has deepened the current slump."

The 1980s binge took place on a colossal scale in every sector of the economy. Runaway federal deficits have more than tripled the national debt since 1980, to $3.1 trillion; interest on that sum eats up $286 billion a year and accounts for the third largest expense in the budget. Meanwhile, consumers increased their IOUs from $1.4 trillion in 1980 to $3.7 trillion last year. And U.S. industry raised its debt from $1.4 trillion to $3.5 trillion over the same period.

The reckless borrowing made a reckoning inevitable. "You can't spend eight years priming the pump and getting all your growth through debt in the private, corporate and public sectors and expect to come out of it overnight," says John Bryan, chairman of Sara Lee. "We're not going to get any momentous return to growth anytime soon." Concurs an Administration economist: "People are smarter than we give them credit for. They've known we couldn't keep borrowing our way to prosperity forever." Asked in the TIME/CNN poll whether Americans today can enjoy the same standard of living as recent generations, 62% said no.

To make matters worse, much of the corporate debt was splurged on paper- shuffling buyouts and grandiose real estate projects rather than on factories or production machines. The vast oversupply of office buildings, shopping centers and other projects led to the bankruptcy of real estate developers, then to the widespread failure of the banks and thrifts that financed the deals. In what some business leaders view as an overcorrection, many of the surviving banks have slammed shut their lending windows to all but their best-heeled customers, depriving the economy of sorely needed money for recovery.

The 1980s were so pumped up with debt that most people thought a deep recession would hit after the market crash of 1987. But by sheer momentum, the economy managed to keep growing for a year or so, much like Wile E. Coyote running off a cliff and standing for a few seconds on thin air. In 1989 and early 1990 the economy was growing so slowly it might as well have been motionless. Then Iraq's invasion of Kuwait in July 1990 sent oil prices above $40 per bbl. and pushed the U.S. into a bona fide slump.

When the recession arrived, it triggered the kind of layoffs that occur in any slump. But it has also accelerated a wave of firings that can only be attributed to longer-term structural changes, including a drastic shakeout in industries that were overbuilt in the 1970s and '80s. Among the worst hit is retailing, which is undergoing a painful adjustment to the frugal '90s. Just last week Zale, the largest U.S. jewelry-store operator, said it would close 400 of its 2,000 stores and lay off 2,500 workers. "We are looking at the historic restructuring of the American economy," says Dan Lacey, an Ohio- based employment consultant. "It's not just decline; it's turmoil. Even those people who are still working have lost faith in their ability to stay employed. The memory of what's going on is not going to be erased from today's workplace any more than the memory of the 1930s was erased from earlier generations."

While some economists have described the current slump as a near depression, that phrase overstates the case if it is taken as a comparison with the period 1929-33, when the U.S. economy contracted by nearly a third. The D word becomes more valid, especially with a small d, when it is used to compare the growth rate of the 1930s, which averaged 0.5% a year, with the expected sluggishness of the 1990s, which some economists predict will see an average growth rate of 2%.

In some respects, the current recession is more painful than the numbers show because this slump is so different from most. The current unemployment rate of 6.8%, for example, appears to be well below the level reached in the 1981-82 recession, when joblessness peaked at 10.8%. But experts say the comparison is misleading because the labor force is growing far more slowly today than a decade ago, which means that fewer people are seeking jobs. Among other things, the slowdown reflects both an aging U.S. population and a decline in the number of people ages 18 to 24 who are embarking on careers. Moreover, 1.2 million discouraged workers have given up looking for jobs, up 25% from a year ago. In the TIME/CNN poll, 23% of those surveyed said they had been unemployed, not by their own choice, at some point during 1991.

* In a perceptual sense, the gloom is deeper because this time unemployment has hit an influential and vocal class of managers and other white-collar workers. "So many of us are seeing our peers thrown out of work," says John Rogers, who runs his own Chicago investment firm. "That's what's so frightening."

Another factor that has aggravated unease in this recession is that there has been no sense of leadership, let alone prescience, from Washington. Consumers were blindsided by the failure of the White House and most economists to foresee the length of the downturn. "Everyone was told it was going to be mild," says Stephen Levy, director of the Center for the Continuing Study of the California Economy. "Coming out of the gulf war, people thought it would last just two quarters." But while the economy did manage gains of 1.4% in the second quarter and 1.8% in the third, few experts doubt that the U.S. has become mired in a double-dip slump that for all practical purposes never really ended. "Everything was set for a typical recovery," says economist Gordon Pye, who runs his own New York City consulting firm. "But when employment did not increase and the waves of layoffs and restructurings continued, that really inhibited it."

The downsizing has dismayed recent college graduates, who have found it difficult if not impossible to land a good job. "I'm beginning to think it wasn't the best financial decision to go to law school," says Kathy Woods, who is still seeking work after graduating from the University of California's Hastings law school last spring. "I was a waitress over Christmas," she says. Laments a jobless graduate of the Georgetown University School of Foreign Service who has lived at home since he left school last May: "Of the 30 or so people I graduated with and am closest to, I know of just three who have professional jobs. Others are receptionists or doing things like waiting tables. A lot are going to graduate school because there is nothing else to do."

Hard times are forcing some people to turn their back on the American Dream. In El Monte, Calif., Julio Toruno, the son of a Nicaraguan immigrant who prospered in Southern California after World War II, watched the revenues from his print shop nose-dive 20% last year. "I don't have the opportunities my father had," he says. Strapped by high housing costs, steep taxes and a declining income, Toruno and his wife recently bought land in Nicaragua and plan to move there in the spring.

For now, many economists are counting on the Federal Reserve's cut in the discount rate from 4 1/2% to 3 1/2% to set the stage for a mild recovery that could start by summer. The sharp reduction was significant because the discount rate, which is what the Fed charges banks for borrowing money, is a bellwether for interest costs throughout the economy. The average rate for a 30-year, fixed-rate mortgage last week was 8.24%, the lowest in 18 years. At the same time, election-year pressures are likely to push Washington into enacting a few modest tax breaks to stimulate growth.

But consumers will have to open their wallets before any recovery can get rolling, and that is by no means ensured. Says Stephen Roach, a senior economist at Morgan Stanley: "Interest-rate cuts are a very constructive stage setter for economic recovery, but we need an improved sense of job security to allow the effects of the cuts to work their way through the system."

So far, though, no reprieve from layoffs is anywhere in sight. Economists say U.S. companies will shed more than 1 million jobs in 1992 in fields ranging from banking to aerospace, a pace even faster than last year's. "It's become almost like a poker game to see who can cut the most," says employment analyst Lacey. "There's a kind of corporate frenzy."

That would be worrisome even if downsizing were a magic bullet that could swiftly restore the competitiveness of American industry. But while layoffs will cut expenses and boost corporate profits, they cannot by themselves turn companies around. GM's plans to close 25 plants by 1995 and cut 74,000 jobs, or 19% of its work force, scarcely addresses such problems as why it takes the company up to a year longer than the Japanese to redesign its cars.

At the very least, the current malaise has raised the public's consciousness about the need for real leadership and accountability in both Washington and corporate America. People are smart enough to know when they are being squeezed. Their pain reflects economic woes that have piled up for years. Correcting those problems will take vision in the White House and Congress, and long-term planning in the executive suite. Americans are unlikely to feel much better until they see that their well-founded concerns are at last being recognized and addressed.

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CREDIT: NO CREDIT

CAPTION: POSITIVES

OPPOSING FORCES

NEGATIVES

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CAPTION: COMPARING THE SLUMPS

At 18 months and counting, this recession is the most stubborn since the Great Depression, but not as deep as some other postwar downturns.

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CREDIT: TIME/CNN POLL

From a telephone poll of 500 American adults taken on Jan.2 by Yankelovich Clancy Shulman. Sampling error is plus or minus 4.5%. "Not sures" omitted.

CAPTION: Has the recession ended in the area where you live?

Do you think economic conditions in this country will improve during the next 12 months?

Has the recession caused you to cut back on your spending?

Can Americans today enjoy the same standard of living as recent generations?

Is the U.S. in a long-term economic decline?

With reporting by William McWhirter/Detroit, Jane Van Tassel/New York and Richard Woodbury/Houston