Cheers for a Banner Year

By Charles P. Alexander

As growth surges and inflation stays low, companies slim down and shape up

For the first time in a long time, Americans will be able to toast the new year with the feeling that it will bring greater prosperity and brighter prospects. With unemployment falling, incomes rising, inflation at bay and shoppers crowding into stores, the economy is entering 1984 on a roll rather than in a rut. Looking back, businessmen and consumers can celebrate 1983 as a year of rebound and turnaround. For many industries and labor unions, it was also a year of transition and turmoil that will permanently reshape the economic landscape. Serious threats to growth remain, most notably the ballooning federal deficit and the formidable challenge of foreign competition. Nonetheless, millions of revelers will ring out 1983 this weekend with a rousing and heartfelt cheer.

The year marked the centennial of the birth of John Maynard Keynes, and the tonic that jolted the U.S. out of recession was just what the famed economist might have prescribed: easier money, lower taxes and heavy Government spending. Ironically, the chief architect of the recovery had never been known as a disciple of Keynes'. Ronald Reagan came to the White House pledging to balance the budget and trim the size of Government. Instead, his Administration ran up a fiscal 1983 deficit of $195.4 billion, which is more than the entire budget was less than 15 years ago. But the President was too pleased with the results to worry much about whether his policies were considered Keynesian, monetarist, supply side or all of the above. Said Reagan in an October speech: "You know that the best clue that our program is working is our critics don't call it Reaganomics any more."

Much of the credit for the recovery, however, belongs to Federal Reserve Board Chairman Paul Volcker. After squeezing the money supply enough to reduce inflation from 12.4% in 1980 to 3.9% in 1982, the central bank eased up considerably in the last half of 1982 and early 1983. The change in policy helped push down the prime rate that banks charge for corporate loans, from 16.5% to 10.5%, and triggered an economic upturn last spring that was much brisker than expected. From April through September, the gross national product, adjusted for inflation, expanded at an 8.6% annual pace. The economy was so exuberant, in fact, that the Reserve Board decided to tighten slightly in late spring, and the prime rate later rose a notch, to 11%. Government figures released last week showed that G.N.P. growth slowed to a more sustainable 4.5% pace in the fourth quarter and that consumer prices rose in November at a modest 3.6% annual rate.

The recovery defused much of the public criticism aimed at Volcker, who had often been accused of bringing on the recession to tame inflation. He stopped receiving two-by-fours in the mail from homebuilders protesting his policies. In a congressional hearing, Republican Senator John Heinz of Pennsylvania told Volcker that "the only things I can think of that you haven't been blamed for are herpes and giving up the Panama Canal." But the Senator added, "We're lucky to have you as chairman."

Volcker's term in office was scheduled to end in August, and the question of whether Reagan would reappoint the chairman generated more excitement and suspense than Billy Martin's fate as manager of the New York Yankees. For a while, Presidential Counsellor Edwin Meese and Treasury Secretary Donald Regan urged Reagan to choose his own man to replace Volcker, a Carter appointee. The anti-Volcker group, though, never came up with a serious candidate, and the business community rallied around the chairman because of his record as an inflation fighter. Finally on June 18 the President interrupted a radio address with what he called a news flash: "Give me the city desk. I've got a story that'll crack this town wide open! . . . I have asked Chairman Paul Volcker to accept reappointment."

The hoopla surrounding Volcker's nomination heightened his status as the staid financial community's first superstar. At his congressional confirmation hearing, so many lawmakers, reporters and visitors were eager to hear the chairman that the session had to be moved from the Senate Banking Committee hearing room to the huge Caucus Room, where Senators had once interrogated the Watergate conspirators. Yet despite his power and prestige, Volcker retains his austere personal style. He still lives in a cubbyhole apartment near his office, bums cheap cigars from colleagues and brags about his watch, which looks exactly like a $1,500 Rolex but cost him only $60.

In their battle against inflation, Reagan and Volcker had good fortune on their side. With the world awash in an oversupply of oil, the once mighty Organization of Petroleum Exporting Countries could no longer dictate the cost of crude. The group's new powerlessness moved Mani Said al-Oteiba, Oil Minister of the United Arab Emirates, to compose a doleful poem that began:

l am truly troubled and with OPEC distressed,

OPEC's major crisis is no longer suppressed,

The market is stagnant, the price of crude oil depressed.

In January a rancorous OPEC session in Geneva broke up before agreement could be reached on a pricing strategy, and the group seemed on the verge of disintegration. Within three weeks, a price war erupted, led by Britain and Norway, two non-OPEC producers, and Nigeria, an OPEC member. Finally in March, after a twelve-day session in London, the bickering band of OPEC ministers agreed to slash their bench-mark oil price from $34 per bbl. to $29, the first cut in the group's 23-year history.

The dip in petroleum prices and the sharp drop in U.S. interest rates helped ease pressure on many developing nations that are struggling under enormous and dangerous debt loads, but their finances remain shaky. Two weeks ago, the new government of Argentina requested a six-month grace period for interest payments on its $40 billion debt. A team of bankers and troubleshooters from the International Monetary Fund approved a $10 billion emergency loan package in November that once again saved Brazil from defaulting on its $91 billion debt, but the country's economy is deeply depressed and has been plagued all year by strikes, demonstrations, riots and looting. As a major petroleum exporter, Mexico was hurt by the oil price decline. Nonetheless, it is managing to keep up with interest payments on its $88 billion in foreign loans.

After an uncharacteristically sluggish 1982, the dynamic economies of the Pacific region surged again in 1983. The U.S. recovery allowed South Korea, Singapore and Taiwan to boost exports and achieve growth rates in the 6%-to-9% range. Japan's economy grew at a more modest 3.5% pace, but the government unveiled a program to spur consumer demand with tax cuts and new public works spending.

Western Europe's rebound has been painfully slow. The ten nations of the European Community have had an average 1983 growth rate of about 1%, and unemployment hovers at 10.5%. Aftershocks of the recession are still shaking confidence. West Germany's banking system was rocked in November by the collapse of IBH Holding, a giant construction equipment manufacturer that was an estimated $300 million in debt. Hellenic Lines, the largest Greek cargo-shipping company, filed a bankruptcy petition this month, after defaulting on an $80 million credit line from U.S. and European banks.

In the U.S., some of the biggest stories were bankruptcies that never happened. International Harvester, the ailing farm-equipment manufacturer that many on Wall Street had given up for dead, limped through the year. The company said this month that its 200 creditors had agreed to a $3.5 billion debt-restructuring plan that gives the firm hope for survival.

Chrysler moved off the critical list and earned a $582.6 million profit for the first nine months of the year. No one better symbolized the determination of American businessmen to turn things around than Chrysler Chairman Lee lacocca. He saved the third largest U.S. auto company by revamping its product line, trimming and modernizing its operations and gaining wage concessions from workers. In August Chrysler roared past a milestone by repaying, seven years ahead of schedule, the last of the $1.2 billion in federally guaranteed loans it had received as part of the bailout plan that Congress passed in 1979. Beamed lacocca: "We at Chrysler borrow money the old-fashioned way. We pay it back."

Chrysler's survival tactics dramatized several trends that have been transforming the U.S. economy. Pressed by foreign competition, such smokestack industries as autos, steel and rubber have been closing inefficient plants, thinning out their work forces and relying more heavily on state-of-the-art technology and automation. Employment levels in these old-line fields will probably never return to pre-recession levels. Future job growth will increasingly be concentrated in such service sectors as health care and the restaurant business, rather than in manufacturing.

As companies tried to reduce costs in 1983, labor unions lost clout and suffered pay cuts. For some 20,000 packinghouse employees who are members of the United Food and Commercial Workers International Union, the average hourly wage dropped from more than $10 to about $8. Said Union Official Lewie Anderson: "Workers haven't taken this bad a beating since before 1935." Greyhound employees staged a bitter seven-week strike against the bus line. In the end, the workers agreed last week to a 7.8% wage cut.

Steel was the sickest of the smokestack industries. Despite the recovery, steel companies lost $1.668 billion in the first nine months of the year. With 250,000 members on layoff, the United Steelworkers has felt as if it were pinned under an I beam. In March the union took a 9% pay cut, but that did not satisfy management. U.S. Steel threatened this month to shut down five plants, either partially or completely, unless employees accept further contract concessions.

While putting a squeeze on workers, the steel companies continued their campaign in Washington for greater protection from imports, which have captured 19.6% of the American market. Though Western Europe and Japan have curbed their steel exports to the U.S., a new wave of shipments is flowing in from Brazil, South Korea and Mexico. Steel executives argue that these exports are subsidized by foreign governments and that the U.S. should retaliate with import quotas.

In its rhetoric, the Administration rejected protectionism. Declared Reagan: "We and our trading partners are in the same boat. If one partner shoots a hole in the bottom of the boat, does it make sense for the other partner to shoot another hole? There are those who say yes and call it getting tough. I call it getting wet." In practice, however, the White House too often bowed to pressure for import barriers. The Government hiked the tariff on heavyweight motorcycles from 4.4% to 49.4% to shield the last U.S. manufacturer, Harley-Davidson, and imposed tighter import controls on textiles.

The U.S. airline industry went through some of its most turbulent times in 1983. Spawned by the beginning of deregulation in 1978, cut-rate, nonunion carriers like People Express triggered fare wars and shot down the profits of the nine major airlines, which lost $71.8 million in the first nine months of the year. Frank Lorenzo, who was one of the pioneers of discount air travel as head of Texas International and New York Air, came up with a controversial approach to cost cutting after taking over unionized, money-losing Continental Airlines. In September he grounded all domestic flights, filed for reorganization under the bankruptcy laws, put two-thirds of the 12,000 employees on "inactive status," and started up service again with workers willing to accept as little as half the wages that Continental employees had been making. Lorenzo said that his maneuver would give Continental an "opportunity to compete." Some critics called it union busting. After Eastern Airlines Chairman Frank Borman warned that his carrier might follow Continental into bankruptcy proceedings, his major unions agreed to pay reductions and work-rule changes worth $367 million. In return, workers will get 15 million shares of Eastern stock and control two seats on the airline's board.

While many industries were shaking off the recession, the electronics business continued to boom. Americans bought an estimated 4 million videocassette recorders, up 97% from 1982, and 6.7 million personal computers, up 109%. California's legendary Silicon Valley, however, fell under the shadow of a colossus. Invincible IBM grabbed the lead in personal computer sales from Apple Computer, the young Silicon Valley firm that had been the industry's pacesetter. In just five months the price of Apple's shares plunged from $63 to $17. Another former Valley highflyer, Osborne Computer, filed for bankruptcy after its portable machines encountered stiff competition from such firms as Kaypro of Solano Beach, Calif., and Houston-based Compaq. Atari and Mattel suffered huge losses because of sluggish sales and fierce price-cutting as the video-game bubble burst.

No business was more beset by change and uncertainty than the telecommunications industry, which is anxiously awaiting the breakup of A T & T on New Year's Day. Telephone equipment manufacturers were eager to get a crack at selling to the seven new regional Bell companies, while computer firms were wondering if A T & T would be a formidable invader of their turf. Many consumers were bewildered. Fretted Dorothea White, 86, a widow living alone in Los Angeles: "I don't really see why they had to break up A T & T. It was a good system, and it seemed to be working." People questioned whether proposed cuts in long-distance rates would offset expected jumps in the cost of local service.

While preparing to spin off much of the Bell System, A T & T has been moving to expand its business overseas. It is taking part in joint ventures to make and market telecommunications equipment with Philips, the diversified Dutch company, and to manufacture electronic circuits with Gold Star Semiconductor of South Korea. In addition, AT&T announced last week that it was buying a 25% stake in Olivetti, the Italian office-equipment maker, for $260 million. In this new partnership, AT&T will gain a European distribution network for its products, while Olivetti will be able to use some of the technology developed by A T & T's Bell Laboratories.

As the U.S. recovery wound up its first year, some economists were already raising doubts about the upturn's ultimate strength and durability. Among them was Martin Feldstein, the chairman of the President's Council of Economic Advisers, who said that huge budget deficits might push up interest rates and produce a "lopsided recovery that would be slower paced and more fragile than a balanced recovery." He repeatedly warned that taxes might have to be raised.

Other Administration officials, however, brushed aside and even ridiculed Feldstein's concerns. Said Treasury Secretary Donald Regan: "I wish economists would sit back and relax. This will be one of the greatest recoveries in history." At a press briefing in November, White House Press Secretary Larry Speakes told reporters that the President and Secretary Regan "obviously don't agree" with Feldstein. He also pointedly announced that Feldstein had been excluded that day from a White House economic policy luncheon. Told that Feldstein was, in fact, present at the session, Speakes quipped, "Maybe he won't make it to dessert."

The public rebuke fueled speculation that Feldstein might be on the way out. But the President later tried to downplay the incident and insisted that there were no substantial disagreements among Administration policymakers. Nonetheless, economists like Walter Heller, who served as chairman of President Kennedy's Council of Economic Advisers, feared that Reagan was unwisely disregarding Feldstein's warnings about the need for a tax hike.

The controversy between the President and his chief economist was disturbingly reminiscent of the dispute in 1966 between President Johnson and his Council of Economic Advisers. Council Chairman Gardner Ackley argued that taxes had to be raised to pay for the Viet Nam War, but Johnson would not hear of it. He later changed his mind and signed a tax-increase bill in 1968, but the delay was a costly mistake. Many economists believe it helped unleash the inflationary spiral that U.S. policymakers have been battling ever since.

Fears of future inflation and monstrous budget deficits were not enough, however, to dispel the public mood of relief and confidence that prevailed as 1983 was drawing to a close. For many people, the most pressing concern at the moment was how to fight past the mobs crowding into shopping malls during the best Christmas season in years. The recovery was rolling, and Americans were ready to enjoy it.

--By Charles P. Alexander