The 1980s Business and the Economy: Topics in the News

DEREGULATION

The U.S. government, like many other governments around the world, regulates the activity of private businesses in the country. It does so to ensure the health and safety of the workers employed by those businesses. Government regulation also helps control the prices of products and their quality and safety. For example, the federal government regulates the manufacture and sale of many foods and drugs, the production of cars, and the practice of many occupations, including medicine and law. In 1938, to regulate the airline industry, the government created the Civilian Aeronautic Board. It had the authority to establish routes, fares, and safety standards.

In the late 1970s, a movement arose to have the federal government deregulate or reduce the restrictions it had placed on businesses. Many in the movement argued that federal regulations limited business activity, creating economic hardships both for businesses and consumers. When President Jimmy Carter (1924–) was elected in 1976, he promised to free the American people from what many thought was the burden of too much regulation by the U.S. government. By 1980, Carter had begun deregulating airlines, trucking, railroads, and interest rates. However, Carter refused to deregulate federal controls over the environment. In fact, he increased them.

When Republican Ronald Reagan (1911–) assumed the presidency in 1980, the basic framework of deregulation was already in place. Soon, Reagan expanded the scope of the Carter administration's deregulation efforts, removing government controls on many business and decreasing those on telephone, electric, and gas utilities. Reagan then took deregulation even further, focusing on federal agencies such as the Environmental Protection Agency, the Consumer Product Safety Commission, and the Occupational Safety and Health Administration.

Reagan and his administration argued that regulations pertaining to the consumer, the workplace, and the environment were inefficient and expensive. To accommodate businesses, Reagan appointed James Watt as his first secretary of the interior. Watt was a lawyer who had worked for the Mountain States Legal Defense Foundation, an organization that used legal challenges to fight environmental regulations in the West. At the Department of the Interior, Watt reduced or eliminated restrictions on private development of federal lands. Among many other actions, he leased a billion acres of federal land for offshore oil and gas exploration and eased federal restrictions on strip-mining (process of exposing minerals by completely stripping away overlying soil and rocks). Perhaps his most controversial act was to open four California offshore oil tracts for exploration. While Watt was uniformly opposed by environmentalists, his California move drew protests even from leading California Republicans.

By 1985, doubts were rising about the wisdom of deregulation. Without federal regulation of interest rates, it was estimated that several hundred billion dollars in additional interest payments were made by Americans between 1980 and 1988. While the banking industry initially did well in a deregulated economy, other industries did not. The housing industry, which is dependent on borrowing, suffered because of interest rates. Deregulation also influenced air travel. Lower fares and greater competition increased the number of passengers from 297 million in 1980 to over 455 million in 1988. This increase, however, produced complaints about congestion and safety. In addition, because of deregulation, a number of airlines were either bought out by others or forced out of business. This was especially true for small airlines that serviced small towns. By 1988, 140 small towns in America had lost all air service.

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After deregulation, financial problems in many industries led to labor strife. From the Reagan administration's point of view, organized labor was another drag on business development. Labor unions in America had enjoyed the right to organize workers since the 1930s, and in the decades since, organized labor had accumulated a good amount of political and economic power. Reagan's attitude toward organized labor was evident when he confronted the Professional Air Traffic Controllers Organization (PATCO) in 1981. In August of that year, PATCO workers went on strike, complaining of stressful working conditions, abusive bosses, and low wages and retirement benefits. Citing a law that bars strikes by federal workers, Reagan fired all of the striking air-traffic controllers. With no sympathy in the administration, organized workers found their position slipping in the 1980s. By the end of the decade, only about 12 percent of American workers in private industry belonged to unions.

Average Wages and Cost of Goods: 1985

THE SAVINGS AND LOAN SCANDAL

The worst result of deregulation by the U.S. government in the 1980s was the savings and loan scandal. In a decade marked by greed, the scandal was monumental. Owners of savings and loans used money invested in their associations by hard-working men and women to fund risky business ventures and lavish lifestyles. In the process, they made millions. In the end, many of the people who invested in the associations lost their all their savings. It is estimated that the cost to U.S. taxpayers to bailout the savings and loan industry will eventually be more than $500 billion. Many believe the scandal is the largest theft ever in history.

Michael Milkin: The Junk Bond King

When a corporation or municipality borrows money from an investor, it gives that investor a bond, which acts like an IOU or promissory note. The bond states the amount of money that will be paid back, when it will be paid back, and how much interest will also be paid on that amount. Junk bonds are given by corporations or municipalities that have a bad credit rating. In exchange for the high risk involved in investing in such a corporation or municipality (the chance that the money might not be paid back), an investor is paid a higher interest rate through the junk bond.

Michael Milken, a financial executive at the Wall Street investment bank Drexel Burnham Lambert, promoted the use of these high-yield junk bonds in the 1980s. Milken and Drexel helped many companies that were just beginning or were small or had a bad credit rating in their business deals by providing the financial backing for their junk bonds. By doing so, they raise millions of dollars in capital for these companies. Junk bonds helped fuel new ventures such as MCI and Turner Broadcasting, but also helped destroy established corporations by funding corporate raiders (companies or people who try to take control of a business by purchasing a substantial amount of its stocks).

In the process, Drexel and Milken made millions of dollars. In 1987, it was reported that Milken earned $550 million himself. However, in September 1988, the U.S. Securities and Exchange Commission (SEC), which oversees the securities markets, filed a lawsuit against Drexel, naming Milken in two counts of insider trading. These charges stemmed from the SEC's investigation of Wall Street trader Ivan Boesky. Milken eventually faced ninety-eight charges, including insider trading, price manipulation, falsifying records, racketeering, and defrauding customers. In the end, Milken pleaded guilty to six relatively minor securities violations. He was fined $600 million, sentenced to prison for ten years (he served twenty-two months), and barred from the securities industry for life.

Savings and loan associations are financial institutions that were originally founded in the early 1830s to accept savings from individuals and to reinvest those funds primarily in home mortgages. Although similar to banks, savings and loan associations served a different body of customers. They made most of their money by providing services to working-class and middle-class people rather than to large businesses or other financial institutions.

The first great banking crisis of the twentieth century arose as the American financial system started collapsing in one of the early symptoms of the Great Depression, the period of severe economic decline that began in the United States in 1929. To prevent a similar collapse in the future and to restore the public's confidence in the banking system, the administration of President Franklin D. Roosevelt (1882–1945) established extensive federal regulations controlling banks and other financial institutions. Among these actions was the creation of the Federal Savings and Loan Insurance Corporation, which was to insure all deposits in savings and loan associations.

In the early 1980s, the administration of President Ronald Reagan (1911–) deregulated or removed many of the federal regulations on the banking industry. Savings and loan associations were allowed to offer a much wider set of services, including commercial lending and nonmortgage customer lending. Another change was the raising of the federal insurance on savings and loan deposits from forty thousand dollars to one hundred thousand dollars. At the time, the typical saving account in savings and loan association was only six thousand dollars.

In 1982, the U.S. Congress passed the Garn-St. Germain Act, which gave savings and loan associations the liberty to invest their funds more freely. It gave these associations the right to make unsecure and often risky loans to businesses and others, and it gave business developers the right to own savings and loan associations. Perhaps most damaging, it gave savings and loan owners the right to borrow from their own association. They had the power to lend money to themselves.

Unregulated, savings and loan owners made extremely bad investments and poor loan choices. Many invested 100 percent in commercial real estate ventures without asking for any money to be put down by the developers involved. Others invested the money of their association's members in risky deals with businesses that had no credit rating or that had a bad credit rating. And some, like Charles Keating of the Lincoln Savings and Loan in California, used association funds to support a lifestyle that included multimillion-dollar homes, trips to Europe, expensive dinner parties, and excessive salaries, often in the tens of millions of dollars. Keating also used his political clout to try to sway important senators and other Washington politicians on his behalf when federal investigators began to examine his business activities.

As risky business deals fell through, savings and loan associations lost all of the money of their members. In the 1980s, more than five hundred savings and loan associations were forced to file for bankruptcy and close. Federal investigators turned up mounting evidence of fraud by many association owners. An examination of Keating's dealings turned up false profits, hidden losses, and extensive mismanagement. In 1992, he was convicted of fraud and sentenced to ten years in prison. Less than five years later, an appeals court overturned his conviction.

THE FARM CRISIS

Since the founding of America, farming has always held a special place in the national culture. The romantic image of the farm family working the soil is not the only reason for the prominence of farming in American society. Taken as a whole, agriculture is the nation's largest industry. More people work in businesses related to agriculture than in steel and automobile manufacturing combined. During the 1980s, agriculture accounted for 20 percent of the gross national product (the total value of all good and services produced by a country in a year). Yet, it also faced a serious crisis that decade.

The 1970s had been a boom time for farmers. There was an increase in the demand for agricultural products, both at home and abroad. To meet that demand, U.S. Secretary of Agriculture Earl Butz urged farmers to plant on as much of their land as possible. To increase productivity, farmers bought new farm equipment and more land, taking loans from banks and other financial institutions to do so. Low interest rates at the time made these loans seem like sound investments since farmers expected to make more than enough money from increased sales to pay off the loans quickly.

However, as the 1980s emerged, the bottom began to drop out of American agriculture. American farmers produced more crops in the decade than they could sell. Part of the explanation lay in foreign markets. Many smaller countries that had purchased so many American agricultural products went beyond their borrowing limit, and they were forced to reduce their imports. To make matters even more difficult for the indebted farmers, land prices fell sharply. Low land prices lowered the amount of collateral (property put up as security for a loan) farmers had, making additional loans more expensive. Soaring interest rates further added to that expense.

As a result, family farms went bankrupt. Because they could not pay back their loans, many farmers lost their lands to the financial institutions to which they owed money. Between 1981 and 1987, some 235,000 farms went bankrupt, the worst collapse of farms in the twentieth century. The farm collapse slowed only when the Reagan administration decided in the mid-1980s to support farm incomes through federal farm programs. In 1981, federal support represented slightly more than 25

percent of farmers' income; by 1986, it rose to almost 60 percent. Even with these subsidies, the value of farmland in states such as Illinois, Iowa, and Minnesota reached its lowest point in early 1987 before it finally began to recover.

SILICON VALLEY AND THE NEW AMERICAN REVOLUTION

During the 1970s and 1980s, the computer industry and the various industries that produced computer-related materials began to alter American society, changing how and where people worked. Originally, the computer industry was dominated by International Business Machines (IBM). IBM specialized in manufacturing mainframe computers, those that were as big as a room and that required specially trained employees to program and enter data through punch cards. IBM intended for those computers to last for decades, and it believed it would make the most profit not through the initial sale of a mainframe computer but through its continued servicing.

American Nobel Prize Winners in Economics

IBM's dominance of the computer market soon caught the attention of the U.S. government, which frowned upon it. To increase competitiveness and development in the market, the U.S. Justice Department brought an antimonopoly suit against IBM, intending to break the company up into a set of small companies. The suit, costing millions of dollars, dragged on for more than a decade before it was settled in 1982. Under the agreement, IBM ended its practice of discouraging customers from buying competitive systems. IBM also agreed to provide competitors with technical specifications since IBM products often set the standard in the industry. Significantly, IBM also agreed to sell its software as a separate item rather than making it part of the price of the computer. This opened the door for dramatic growth in the software business.

America's Richest Man

During the 1980s, Sam Walton (1918–1992) became America's richest man, combining innovation, business savvy, and a down-home style to achieve his success. Walton built his chain of discount stores, Wal-Mart, into the largest in the country, surpassing even K-Mart.

After World War II (1939–45), Walton purchased the franchise of Ben Franklin a five-and-dime store in Newport, Arkansas. In the 1950s, Walton began thinking of owning a chain of stores. The Ben Franklin stores specialized in rural markets, and after some success at running several franchises, Walton proposed that the Ben Franklin stores enter the urban market as a discount chain. The company rejected his proposal, but Walton remained determined. In 1962, he left the Ben Franklin stores and began his own discount store, Wal-Mart.

By 1985, Wal-Mart had more than 750 stores and more than 80,000 employees; five years later, the company had grown to more than 250,000 employees. Walton encouraged change and relied upon input from his employees to further productivity. By the end of the 1980s, Wal-Mart was growing faster and earning greater profits than Sears and K-Mart. In 1983, Walton had also introduced a new membership-only warehouse chain called Sam's Club that brought in $96 billion in annual sales by the end of the decade. In 1990, Walton's personal fortune was estimated to be between $9 and $13 billion.

During the 1980s there was an explosion in the sale and development of microcomputers. These personal computers, based on microprocessors, eventually made the mainframe all but obsolete. Apple Computer, formed by Steven Jobs and Steve Wozniak, first introduced the easy-to-use personal computer in the late 1970s and was soon followed into the business by other companies. When IBM entered the market, the company did so in a big way, using its vast resources and name recognition to dominate the personal computer market. In 1980, IBM asked Bill Gates of the newly formed Microsoft Corporation to design an operating system for their new personal computer. That text-based operating system software program, introduced on IBM computers the following year, was known as Disk Operating System or DOS.

The problem with DOS was that it was complicated to use. Only people who had a lot of training and experience with the technology could use it successfully. In 1985, to solve this problem, Microsoft introduced Windows, a graphical operating system for IBM personal computers that provided the ease of use first introduced by Apple with the Macintosh, in 1984. Microsoft and Windows soon came to dominate the software market. IBM, however, lost its dominance in the computer market because, initially, it did not manufacture computers. It merely bought computers from other manufacturers and applied the IBM name to them. Since IBM did not have a patent on the "body" of the computer (the hardware or visible components), other companies were able to copy IBM computers. This led to the term "IBM clone" to describe computers that had the same hardware components as IBM computers and that used DOS and then Windows as the operating system.

During much of the 1980s, the entrepreneurial spirit was still alive in the computer industry as people founded both hardware and software companies. Fred Gibbons founded the Software Publishing Corporation in 1981; by 1985, he had 6 percent of the $400 billion software business. The Intel Corporation, founded in 1968 by Andrew Grove, Gordon Moore, and Robert Noyce, remained a leading developer and manufacturer of microprocessors throughout the decade. J. Reid Anderson's Verbatim Corporation did well selling magnetic storage media, including floppy disks.