On Balance, in Trouble

There’s a growing chance that 1989 will be the year a new national debate takes on a political stature hitherto re served for war and peace, wealth and poverty, justice and injustice. That issue, believe it or not, is debt --America’s 1980s penchant for living on borrowed money.

Over the next two years, the odds are that major officeholders--and possibly even a brand-new President--will be broken on the wheel of debt politics as the consequences escalate from boring statistics to high drama. A half-dozen major confrontations bear down on 1989.

What many Americans are starting to understand is that more than simple indebtedness--who uses it, who pays for it, who collects the interest--has mushroomed during the Reagan era. So has the use of debt as a critical covert tool of U.S. political economics, and 1989 is likely to witness a long overdue analysis and discussion. Politics has always followed the flag; now it seems about to follow the credit card.

Stakes couldn’t be higher. The incipient debt debate should crystallize just how much Reagan-era conservatism has changed. Old-style conservatives condemned debt and deficits as the devil’s work. The new ones, by contrast, oppose criticism of debt and deficits because both techniques have become linchpins of neoconservative economics. President-elect George Bush now finds himself heir to the most pro-debt Administration in modern U.S. history, and as a result, there’s a good chance the politics of borrowing will dominate 1989 debate in Congress.

For all its triteness, the federal budget deficit will lead the list. Today’s red ink might be bearable under other circumstances, but not in 1989, when federal deficits are just the fountainhead. Cocksure early 1980s attitudes--”don’t worry about debt”--steered the decade toward a wider economic looseness.

Let me stipulate: Peacetime national deficits approximating 3% of gross national product aren’t crippling to many other nations. And taken alone, they might not matter in the United States. But they don’t stand alone. Reagan’s America boasts more varieties of troubling debt levels than Baskin-Robbins has ice cream flavors. Even in the halls of Congress, this year’s Gramm-Rudman-Hollings Act challenge to trim the federal budget deficit from approximately $150 billion to $100 billion-$110 billion in fiscal year 1990 has other debt clouds keeping it company on the legislative horizon.

Consider the Federal Savings and Loan Insurance Corp. (FSLIC) mess--the mammoth bailout apparently needed to rescue America’s insolvency-threatened savings-and-loan industry. Excessive 1980s deregulation and nonchalance toward debt have left as many as one-third of the nation’s 5,000 S&Ls; requiring congressional rescue. The cost over the next three years could be a budget-walloping $50 billion-$100 billion.

Count FSLIC bailout dollars for deficit purposes, even divided over three years, and they’d shatter Gramm-Rudman targets. The whole federal deficit-reduction process could be jeopardized. So the soon-to-be Bush Administration, not surprisingly, is trying to blueprint an off-budget bailout. Maybe it’ll work; maybe it won’t.

That brings us to a third potential hot spot: proposals to use Social Security to reduce (or disguise) the rest of the debt structure. One such tactic is already operational. For Gramm-Rudman purposes, the growing surplus in the Social Security system is already being counted, despite purists’ dissent, to offset and reduce the federal budget deficit.

Now there’s also growing pressure from Bush advisers--either tax more Social Security benefits or terminate the eligibility of persons above a certain income level. Either approach would reduce net overall Social Security outlays. The catch is that many in Congress are bound to raise a telling point: Why should the elderly be singled out to pay for the national debt binge?

Liberals are already finger-pointing elsewhere--toward upper-bracket and corporate high-rollers. The new chairman of the House Banking Committee, Democrat Henry B. Gonzalez of Texas, has called for curbing Federal Reserve Board independence and high interest rates (the federal government will pay up to $200 billion in interest this year). And there’s a growing desire on Capitol Hill to penalize business debt maneuvers practiced under the label of leveraged buyouts.

The LBO game pivots on a fitting 1980s alchemy: stock becomes debt which becomes profit. In a nutshell, corporations, with the help of Wall Street (under friendly or hostile circumstances), repackage themselves by reshuffling ownership and substantially replacing stock with bonds. Borrowing becomes the key. Leveragers themselves get rich. Often, though, the reshaped corporations fire employees and sell off divisions to raise money to service their expanded debt. Many companies go off the income tax rolls, leaving other Americans facing higher taxes.

Congress, as might be expected, has already targeted this latest mania. Corporate debt has been soaring during the Reagan years, and the term LBO has now become a shorthand for greed. A half-dozen congressional committees and subcommittees have already announced 1989 hearings.

The fifth perilous debt situation involves foreign loans made by and owing to U.S. commercial banks. Since mid-1988, the value of Third World “sovereign debt”--foreign government bonds--has slumped to new marketplace lows. And autumn’s left-tilting local elections in Brazil, as well as comments from newly elected leaders in Argentina and Mexico, have increased speculation about 1989 debt repudiation or default.

Here, too, Congress may insist on jumping in. Few legislators still believe in the former Treasury Secretary (soon to be Secretary of State) James A. Baker III’s plan for Latin America to “grow out” of its half-trillion-dollar debt while continuing to make payment to the major U.S. banks. Indeed, the drama already has a major element of farce; the U.S.-dominated World Bank has been making loan after loan to give Southern Hemisphere debtors the wherewithal to keep up interest payments. Open default would precipitate a genuine crisis. Debt repudiation would force U.S. banks to take huge losses on their overseas loan portfolios.

The potential sixth horseman of 1989 debt politics is America’s own massive record-level overseas borrowing. The once-proud U.S. of A.-- not Argentina, Brazil or Mexico--has lately emerged as the world’s leading debtor nation. To pay for costly tax cuts, defense buildup, escalating middle-class entitlement programs and a tidal wave of imported consumer goods, Washington has had to borrow at high rates in rich nations like Japan and Germany. The United States already owes foreigners a net $500 billion. By 1992, the net indebtedness could be an even $1 trillion.

To Reagan true believers, this is no more a problem than the 1985 budget deficit. Deficits don’t hurt the economy, tax collectors do. But 1988 reality suggests otherwise. Control of U.S. interest rates and bond markets is shifting from New York to Tokyo. Foreigners have so many dollars from U.S. credit-card transactions that they’re buying everything not nailed down from Maine to California.

That also bothers Congress enormously. We are the only major nation with negligible mechanisms for monitoring foreign investment. Our economic doors are wide open. By contrast, most Latin American nations will not let U.S. banks swap debt paper for equity--factories, real estate or whatever. In America, however, foreigners are free to cash in bonds or dollars for half of downtown Phoenix or Los Angeles. Murray Weidenbaum, former chairman of the GOP Council of Economic Advisers, has predicted that the inflow of foreign money will be 1989’s No. 1 issue.

It seems unfair for a new President to enter office under such a cloud. But the real problem may be that George Bush doesn’t see it as a cloud. His assessments of 1981-88 have been almost as buoyant as Reagan’s. And among his first appointments to high office were Baker and Richard Darman, prominent policy-makers of the second Reagan Administration, men who cut taxes in the face of huge budget deficits and presided over a U.S. metamorphosis from international creditor to debtor. These are unlikely credentials for reformers.

The political and economic equation is simple enough. If deficitry, debt and the free flow of capital--in and out-- has, in fact, become the national strategic asset and badge of strength that the new conservatives of the 1980s insist, then the upcoming Bush Administration may prove a triumphant surprise. But there’s also a good chance that the “don’t worry, be happy” attitude is riding for a fall. If so, the unfolding battles of 1989 could be decisive.