Why Growth Will Lag

David Stockman, the Reagan Administration’s wunderkind budget director from 1981 to 1985, cut his political career short by warning repeatedly about the dangers of the massive federal debt buildup.

Now a partner at Wall Street investment firm Blackstone Group, Stockman is no less vocal about the debt problem--and of course, there’s so much more of it to talk about, he notes.

Speaking at the Collins investment conference Thursday, Stockman said the U.S. economy is doomed to slow and fitful growth over the next few years, no matter what President-elect Clinton does.

“Like all new administrations, the Clinton people don’t believe the cake is already baked,” Stockman said. But the reality, he said, is that the economy’s slow course has been guaranteed by three “hangovers” from the ‘80s: the huge public and private debt loads; the drastically oversupplied market of real estate and other fixed assets, such as aircraft, and the excess capacity created by the service industry in the ‘80s, the economy’s growth engine in that decade.

One set of figures by themselves tell the story, Stockman said: In 1980, residential real estate in America was valued at $2.6 trillion, while the mortgage debt on that property totaled $940 billion, or 36% of the value.

By 1991, the property was worth $4.7 trillion, but the ‘80s borrowing binge had pushed the mortgage amount to $3 trillion, a stunning 64% of the value. That figure has to be brought down, Stockman said, and the only way is through less consumption and more saving--a recipe for a slow economy.