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THE PRICE OF COMFORT : The Reagan-Bush faith in laissez-faire and in the wisdom of the market has cracked America's economic foundations.

January 06, 1991|John Kenneth Galbraith | John Kenneth Galbraith is Paul M. Warburg Professor of Economics Emeritus at Harvard University

The speculation and its collapse have brought unemployment in Wall Street and throughout the financial industry. Far more serious, however, is the burden of debt and interest charges of the corporations that suffered or successfully resisted takeover. To avoid bankruptcy, they have been meeting these charges by curtailing employment and further diminishing investment in plant improvement and new facilities. Managerial staff is also being pared down. This unemployment, which extends on to blue-collar workers, and the fear it engenders are having a depressing effect on consumer expenditure and output.

There is a further and grave effect here. In Northeast United States, as earlier in Texas, houses, apartment houses and, above all, office space have been built with abandon. Whole areas of Boston, New York and other cities have been transformed. Those so engaged have rivaled the junk-bond promoters in community and even national fame.

The collapse of the real-estate boom has left not only empty houses, apartments and office buildings but has idled construction companies and workers, and, most important of all, is having a highly adverse effect on the banks.

Large banks of New York, Boston and other Eastern cities are now struggling with a mass of unpaid loans and have reserves far below what both they and the regulatory authorities deem adequate. In consequence, they have had to curtail lending for other purposes--the banking system is contributing sharply to a more general recession.

There is also the S&L disaster. Housing and other real-estate operations are financed by thrifts, along with the commercial banks. As in the case of the banks, the S&L depositors are insured by the federal government up to a generous limit of $100,000. In its enthusiasm for deregulating the economy, the Reagan Administration removed virtually all restrictions on what could be done with those government-guaranteed funds. And it greatly reduced the number of people maintaining surveillance on S&L operations. The result has been by far the greatest public scandal in U.S. economic history--and the government stands liable for the deposits so guaranteed.

There is, however, the further and perhaps more serious consequence from vast housing tracts, great office buildings and much empty land all being dumped on the market as the failed firms are taken over and liquidated. From this comes the further adverse effect on property values and bank loans. On some matters there seems no end.

The United States, in short, faces--is indeed now experiencing--a recession under circumstances that preclude the obvious preventive or remedial action. Lower taxes and increased public spending are ruled out; these would only seem a continuation of the relaxed and now condemned Reagan policy. Saddam Hussein has forced up energy prices and therewith the price indexes as a whole. This has kept alive fears of inflation. Dramatic easing of monetary policy--lower interest rates to encourage investment expenditure--is thus at least partly excluded.

No one knows how serious the recession cum depression will be or how long it will last. Or what its world effect will be. Those who so say divide, as I've often said, between those who do not know and those who do not know they do not know. Nonetheless, the American prospect, as we enter the second year of the new decade and end 10 years of free-enterprise rediscovery in Washington, is far from bright. And from the United States the shadow of financial instability, economic recession, unemployment and uncertain government extends out to the world.

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