12 minute read
Stephen Koepp

In 1986, coming out on top was an experience not just for the Chicago Bears and the New York Mets but for another bunch of sometime underdogs: U.S. consumers. At long last, average Americans got measures of economic revenge for many of the indignities they had suffered in recent years at the hands of everyone from Arab oil sheiks to Wall Street’s predatory speculators. For consumers, who had already been savoring three years of economic recovery, 1986 was a time of pleasant surprises and unexpected bonuses.

Every season brought something to celebrate. A breathtaking slide in oil prices made gasoline cheaper than it had been since 1979. Inflation fell so low that it actually ran backward for several months. Even the tax system, of all things, changed for the better when Congress delivered a historic reform law that will lower rates for most consumers and wipe out many of the loopholes long enjoyed by businesses and wealthier Americans. Meanwhile, Government investigators cracked down on Wall Street’s insider traders, who had been reaping outrageous profits at the expense of ordinary investors.

But not everyone felt inclined to toast the year. Farmers and oil-industry workers suffered painful contractions in their industries. Thousands of employees in corporate America lost their jobs as big companies cut staff and dumped subsidiaries to limit their vulnerability to Wall Street’s rampaging takeover artists. For Big Business, the attacks by corporate raiders were compounded by withering charges that large corporations have become overgrown and afraid to take risks.

Yet when most Americans scanned the business headlines during 1986, they generally found reasons to be pleased rather than dissatisfied. The best news for everyone was that the economic recovery persevered through 1986, its fourth straight year, with no apparent signs of coming to a halt in 1987. The economy began the year with a robust first-quarter growth of 3.8%. The stimulus came partly from a short but intense home-building boom that took off as mortgage rates declined to as low as 9.5%. Sales of new homes surged 24.7% in March, to an annual rate of 924,000, the highest level on record.

The economy’s weakest moments came during the year’s second quarter, when fears began to grow that the recovery might have run out of momentum. Growth virtually stagnated from April through June, expanding a measly .6%. A primary cause was trouble in America’s farm and oil-producing states, whose woes temporarily dragged down the whole U.S. economy. But the downturn jitters proved unwarranted; the economy bounced back with a 2.8% expansion in the third quarter and was expected to perform at about that level during the October-December period and all of 1987.

The historic petroleum price plunge of 1986 could be traced to September 1985, when Saudi Arabia got fed up with its dwindling share of the world’s oil market and decided to reverse completely its traditional strategy of holding back production to prop up prices. Oil Minister Sheik Ahmed Zaki Yamani raised crude output from about 2 million bbls. a day to 4 million bbls. with the aim of forcing rival oil producers like Britain to cut back to make room for the Saudis. But when competitors refused to budge, the world’s oil glut rapidly increased and discounting became rampant. “The price war is here,” said Mani Said al-Oteiba, Oil Minister of the United Arab Emirates, in February.

The result was a windfall for customers, for a change, rather than for the Organization of Petroleum Exporting Countries. Crude prices plummeted from $26 per bbl. in January to below $10 in April and remained under $15 for most of the year. The low prices distressed the Saudi royal family and provoked anger from other OPEC countries, prompting the Saudis in October to oust Yamani as Oil Minister after he had spent two decades as a leading OPEC strategist. With that, the Saudis abandoned their price-war tactics. When OPEC met in December, twelve of its 13 members, with Iraq dissenting, decided to cut production and sell their various grades of oil at fixed prices averaging $18 per bbl. While the pact boosted market prices to near that level, the group may have trouble keeping them there. In the past, at least, its members have tended to cheat on such agreements and undermine their effectiveness.

Falling energy prices for the year as a whole knocked the wind out of overall U.S. inflation. Economists estimate that prices rose only 1.8% for all of 1986. During three months of the year, the Consumer Price Index actually reversed its usual upward course and registered deflation instead.

Many economists believe that 1986 may have been the turning point for the most pressing U.S. economic problem of all: the trade deficit. That gap was largely the result of a U.S. dollar that became too strong during the early 1980s and thus made foreign products overly cheap in the U.S. and American- made merchandise expensive overseas. The high-flying dollar created an almost insurmountable handicap for U.S. manufacturers of everything from earthmoving equipment to microchips. Just as painful was the situation down on the farm, where growers were stuck with record grain surpluses partly because they were unable to sell enough of their crops overseas.

A sharp decline in the dollar that began in early 1985 and continued through most of 1986 gave exporters hope that their business would soon revive. “We’ve got a real chance that America can compete again,” said General Electric Chairman John Welch in February. But the trade imbalance proved immensely stubborn until the end of 1986, when economists at last began to see a moderate increase in U.S. exports. They generally estimate that the trade gap will hit $170 billion for 1986, a record total, but could fall to about $140 billion in 1987.

As if to show voters that miracles really can happen, even in Washington, Congress in September passed the most sweeping federal income-tax overhaul in / more than 40 years. The tax law, which goes into effect this week, wipes out deductions and loopholes by the hundreds. It represents a historic change in tax philosophy, under which the Government will take a far smaller role in attempting to shape the economy through its tax code. The law was almost universally applauded as a bold stroke for economic fairness and efficiency. Most tax shelters were eliminated, which should encourage consumers and businesses to seek rational, profit-making investments instead of complex, wasteful schemes designed to lose money for tax-saving purposes.

For most consumers the tax overhaul will be a boon. It reduces levies for about 60% of taxpayers and entirely removes some 6 million low-income earners from the tax rolls. The new law simplifies the tax-rate structure from 15 categories for individuals to just two, and lowers the highest effective rate from 50% to 38.5% in 1987 and 28% after that. At year’s end millions of taxpayers scrambled to take advantage of many loopholes that the new law will eliminate. Some consumers went shopping for a new car so they could take a sales-tax deduction, which will no longer be allowed in 1987. Other taxpayers sold securities or real estate to take advantage of capital-gains rates that will become less favorable under the new law.

The legislation will reverse a 3 1/2-decade trend in which businesses were bearing an increasingly lighter share of the federal tax burden. Over the next five years the tax plan will shift $120 billion in levies from individuals to corporations, partly by eliminating some incentives for investing in plant and equipment. Because of this, many economists predict that the bill could depress capital spending enough to slow down the economy somewhat in early 1987.

It was a bullish time on Wall Street for the fifth year in a row, but the stampedes became wilder than ever. The Dow Jones industrial average entered 1986 at 1546.67 and closed last week at 1930.40, up a total of 383.7 points for the year with three trading days remaining. While the general trend was delightful, small-time investors became distressed by the increasing volatility of the market. On Sept. 11 and 12, for example, the Dow plummeted 121 points, including a one-day drop of 87, the worst in history. Individual shareholders and corporate leaders complained loudly about the increasing tendency of institutional investors to roil the markets with fast, huge, computer-driven trades in the pursuit of quick profits.

Stockholders welcomed the sensation-making results in 1986 of a Government crackdown on insider traders, who make illegal profits from information not available to the general public. The Securities and Exchange Commission announced Nov. 14 that it had nabbed Speculator Ivan Boesky in the biggest insider-trading scam of all time. The SEC charged that Boesky had earned some $50 million in illegal profits by trading on inside dope about takeover situations. “My life will be forever changed,” said the chastened Boesky, who had to pay a record $100 million settlement and will be banned from professional stock trading in the U.S. starting in April 1988.

As part of his settlement with the SEC, Boesky reportedly had allowed investigators to tape-record his business conversations, which implied to nervous Wall Streeters that more culprits were likely to be snared in the weeks and months ahead. Most intensely watched was the go-go investment firm Drexel Burnham Lambert, which had close ties to Boesky and ranked as Wall Street’s leading financier of corporate raiders through high-yield, high-risk junk bonds.

Since so much insider trading is based on knowledge of impending corporate raids, the Boesky scandal heated up the public scrutiny of takeover artists. Economists and other thinkers wondered out loud whether greed had gotten out of control on Wall Street. “This is no longer free enterprise. It’s predators on the loose,” declared Investment Banker Felix Rohatyn, perhaps the most outspoken critic of corporate raiding. Observers began to describe the era as a time of paper entrepreneurship, in which a lot of stock and money changes hands but no real work gets done to benefit the economy. “In America, industry has become the plaything of finance,” said Robert Reich, a lecturer in public policy at Harvard’s Kennedy School of Government.

The situation has raised pertinent questions about the role and performance of giant corporations. Why had once strong U.S. companies become so vulnerable to raiders and foreign competition? The atmosphere of soul-searching gave rise in 1986 to several of the hottest business buzzwords of the 1980s. One was “corpocracy,” meaning the Big Business equivalent of government bureaucracy. The Reagan Administration used the term in contending that many of corporate America’s problems were of its own making. Richard Darman, the Deputy Treasury Secretary, stirred the debate in November, when he blasted big < companies’ tendency to be “bloated, risk averse, inefficient and unimaginative.”

The Reagan Administration invoked corpocracy as a reason to take the lead on another fast-rising issue: industrial competitiveness. Legislators began picking up that term during 1986, often as a politically palatable way to champion trade restrictions designed to help beleaguered industries in their home states. Some of those measures, which Congress is likely to debate in early 1987, could include export subsidies, import quotas or other protectionist steps that the Administration generally opposes. To pre-empt any protectionist bill, the Administration said in December that Reagan would announce his own competitiveness-boosting plan in January’s State of the Union address. The Reagan proposal would emphasize increased productivity at home, probably through greater emphasis on worker training and research and development.

The need for U.S. businesses to boost efficiency prompted many of them to embrace yet another popular concept: restructuring. The mild-sounding new term actually meant the radical shedding of unwanted and unprofitable divisions and the wholesale trimming of excess employees. A highly visible case was CBS, whose board of directors dumped Chairman Thomas Wyman in September and installed as acting chief executive the company’s largest stockholder, Laurence Tisch, a conglomerator known for wielding a sharp scalpel. At CBS, Tisch proceeded to sell off publishing divisions, lay off hundreds of employees and chop such perquisites as limousines and company-subsidized birthday parties.

Indeed, slimming-down became a major preoccupation of U.S. corporations. AT&T announced plans in December to eliminate 27,400 jobs, or 8.6% of its work force. One of the companies most in need of fat trimming was General Motors, which began a program in November to close ten plants and part of another over three years, a strategy affecting 29,000 of its 812,000 workers. But Chairman Roger Smith failed to streamline GM’s operations fast enough to please the company’s self-appointed gadfly, H. Ross Perot, who had joined the GM board in 1984, when the automaker bought his Dallas-based company, Electronic Data Systems. Riled and embarrassed by the Texan’s public hectoring, GM’s directors tried to quiet Perot in December by removing him from the board and paying him $700 million to buy back his stock.

Some of the most radical restructuring — and merging — took place in the airline industry, in which carriers weakened by fare wars banded together for strength. Even feisty Donald Burr, founder and chairman of upstart People Express, agreed in September to combine his ailing carrier with rival Texas Air. Piloted by the successful union buster Frank Lorenzo, Texas Air also acquired Eastern and Frontier airlines in a drive to become the largest U.S. carrier. Other airlines joined forces as well: Delta agreed to buy Western, Northwest took over Republic, and TWA bought Ozark.

Yet not everyone was preoccupied with restructuring during 1986. Plenty of innovation and entrepreneurship took place. Ford took a chance on a radically aerodynamic line of autos, the Taurus and Sable models, and sold some 347,000 of them. Kodak introduced a revolutionary new, lithium-based battery called Ultralife, which lasts twice as long as alkaline cells. A Yuppie tinkerer in Massachusetts started selling little yellow auto signs that read BABY ON BOARD, thus giving birth to an overnight industry to produce such whimsical retorts as NOBODY ON BOARD and EX-WIFE IN TRUNK. Perhaps the most fitting hit product for the end of 1986 was the five-album set of live songs by Bruce Springsteen, America’s poet of the common man. Typically priced at only $25, his album found its way under thousands of Christmas trees and helped consumers ring out an unexpectedly upbeat year.

More Must-Reads from TIME

Contact us at