Commentary: Thank '80s Greed For '90s GrowthChristopher Farrell
The impending breakup of RJR Nabisco Inc., a mere decade ago the largest leveraged buyout in history, seems like a fitting requiem to the 1980s. After all, Barbarians at the Gate, Den of Thieves, and other books chronicled the '80s as an era of Ponzi finance, merger madness, and insatiable avarice. The financial shenanigans of the '80s seem light-years removed from the high-productivity economy of the '90s.
Hold on. Despite the excesses, the '80s were far from a lost decade. "I credit the '80s for giving a foundation to the economy of the '90s," says Samuel C. Hayes III, professor at Harvard business school. Adds Roy C. Smith, professor at New York University's Stern School of Business and a limited partner at Goldman, Sachs & Co.: "The reason why the incredible economy of the '90s has continued to do well--higher stock prices and U.S. companies competing successfully overseas--is mostly because of the '80s."
HANG-ON MENTALITY. That might seem off the wall, but it's not far off the mark. It seems almost like ancient history now, but U.S. companies stumbled horribly in the 1970s. Industrial America, including the auto, steel, electronics, and machine-tool industries, lost market share and profits to Japanese, German, and other overseas rivals. Productivity growth faltered to a 1% annual rate, and the sense grew that the U.S. had fallen into a long-term economic decline. "All this had an enormous impact on management's willingness to take risks," says Smith. "Management's mentality back then was hang on and survive at all costs."
That mind-set was potentially catastrophic. The wellsprings of economic growth aren't just technology, globalization, investment, or even productivity--all the things we talk about today. It's also risk-taking, what the great British economist John Maynard Keynes called "the animal spirits of capitalism." Everything else pales in comparison to the entrepreneur risking all on a new way of doing business, from retail superstores to the Internet. Without risk-taking, even the most promising technology would gather dust in the university lab.
Like them or not, innovators such as T. Boone Pickens, Craig McCaw, Henry R. Kravis, Richard Rainwater, and, of course, Michael Milken challenged an encrusted Establishment. Milken's junk-bond finance and Kravis' leveraged buyouts gave ambitious risk-takers the opportunity to displace risk-averse managers. And that's the reason the previous decade led toward a business culture that now rewards innovation, argues Peter Bernstein, a New York City-based economic consultant to institutional investors.
The influence of the financial gunslingers extended far beyond their immediate dealmaking. For every leveraged buyout or hostile takeover, a dozen corporate chieftains got the message: Take risks or lose your job. In other words, restructure your workforce and start breaking down bureaucratic barriers; focus on core competencies and shed peripheral businesses; tie executive compensation to the stock market, work your capital smarter, and add to shareholder value. If you don't do it we'll do it for you. "Everything that was new about Henry Kravis and the raiders, everything they did in the 1980s, companies do to themselves now," says Steven N. Kaplan, finance professor at the University of Chicago. "We are all Henry Kravis now."
In 1980, the Dow Jones industrial average hovered around the 900 level, and the value of all U.S. companies was $1.4 trillion. Today, the Dow is flirting with 10,000 and the value of U.S. corporations comes to some $12.6 trillion. The 1980s simultaneously marked the death rattle of an old industrial order and the emergence of a new entrepreneurial economy.
Along the way, of course, terrible mistakes were made. Pickens fell into disrepute. Milken ended up in jail, as did a number of other '80s financiers. And, as in any dramatic conversion, a lot of companies faltered as they groped to build a more flexible, responsive corporation. But on balance, what emerged were the world-class competitors of today.