It's news that the United States is a global debtor. Trade deficits and exchange rates seem now to constrain our economic policy. But there's nothing new about excessive debt in the private economy -- or about how debtors need to "work out" their problems. Lessons from the stories of such companies as Chrysler, Lockheed and International Harvester should be studied in Washington.
As with workout companies, we've borrowed too much. Like the best of the corporate examples, too, the United States is far from broke. We are not a banana republic and have no need to suspend payments on our debt. In fact, we have the ability to pay back over time -- but it may take a long time.
During the Reagan years, massive tax reductions sent American consumers on a consumption binge. Simultaneously, defense spending skyrocketed. In the world of classical macroeconomics and a closed economy, this much aggregate demand would probably have kindled full employment and demand-pull inflation. It hasn't this time, though, because of the international side of our economy.
Just as we've been consuming more than we made, foreign suppliers have been willing to ship us goods and services (at a profit) to fill the supply deficit. We paid them with paper. The pre-Iacocca Chrysler did the same thing. It made too many cars in order to improve its profits and financed the spree through excessive borrowing. Because the cars were not sold, suppliers were essentially paid with Chrysler's paper.
The United States, then, has not been guilty in isolation. Our foreign trading partners went along willingly, selling into our consumption and financing us by taking our paper. This is critical to an understanding of how we should confront our problem. We must recognize that others share the guilt. We have here a common problem -- not an individual sin. And that is the first rule of any workout: Recognize and accept reality.
Rule No. 2 of any workout: Everybody plays. Creditors and stockholders sometimes want to escape the consequences of the problem they have helped create. (Notice any financial flight to quality in the last few weeks?) But they cannot be allowed to escape -- except on the debtor's schedule. No selective repayments, no side trade deals, no repossessions by isolated creditors can be tolerated.
In the international context, this means foreign holders of dollar-dominated securities must continue to hold. Our national debt is importantly owned abroad, and that must continue for awhile. Foreign creditors can expect real repayment only if they are willing to contribute to reviving the United States' trading capacity. Interest-rate wars cannot be tolerated. Our money rates must be high enough relatively to prevent further dollar outflows. Yet our rates in absolute terms need to be low enough to support capital investment in the United States and a reasonable level of economic activity. And, at the same time, our trading partners must allow the dollar to drift lower in search of price levels that will stimulate our exports and must keep their markets open.
Does this mean exporting our pain and causing our trading partners to lose, relative to the United States? Of course. Creditors always lose something in a workout: liquidity, at a minimum, and sometimes a portion of the principal owed. But they must remember that the independent decisions of willing lenders, as well as the errors of a too-willing American borrower, brought us to this point.
Rule No. 3 of a workout: The debtor needs a plan. The United States will have to trade its way out of its deficit. Japanese schoolchildren have been raised for 40 years to understand the national imperative: "Trade or die." Our children need to understand the message as well. And if they can understand it, perhaps Messrs. Rostenkowski and Reagan can also.
Workout companies must maximize both efficiency and cash flow from operations. So, too, the United States. Productivity must be a national priority. Growth and trade must be understood as essential -- by both the American public and our creditors.
Congress could help the recovery program by implementing tax policies that encourage investment at the expense of consumption. They've been going the other way. Less attention needs to be paid to curbing takeovers, despite what Dan Rostenkowski thinks. Some leveraged takeovers have been bad for us. Many deals are merely liquidations of corporate America. But it makes more sense to focus on why that is. If capital could earn more being invested in new plant and equipment -- and productivity must grow for this to be true -- it would flow that way. Businesses are being liquidated in leveraged deals because there isn't demonstrably anything better for capital owners to do. When was the last compelling new public offering of investment securities by any basic U.S. industry?
Rule No. 4 in a workout: No selective creditor remedies are allowed. One trend that needs to be watched carefully is foreigners' owning American wealth, whether corporate or real estate. Sir James Goldsmith, Rupert Murdoch, Alan Bond, Hanson Trust and a variety of Japanese insurance companies are recent participants in our exportation of wealth. The reason this is tricky is that the free flow of private capital is essential. Yet, as a debtor country, our government should care about creditors' converting from our debt to our equity at will. The United States can settle its international accounts from its cash flows, and stay rich, or from its balance sheet, and become poorer. Right now, we are settling from our balance sheet, and thoughtlessly.
Rule No. 5: Preserve control. For the near term, the government must also focus on preserving institutions. The Fed and Treasury must continue to bolster thrift institutions and banks and, if necessary, shore up or gracefully bury certain brokerage firms. The United States, at least for now, needs institutional confidence and stability.
The overwhelming workout experience of private companies is that viable entities are saved and creditors generally are paid. But a debtor must run its affairs aggressively and manage its creditors. We must understand that we have control over our own destiny; our creditors must believe that their future well-being is tied inextricably to ours. It may mean playing hardball, but we need not be whipsawed between competing demands of internal well-being and external harmony.
The writer is a general partner of Chilmark Partners, a Chicago merchant banking firm.