The economic legacy of the Reagan administration is sure to include a long list of grotesque distortions. High on that list will be the wrenching transformation of the U.S. corporate landscape that appears to be approaching something of a climax.
The White House long ago cleared the field for board room buccaneers when it passed the word that it was disinclined to invoke the antitrust statutes. In such an environment, the Boesky Bombshell was inevitable. Ivan Boesky, one of Wall Street's biggest, best-known and most successful corporate raiders, has turned out to be a self-admitted felon - caught, in effect, with his hand in the national till.True, takeovers, leveraged buy-outs and junk bonds may seem like small potatoes next to other, massive problems that Mr. Reagan will likely leave behind in January 1989:
U.S. manufacturing will still be drifting in the doldrums, ravished by imports. American consumers are not likely to shake off quickly their addiction to foreign goods. The federal debt will be at least $2.5-trillion, almost triple the amount in 1980. The U.S., which has been a principal creditor nation since World War I, will owe a net foreign debt of more than $500-billion. The country will have earned the dubious distinction of being the world's largest debtor.
However, over the long run the merger wave may prove still more damaging. The toxic waste in most corporate takeover attempts (successful or unsuccessful) is a mountain of debt that companies assume at the same time that they redeem large amounts of common stock. The totals run to the hundreds of billions of dollars. In addition, human and community turmoil inevitably accompany rapid-fire reshuffling of corporate control.
Many factors lie behind these trends. But surely one of the most important was the virtual abrogation by the administration of its responsibility to enforce the antitrust statutes. The permissive, anything-goes attitude in the Justice Department's Antitrust Division opened the door.
Thereafter, it was only a matter of time until the players took advantage of the opportunity: Kohlberg, Kravis and Roberts could elevate the leveraged buy-out to an art form. T. Boone Pickens was free to roam through the oil industry like a U-boat stalking a slow-moving tanker. Mike Miliken, who
invented junk bonds for Drexel Burnham, was on his way to sainthood on Wall Street.
The shift in the administration's attitude toward antitrust enforcement is easy to document. According to an analysis published last year in the Review of Industrial Organization, during the first Reagan administration the Justice Department obtained only half as many criminal antitrust convictions as under President Carter. More to the point, total fines imposed for criminal antitrust violations (adjusted for changes in inflation) were only about one- quarter as large.
Not surprisingly, while antitrust enforcement has all but disappeared, merger and takeover activity has soared. Data compiled by W.T. Grimm Co. indicate that from 1977 through 1980 publicly-announced mergers averaged about $50 billion annually (in real 1982 dollars). Since then, real merger activity has averaged roughly three times greater - more than $150 billion. The number of merger transactions has shown a smaller rise, but the size of the typical transaction has exploded.
The situation is complicated. Foreign investors, who have piled up huge amounts of dollar-denominated assets as a result of the U.S. balance of payments deficit, are just beginning to use their resources to increase significantly their direct investment in U.S. industry. The extent of foreign control of the U.S. economy will be a major topic of debate in the months ahead. At the same time, Congress must also consider the domestic economic structure.
The administration maintains that the upheaval in the corporate sector - which accounts for about two-thirds of the economy's gross domestic output - has been, at worst, benign and, at best, beneficial.
In an essay on "The Market for Corporate Control" in the 1985 Annual Report of the President's Council of Economic Advisers, the White House argued that the "available evidence is that mergers and acquisitions increase national wealth. They improve efficiency, transfer scarce resources to higher valued uses and stimulate effective corporate management."
The administration went on to state that the merger process also helps to ''recapitalize firms so that their financial structures are more in line with prevailing market conditions. In addition, there is no evidence that mergers and acquisitions have, on any systematic basis, caused any anti- competitive price increases."
The White House also specifically rejected what it described as four economic criticisms that are frequently voiced:
1. Takeovers increase concentration and have adverse effects on competition;
2. Tax-motivated takeovers can generate economic losses for the economy;
3. Takeovers can crowd productive business projects out of the capital markets; and
4. Takeovers can create incentives for management to concentrate on short-term performance to the detriment of long-term corporate investment.
These arguments provide some intellectual respectability for the administration's policy - or lack of policy. But it is hard to judge their quality. Analysis of industrial structure isnotoriously slippery.
However, what is clear is that the U.S. economy is currently facing its greatest challenge since the Depression. The manufacturing sector must be rejuvenated. Massive resources must be shifted from domestic markets to international trade in order to control the deficit in the balance of payments. Only time will tell whether the helter-skelter redrawing of the corporate map in the last few years will help or hinder this process.
It is also plain that the huge increase in corporate debt over the last few years - and the associated reduction in common stock - have started to undermine severely the quality of credit in the United States.