Civilisation américaine – Semestre 6

1980s takeovers

Cours à rattraper

The Reagan economic program, what it was theorically and what was left

The problem we have is that they look different from the ones of the 1960s, they
are meant to undo the diversification of the 60’s.

In the 60’s when companies diversified through takeovers the market reacted
positively, increased, investors bought the shares of the companies applying
these strategies. Then they bought the ones from the 80’s.

Why did they do so? Was the market right/wrong in the 60’s/80’s.

If it was wrong it means that it is fallible. Markets are not necessarily efficient.

Two interpretations
 The first interpretation: the efficient diversification

In the 1960s the environment was relatively uncompetitive because of heavy

regulation, and because the economies were less integrated internationally. The
market was then right to react positively to diversification.

In the 1980s business and environment had changed: much more competitive
because of high oil prices; more difficult to be profitable, the Far East competition
had emerged (Japan), productivity had declined  aggressive management
practices to bring profitability up again.

In large conglomerate managers were hard pressed to have sufficient knowledge

of all the markets. Conglomerates were no longer the answer.

The market reacted to this change by encouraging companies to specialize again,

to focus on specific markets and a new approach to antitrust regulation made it
easier for companies to specialize again.

This view is appealing to people who buy by the view of efficient markets.

 The second interpretation: Inefficient diversification

It is the opposite.

A substantial part of the mergers/acquisitions of the 60’s were a mistake,

because the companies were more efficient than the companies before the
mergers/acquisitions. The companies that suffered most were the targets.

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Reasons: companies small and operating in markets new. The new owners of
these companies came from traditional sectors and they would encourage these
new divisions to apply techniques already at work in the mother company: didn’t
work well. One of the justifications: companies brought manager expertise to the
new companies.

In effect, with the distance of time you see that one major reason for this was top
managers of large conglomerates were pursuing their own objective: extending
their power by extending the size of the company you are running.

Maybe this process was reversed because managers found other ways to
improve power and prestige than extending the size of the company.

Managers were not working for the best interest for the shareholders. This was
only possible because of weak government and insufficient control of the owners
on the company.

10 years later the failure of this strategy became obvious. When you look at the
large takeover battles of the 1980s it was battle between the finance and the top
managers.

At least in some historical facts seem to support this thesis. It is not just a myth,
it happened.

Those managers who realized soon enough that the 60s strategy was wrong and
sold , they escaped the threat of takeovers. Those who didn’t do so found
themselves in a weak position.

One thing is true: one way to avoid a takeover was essentially to have an asset to
stake holders value that was high. Then there was no interest in launching a
takeover against you.

Consequences on Efficient Markets Theory

The question is : which is the theory that is right? Is it efficient or inefficient
diversification?

If we look at what researchers have been doing it seems that it is the 2nd. The
reason why the markets reacted positively is because it was a new strategy and
they didn’t have enough information to measure that this approach was wrong.
Then it started to undo what had been done. The most important conclusion it
that the single most important factor was antitrust form. Without strong antitrust
enforcement the 1960s takeovers would not have happened. Antitrust legislation
led to a loss of efficiency.

The conclusion is that you should relax the antitrust legislation and the end it is
better to have a few monopolies than inefficient companies

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Biases and contradictions in the interpretations

The conclusion is probably biased because it is way more profitable for some
people.

They are both very short sided because they analyze only from the point f view of
those companies that were studied but not a macroeconomic analysis.

1980s takeovers

If you look at market valuation  the total value of tender offers of mergers,
LBOs, leverage buyouts amonts to 1.8 billion Dollars.

That amounts to 650 billion dollars.

For companies that is good.

What trigger this increase in value? A lot of it has just to do with the demand of
these shares generated by the tender offers.

What about other shareholders?

One study argues that they in the end felt better than those of companies who
were not the target of takeover bids.

These distinctions are lost in the statistics.

If we try and think in macroeconomic terms we can say that the money that went
into takeover bids to finance was not available for investment in other areas of
economy.

CHART Tradebalance
First level of analysis: we are looking at the first chart of the financialisation in the
USA
Financial sector uses more resources, more people than before, it means that not
enough resources go to sectors producting exportable goods or goods that are
going to be bought by the American public.
As a result American buy more and more imported goods.
We see here the result of increased Pendino due to gains made during the
speculative bubble.
The American econmy is longer producing its goods, essentially involved in
financial activity.

1980s Reagan Policies

- Electoral program « get the government off the back of people »
- Deregulation
- Tax and budget cuts (reduce budget deficit)
- reduce inflation 10.4%
- Restoration of US international prestige

 restore strong leadership = 2nd point

Here are in essence the 4 points that were part of Reagan’s promises as a
candidate.

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The liberalism of the 1960s baby boomers

Individualism among much of the American electorate, especially in the higher

layers
Less regulation, less Government
This is why you see this reversal from liberal to Conservative domination
This new Conservative approach of reducing Givernment became attractive even
to people who would define themselves as liberals.

There is another point why Reagan became attractive  to restore US prestige

The challenges to American autorité (Vietnam…) had a hearing on the
Conservative, they resented it as a loss of domination, authority, prestige.

Even for the classical left wing segment, the classic liberals, Roosevelt, was
affected by the loss of US prestige. The Vietnam War was a cause of this.
They were fighting for freedom and saw their country in the position of the bad
guy.

Non classical left : radical liberals who had been part of the Student Protest
Movement in the 1960s, they were also affected.
They were against the Vietnam War because didn’t like the image that their
country was getting in the Vietnam War.

This issue of US international prestige affected everyone in the US.

The challenges to US authority in the world were very real.

In 1966: the Iran crisis

Nov 4th 1979  Iranian students took over the US embassy and held a number of
members of the personnel as hostage and demanded that the US send the cha
back to Iran.
This was Under Jimmy Carter administration.

Individual fate

ARTICLE

The profitability of these companies did not increase after the mergers and
acquisitions. Originally the justification was a loss of profitability.
One of the stakes in the regulation was the imposition of the concept of
shareholders value.
The ideological issue being how you conceive corporation control.

Negative consequences, 2 reasons:

- Operational profitability: how a company can produce goods and services
- Financial profitability: how much it can produce given its share value

If you have a company through an acquisition by somebody else, price of the

shares increases but it does not improve its real profit. The ration worsens.
For the ratio to stay stable the profit would have to increase, or the market
shares.

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Did Reagan deliver?

- Government spending2.5%
- Top marginal tax rate from 70% to 28%;
Corporate tax from 48% to 34%
- Deregulation continued (slower than under Carter)
- Inflation: 10.4% in 1980, 4.2% in 1989

The same 4 points are starting to surface in the policy of the Gvt in France.
 Start of the neoliberal policy

Largely justified by the issues of the 1970s: slow economy with a high inflation 
stagflation
Government continued to increase during the 1980s during the two Reagan
administrations but at a slower pace than under Jimmy Carter. The increase had
been about 4% and it was 2.5% under Ronald Reagan. Slowing of the growth in
Government spending.

- Reduction in taxes
The top marginal tax rate is the tax rate imposed on the highest trench of
revenues for people who have revenues.
It calculated by brackets.

- Deregulation
Reagan continued to deregulate the economy but it did less so than Jimmy
Carter who was a Democrat.

- Fighting off inflation

Reagan delivered on that. Inflation was 10.4% before his election and went down
by 1989 to 4.2%.

The conclusion:
Not bad for marginal tax rate
The growth of GDP per capita working age
Bank failures reached a higher rate than what had been experienced at any time.
The two main achievements: the reduction of marginal tax rate and the reduction
of inflation.
Extremely important: the reason why it was so successful on this is because
these two points gathered by partisan approval = Democrats + Republicans.
That tells us that in effect the will to reduce taxes and inflation was not just
something that the Conservatives supported. These were measures that both
Parties agreed on. The first draft of legislation for the reform of the tax code was
first introduced in Congress by two Democrat Congressmen.
The same goes for the necessity to fight inflation, Jimmy Carter started first.

There was Partisan agreement on these two points because?

+ -
Borrower Lender
Companies Banks
Households Brokers
State Wealthy / Savers

There was a shift in the balance of power.

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The proposition for a reduction of the tax rate was with other tax reductions. The
result was that people who in the end were not the main beneficiary of these
reductions because benefits you can derive from inflation are not very visible.
A decrease of your income tax is very visible.

Social Security

Military spending, many people were drastically in favor of it. Not because it was
going to bring power to the US but because it brings work and well paid jobs.

It is a form a Keynesian support, it was mainly for households.

Reagonomics  opportunistic political initiative

Bringing back the Conservative Party to the White House after a long time of
absence.

Bonds are securities, they are sold  Government bonds

Who would buy them?
The wealthier portion of the population, those whose taxes have been reduced
most.
It is benefiting to the beneficiary twice  more ability to buy bonds + less taxes
The system has become problematic.

Not surprisingly this change has taken place.

More money goes to finance.

MANQUE UN COURS

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Civilisation américaine – Semestre 6

Séance du 17/03/2010

Période post moderne  à partir de la fin du communism

1990s: outline
Preamble
- George Bush
- The Gulf War
Clinton and the economic boom
- An economic cycle with profound sociocultural, ideological implications
- The lessons of Clinton’s election
- Clinton’s economic policies
- The 1990S growth cycle
- The post modern parenthesis

Main question about the 1990s: the deficit, Clinton

His policy seems to bear fruit. The American economy recovered in the 2nd half of
the 1990s.

The 1990s – Preliminary details

- Stock options
- Initial Public Offering (IPOs) and Underwriting
- Venture Capital

Stock options: to encourage managers of companies to work with the interest of

shareholders. They were invented in the late 1900s.

1990s Preamble
- George H. Bush
- The Gulf War
 A brief chronology
 Conventional geopolitical analysis
 Other angles

George H. Bush

He only served one term. So did Carter but he finished in a very weak position,
tarnished.

Major policy triumph  first Gulf War

For two reasons:
- Drastically won by any standard, victory obtained in a small cost. If soldiers
had not gone to war, more would have died in America.
- It was a diplomatic triumph. He managed to form a coalition. About 30
countries sent troops. Not really anyone opposed to war.

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1991  the approve rating was above 90%.

It was so high that he caused the favorite potential Democrat candidate to quit
before the election.
They had to run a Primary election, among them was Clinton.

Motto of Clinton’s campaign in 1992  It’s the economy stupid. The economy
was not doing well. Clinton understood well that the opinion was not so much
interested in foreign issues but in what was going on at home.

The Gulf War is an exception in conflict. Also because it gave way to most biased
analysis.

1. A brief chronology

It took place shortly after the end of the war between Iraq and Iran. It had lasted
for 8 years. To quite a large extent it resembled WWI. The two opponents are in
relative terms in the same development stage and in position to bring to the
conflict the same force and kind of technology.
Modern technology had a tendency to annihilate itself. It was practically
immovable.
It is a suicidal form of conflict.
Very quickly on the front the vehicles allowing movement war became practically
useless. It was not safe.
A significant number of casualties on both sides.
Iran has a much higher population than Iraq, which at the end of the war was
practically ruined.

Allies + Saddam Hussein against Iran  growing power in the area

They felt betrayed.

Oil sale was the only way for Iraq to pay its debts. Inflation raised to 40% a year.

Another problem: slant drilling

The Iraqis troops in Kuwait  08/02/90

Immediately the US pushed several resolutions, condemning the invasion of
Kuwait.
Saddam made a big mistake: started criticize the Arabis for being close allies to
the US.

Within months, before the end of the summer of 90 they had sent 500 000 troops
in Saoudia.

The US went to the UN, Hussein had to withdraw and they allowed the use of
force if he did not.
Built of the coalition started, 44 nations and a total of more than 900 000 soldiers
in Saoudi Arabia.
Japan and Germany helped a lot financially.

The conflict started 02/02/91 and ended 2 weeks later.

It started by massive bombing after which the troops moved into Kuwait and Iraq.
The last campaign lasted 100 hours.
Bush ended the conflict before Hussein had been captured.

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2. Conventional geopolitical analysis

Saddam Hussein was a ruthless dictator, became a military dirigeant.

His military built up was very expensive. He had to convey Kuwait, allowed him to
the oil of Kuwait.
It is both a political and an economic objective that caused the war, motivated by
the ambition of Hussein to become a major player in the Gulf region.

3. Other angles
There are several facts that do not fit this picture.
 The role of the US during the war
During the Iran/Iraq war they helped both sides.

Iraq had been seen as an ally by the US.

The very ambiguous statement made by the American ambassador to Iraq, a few
days before the invasion of Kuwait by Iraq, he was meeting Hussein for the very
1st time, saying that they had no interest in their conflict. “The Kuwait issue is
not associated with America”.
They did not really care.
What had never been clarified is why the ambassador said that  cynical
attempt to trap Hussein? Had she no specific instructions?

2nd point : the benefits of the Gulf War for the US

Not small

Since WWII the US tried to settle troops in the area.

At the end of the war they were in measure to implement their troops.

After the end they signed large arm sales contracts.

1990s Gulf War – other angles

- Ambiguous role of the US before the war
- Benefits of the Gulf War for the US
- Media representations
- Theatrical micro-militarism (Todd)
- The Gulf War did not take place (Braudillard)

Journalists had to be accompanied by American troops. What was displaced in

the media was images essentially coming directly from the weapons.
They saw images from the bomb before it exploded.
The result is that absolutely none image from the Iraqi side was showed on TV or
printed in newspapers.
Hussein made a mistake, he did not want images from his side to be shown. He
should have.
After the war the count of casualties began and estimates showed 100 000s of
people.

The remaining image of that was the display of a formidable superiority in

technology and amount of force of the US army.

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- Theatrical micro-militarism

Todd explains that when the empire is no longer to defy its enemies it is going to
defy an enemy to its measure.

AN attempt to demonize and to blow the actual strength of their opponent.

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1990s: Clinton and the economic boom

- A boom with profound implications

- The lessons of the election
- Clinton’s economic policies
- The 1990s growth cycle

IPOs

Public company is not a state owned company, it is a company whose capital is

open to the public.
The most important rule is disclosure rule, on a regular basis has to disclose its
accounts and to disclose certified accounts.
By laws  its capital is owned by the owners of the company
It has to look at the SAC and to start the initial public offering procedure.

Banks : they buy the shares to the companies and they sell them to the markets.
They ask their clients (brokers or other banks) if they want these shares.

The stock issues of the 1990s, interesting they increased in a spectacular way.

There is a speculative mechanism at work and it has to do with the IPOs.

The economic boom under Clinton  numerous effects at a time when the US
had a unique position with the end of the Cold War that they won and was the
only superpower
Probably because it was doing the right thing

The end of the Cold War caused a shift towards the US as there was no
alternative anymore, for the countries that were going out of the zone of
influence of the USSR and developing countries.

The US was the model bringing success. It did a lot to promote the cause of neo
liberal policies.

There are essentially two lessons that we can derive

1990s: The lesson of the election

- “It’s the economy stupid!” vs the Gulf War
- Negative campaigning
- The first baby boom president

When we look at the confrontation Bush sr / Clinton we see the Old vs the New
School
Bush was approved, campaigned on that, at the end it was below 50% because of
the economy.

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Civilisation américaine – Semestre 6

Clinton had understood that he could win on the economy “It’s the economy
stupid!”
This is how he won against George Bush.

Bush was hurt by the increase of taxes.

He did that because of the Gulf War. Another expense was the debt of the
savings and loans industry.
They were “caisses d’épargne” and a heavy regulated segment of the US
industry. They were relatively small local banks whose main roles was to take the
savings of ordinary people and grant loans to them.
Very conservative form of business
They were guaranteed by the federal Government, if it went bankrupt they would
pay the deposits back.
The agency in charge of doing that is known as the FDIC (federal deposit
insurance corporation), created by Roosevelt in 1983.
It was decided it was important to increase the faith of the people in the banking
system so that there would be no more bank failures.

Glass Steagull  piece of legislation by Congress as a response to the collapsing

of the banks
Complete separation between the deposit and investment banking

Effect on the savings and loans

 Loans at a slightly higher interest rates
 Savings at a slightly lower rates

When the Federal Reserve increased its interest rates all rates had to increase.
The interest rates paid on the savings increased a lot but not for loans because
they were fixed.
The spread became negative  banks gave more money to the depositors that
they gained, they went bankrupt.

Bad economy + tax increase  disaster

Clinton had understood that the voters were much less interested in the prestige
of the US and more in their own domestic issues.
Due to the growing rate of the baby boomers in the voters’ ranks.
On the other hand, the demographic class of the baby boomers is in full force and
others are deserting the voting ranks  disproportional weight to the baby
boomers.
Bill Clinton was one of them. He understood what he had to say to them.
Clinton insisted on the economic crisis and also issues like improving overcalling
the health care system, for the middle class, same for the educational system.

Another element that gives us a lesson about the election  the negative
campaigning
It has always existed in the US, you raise the negative points of your opponent.
Bush’s campaign pushed the negative campaigning to an extreme never seen
before. It became the central element to his campaign.
This strategy was going to change strategies for the future.

Clinton was accused to have an affair, of dodging the draft in Vietnam and
smoking marijuana.

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1990s
- 2 contributions of the 1990s to political rhetoric
 Smoking without inhaling
 Fucking without penetration
- Monica Lewinski facing accusations of perjury (impeachment)

Negative campaigning  we see

- He had with Jennifer Flowers
- The draft
- He smoked marijuana

Interesting that these issues were chosen by the Bush campaign.

The symbols are those of the 1960s and they went on through Clinton’s two
terms. It is an attack on what he symbolizes: the access to power of the
generation of the 1960s.
Very few presidents generated such hatry.

1990s Clinton’s economic policies

- Middle Class Issues

- Orthodox remedies
- Phase II : serving the contended

Largely conservative.
Most of them ignored by the campaign of George Bush.
He also tackled the environment.

Clinton’s Phase I

- Enhance Health Care, Education while reducing deficit ($290 B.)

- State of the Union 1993
 Balanced budget = long term growth strategy
 Challenges the US to accept sacrifices for the future
- 1993: vows deficit < $200B. (spending cuts + tax increases
- 1994: vows deficit < $176 B. (more budget cuts)
 Exception : justice

On his inaugural address he talked about self sacrifice.

Very interesting for several reasons:

- Representing a generation that prefers immediate satisfaction
- A Democrat making the standard Conservative liberal credo his own
This is the standard view of the orthodox economist.

He vowed to apply these measures and succeeded.

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In 1993 he succeeded, in 1994 he vowed to even further only with budget cuts, a
typical Republican Conservative decision.
The exception: justice budget increased to fight crimes etc.

By 1994 the economy was enjoying a strong recovery and 5 million new jobs
were created.
It is when the mid-term election took place. A part of the Congress is renewed.
This is when he started phase II.

Clinton Phase II

-1994 mid term: Republican landslide

- Serving the contended
 Fight illegal immigration
 Conservative Welfare reform, allowing tax alleviation

2nd part of his term: more Republicans in the Congress, more difficult.

His Welfare reform enabled 2 million people to benefit from the Health Care
system.
It was not easy.
All of these measures he took did not serve any special interest.
He had to face opposition from both sides.
You see a President taking a course different from his predecessors.

The 1st half of his term: he tried to depart from what elected officials had done
before = contenting the electors. He called for taking steps that would be good
the country in the long term even though that meant momentary discontent for
the contented.
He tried to bring virtue to the American political system.

In the following two years he turned much more towards a strategy that aimed at
satisfying the contended.
He had Congress vote a new increase in minimum wage which had not changed
in 4 years and took measures to fight illegal immigration (aimed at the middle
class).
He granted 40 million dollars to Mexico so that it would develop its economy
along the border.

There was opposition between him and the Congress  the Federal Government
was paralyzed. Civil servants were paralyzed, it lasted several weeks an
agreement was found and the budget was voted.

This decreased his approval rating.

Welfare reform
Clinton had already mentioned he wanted to change the way it worked.
Newt Gingrich dismantled completely Welfare (everything that helps the poor).
Clinton could not accept it as Democrat. He made a counter proposition on very
conservative theses.

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Every person had to find a job in 2 years, could not benefit from it more than 5
years in their life.
On this basis he had his law passed.
Democrats were not found of it and Republicans hated it.
After that story happened the Monica Lewinsky scandal.

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The 1990s growth cycle

- The triumph of neoliberalism

 Rates of proftos

 The IT Revolution

 The speculative bubble and its

causes

The 1990s economy

- 1990-91: recession / 1992-94: slow recovery / 1995-2000: strong growth

>4%
- Unemployment 4% by end decade
- 1991-200 expansion doesn’t rank high among expansion periods
- Post 1995 growth fueled first by investment, then by remarkable
consumption boom
- Stock prices 95-99: +24% / year
- Problematic tendencies

1995-2000: message = unending cycle of growth

Another remarkable feature: the bull market of 95-99

1990s growth perspective

 Slide

The growth of the 1990s is not by any measure spectacular.

The 1990s economy

 Slide

10% investment = huge

It raises the suspicion of overinvestment.

The rates of profits in the 1990s you see are by no measure a record.

1990s growth in perspective

- Reasons for rise of profits

 From 1972 to 1996, value of output/hour worked: +1.3%/year
 Total growth of value of output/hour worked: +36.4%
 Real wages, same period: -2.5%

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This scenario resembled the one of the 1920s.

One strategy implemented: division of economic roles in the world.

Economic relation between the US and China: one specialized in consumption
and the other in production.
They geographically separated. There was no clear awareness that this would
happen.
By dividing them geographically there was an attempt to solve this contradiction:
to increase productivity you need to not increase salaries but you hurt capitalism
because you hurt demand.
Debt is what fueled demand in the US throughout the decade.

Equipment other than technologies increased at a rate of 8.4% whereas others

by more.

The 1990s growth in perspective

- The speculative bubble

 1990-94: stock price growth close to corporate profit increase
 1995-2000: stock prices +23.6%/year while corporate profit growth declined
 Agregate value of outstanding shares
 1994: $5.5 trillion, 199: $17.1 trillion
 P/E of SPindex: 19.9 in 1994, 44.2 in 1999 (average = 20)
 Based on P/E=20, 81% of rise may be speculative

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