U.S. outlook issues: putting America's house in order.

Despite the economic growth in 1987 and 1988, there are three issues of concern: the strength of consumer spending, the risk of accelerating inflation, and the federal budget deficit. The history of recent consumer spending is reviewed, and the recommendation made that if the recent "binge" of 1987-1988 has caused the economy to overshoot its production capacity, monetary and fiscal policies should be adjusted to rein in the spending. Regarding inflation, despite projected productivity gains, the economy seems to be heading for a 4.5%-5.0% core rate of inflation, a rate that can surge to 1970s-like levels with any substantial bad news. The observation is made that no major sustained cut in financing costs will occur until U.S. fiscal policy is changed. Regarding the deficit, voters cannot seek more services without either higher taxes or higher interest rates; growth alone will not cure the federal deficit. The distinction between good and bad types of debt is made and the history and causes of the $ 2 trillion increase in federal debt between fiscal years 1980 and 1988 is reviewed. Corporate debt and the recent corporate acquisitions and leveraged buyouts are analyzed. Public policy considerations arise primarily from the need to limit the system risks imposed by the scale of the buyout mania and to insure fair treatment of current debt holders of target corporations. Greater regulation of pension investments may be necessary, and widespread use of change-of-ownership clauses in bonds would be productive.