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TIMES BOARD OF ECONOMISTS / IRWIN L. KELLNER

Both Government and Business Must Change to Foster Growth in Jobs

April 11, 1993|IRWIN L. KELLNER | IRWIN L. KELLNER is chief economist at Chemical Banking Corp. in New York

Although the economic expansion has just entered its third year, many people don't believe that the recession has ended. Conversations with consumers and businessmen across the country reveal a deep-seated malaise regarding the state of the economy.

Thousands of companies large and small are finding it increasingly difficult to conduct business as usual in today's environment. Most are having trouble increasing their selling prices to cover such rising costs as taxes, materials and rent. And virtually all report having to cope with more and more regulations at all levels of government, which not only limit their freedom to run their firms as they would like, but also take up their time and add to their costs, which they can't recoup.

Not surprisingly, businessmen are constantly searching for ways to cut their costs, and one way is to economize on labor--for most firms, their biggest expense. Far fewer jobs have been created during this recovery than at this point in past upswings, and most of those that have been added to business payrolls call for either part-time work or, if they are full time, lack the usual fringe benefits such as sick days, overtime, vacation or health care.

As you might expect, this inability to find the right job for the right pay has depressed people. Many families are watching their spending very carefully, buying only what they have to from the cheapest outlet and refusing to pay higher prices whenever possible. Of course, this only reinforces business' efforts to cut costs, which makes job finding even more difficult.

If this vicious cycle continues, it could threaten this feeble expansion, bringing forth another recession at a time when many families and businesses have yet to recover from the previous one--mild as it was. Needless to say, it would reduce the chances of the Democrats holding onto their majorities in Congress come next year's elections, and might well jeopardize President Clinton's chances of winning reelection in 1996.

Job creation is now the nation's most important problem. More jobs carrying traditional benefits are necessary if this expansion is to continue. And continued economic growth is necessary if we are to have any chance at all of reducing Washington's budget deficit.

Until recently, the "invisible hand" of the marketplace could have been counted on to take care of job creation as each company, acting in its own best interest, would have benefited the country as a whole.

Indeed, this was the true meaning of the answer given by Charles E. Wilson, president of General Motors in 1955, to a question asked by Sen. Richard Russell. Russell asked if Wilson, who had been nominated by President Eisenhower to be secretary of defense, would be willing, if necessary, to make a decision unfavorable to GM. Wilson answered: "What's good for the country is good for General Motors, and vice versa."

Unfortunately, this is no longer true today--and the sooner Washington and other levels of government realize this, the sooner we will return to creating the number and kinds of jobs that are needed to sustain and nourish this expansion.

The cost of hiring people is escalating. For one thing, payroll (Social Security) taxes began to rise rapidly, starting in 1984. This was the result of the Greenspan Commission's recommendations to ensure that the Social Security trust fund would remain solvent for at least the next few decades.

Other costs of hiring are rising too. The price of health care, which had been rising twice as fast as the cost of living since the mid-1960s, has finally gotten to the point where it has become a deterrent to hiring "permanent" workers. Companies of all sizes are now using temporary workers, for whom they don't have to pay health care costs, not to mention other benefits.

Then there are the costs imposed by governments. Passed with all good intentions, laws such as the Americans With Disabilities Act, the new Civil Rights Act, increases in the minimum wage and, more recently, the Family Leave Act, are making it even more difficult for employers to add workers.

It should be pretty clear by now that if we are to enjoy a return to sustained economic growth, both government and business will have to make some changes.

Clinton ought to reduce some of the impediments to hiring. He has already made a major move in this direction by announcing his intention to relax some of the restrictions that have been inhibiting bank lending. Small businesses will be the chief beneficiary, since they rely mainly on their banks for credit, not having access to the stock, bond or commercial paper markets for funds. The Administration is also correct to propose tax credits for small business hires and to reduce capital gains taxes for new businesses and old companies starting new enterprises.

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