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JAMES FLANIGAN

Pay Attention, Candidates: It's the Economy Again

February 18, 1996|JAMES FLANIGAN

The big issue of the 1996 election campaign came clear last week and it's not the flat tax. It is wage stagnation, job anxiety and generalized worry about living standards.

Patrick Buchanan, the candidate riding the issue in the Republican primaries, blames international trade, especially trade with Mexico, for the fact that wages for most U.S. workers are treading water.

But he's wrong to blame trade alone and completely wrong to blame the Mexicans, says economist Lester Thurow of the Massachusetts Institute of Technology, who sees three factors--trade, technology and misguided national policies--governing the fate of U.S. workers these days.

Thurow, who has a new book, "The Future of Capitalism," coming out in March, is on the right track in his analysis and in his call for government policies to encourage growth. Such a policy shift might sink the stock and bond markets temporarily, but it would improve the economy.

To understand what's going on, follow the links in the economic chain. Trade is not a matter of cheap labor but of skilled workers elsewhere. "U.S. workers are competing with engineers in Bangalore, India, and technicians in Taiwan and China," says Thurow, describing a world labor market that mirrors the global market for goods and services.

That enlarged market and advancing technology in turn have imposed demands that U.S. workers have greater math skills than ever to get factory jobs and more education to get almost all jobs. Community college is necessary now where high school alone used to suffice.

Along with the demand for skills has come premium pay for educated workers, but a widening disparity with wages for the less skilled. And that has left vast numbers floundering, not only the 7.5 million unemployed but at least another 5 million workers underemployed.

They are frustrated because government emphasis on fighting inflation and cutting budget deficits has kept U.S. growth at a subpar 2.5% and "encouraged a low-wage economy," says Thurow.

Rather than reappointing Federal Reserve Board Chairman Alan Greenspan, as President Clinton proposes to do shortly, Thurow--and a growing number of politicians--would retire him.

What's going on is a change of economic policies in both parties. In the Republican primaries, Buchanan and Steve Forbes have advocated pro-growth policies from the start, and Bob Dole and Lamar Alexander are now chiming in.

On the other side, a receptive White House is being urged to adopt faster growth policies by the influential Democratic Leadership Council.

No matter who wins, that promises fewer budget cuts in this election year and more government investment programs in future years.

The bond and stock markets may anticipate the political shift by reversing their recent upward surge. Indeed, bond prices are already falling as long-term interest rates edge up.

But the economy could add 1% to its annual growth--enough to add 2.5 million jobs paying $12 to $14 an hour.

And faster growth is needed urgently because the economy is getting worrisomely narrow.

You can see it in consumer surveys. Last year the top 25% of income earners, those making $65,000 a year and more, accounted for two-thirds of all automobile purchases, according to J.D. Power and Associates. In 1980, by comparison, top income earners accounted for only 41% of car sales.

"Those buying new cars and trucks today are the 45-to-64 age group," says Paul Ballew of J.D. Power. "Young people? They can't afford new cars, so they're in the used-car market."

Such statistics put flesh on reports of income disparities in a time of rising business profits. Demagogic politicians criticize profits as the loot of big corporations, but in fact they're widespread among the self-employed and small-business owners. "The key to succeeding in this economy is to have access to profits. It's wage earners who take the hits," says economist Diane Swonk of First Chicago-NBD Corp., the recently merged Chicago and Detroit banking company.

The problem often is not wages but skills. "Our manufacturing customers here in the Midwest tell me young people they hire to replace retiring workers can't handle the jobs," says Swonk. "Their education hasn't prepared them. Good jobs are going begging, but high school dropouts and even some graduates can't take them."

Those are the people left behind by the new economy, youth of all races with indifferent education, unpromising futures. Their numbers are large and their resentments may be ominous for a society that Nobel economist Robert Solow sees as turning "mean and crabbed, limited in what it can do, worried about the future."

The sad thing about elections in such a complex economy is that we get sound bites instead of serious discussion. But the offsetting good feature is the adaptability of U.S. politics. Because Buchanan has called attention to real issues, campaigns from now on will focus on ways to spur economic growth.

In that respect, we need to understand the role of government investment. All federal spending is not a river of entitlements, explains Robert Shapiro of the Progressive Policy Institute, which advises the White House.

Spending that invests in infrastructure, such as highways and airports, supports economic growth.

Spending on research and development, whether through the National Institutes of Health or the Defense Department, spurs innovation, which is essential for economic vitality.

And investment in human capital, whether through land grant colleges or a GI Bill of Rights or on-the-job training for Midwest youngsters, yields enormous dividends for the economy and society.

Serious discussion of such investment, how to fund it, how to manage it, would be far more helpful to the country at this time than attack ads and sound bites. Unfortunately, when we want "Hail to the Chief" we often get "Send in the Clowns."

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