March 1994

Three New Ways to Create Jobs

As joblessness grows and companies eliminate employees in the name of efficiency and productivity, a valuable opportunity is being ignored. In one expert's opinion, tax credits, higher interest rates, and aggressive development of overseas markets can create permanent job, stimulate the economy, and make possible the host of quality-of-life programs America desires

by Charles A. Cerami
Something about today's kind of joblessness is different from the brief spasms of unemployment that used to accompany post-Second World War recessions. Economists shudder when they hear that a shortage of jobs has been lurking for two decades--even during times of "economic growth." Recent improvements will be drowned by more planned layoffs this year and next. Many companies, moreover, say they do not intend to hire more workers, regardless of how their business does.

How have political and economic leaders responded? Whenever the Clinton Administration meets with business leaders to discuss jobs, it discovers that all they want to talk about is efficiency and productivity--in effect, how to get rid of more employees. There's plenty of talk of how Mexico or Asia may prove to be a bonanza, but nothing is being done to create real, permanent jobs. Our government is coasting on the old false hope that once we rouse the economy, jobs will appear automatically.

Can something be done? Here are three approaches that, if tried together, will make a difference. They are not just one person's thoughts. They are distilled from thirteen years of discussing this subject with many U.S. and foreign officials, up to the level of Prime Minister.

Sixteen respected world leaders worked with me, first to prepare a 1985 New York Times series that foresaw a "looming worldwide job shortage" in the mid-1990s, and later to write a book offering possible solutions. These solutions have now been updated. None of the participants are extremists. They are all in the mainstream of world affairs--people like William Roth, Republican senator from Delaware; Bob Graham, Democratic senator from Florida; Claude Cheysson, a former French Foreign Minister and European Community commissioner; and Jacques de Groote, one of the International Monetary Fund's most creative executive directors.

One of these ideas could be put into effect within weeks, another in months, and the results might be measurable during 1994. The third proposal would have multiple effects, some needing several years to make themselves known; but we would enjoy the benefits for a century or more.

An Incentive to Hire

The Administration should very powerfully urge Congress to enact a new law--a Human Employment Tax Credit. This means giving companies a cash incentive to hire more people.

We must stop regarding employment as merely a peripheral effect of economic well-being. Jobs are not the second step on the ladder to full economic recovery. They have to be the first step. The reason the Japanese suffer less in recessions than Americans do is that their workers are generally kept on the job. Right now, when joblessness in their Western markets is battering Japan's sales, their own unemployment is under three percent, less than half of ours and only a fourth of Europe's rate. For a Japanese businessman, firing is the last thought that comes to mind. You don't fire your spouse; you don't fire your workers. As a result, even though people spend less than usual when the economy is soft, they do spend. And they pay taxes. In our system joblessness is the worst stumbling block.

The Human Employment Tax Credit would attempt to create jobs quickly. It is the exact opposite of a very damaging U.S. tax break called the Investment Credit. This device, widely used from the 1960s into the 1980s, encouraged companies to buy more labor-saving machinery by promising them a federal tax credit. Since we are a world of and for human beings, why on earth destroy human jobs? In the age-old way of the Emperor's New Clothes, most experts say--all too confidently--that new technology increases productivity, which in turn enables a country to compete against others and raise its standard of living.

The study of productivity, however, has become a religion, and its disciples have trouble agreeing on the nature of its effects. Basically, you divide total output by the total number of hours required to produce that output, and you get a number that rises as certain jobs can be completed in fewer hours. Whether the increase is good or bad depends on the situation. Productivity buffs divide into several subschools that focus on worker attitudes, work ethic, managerial performance, environmental factors, excess use of foreign parts, and other issues. Henry Kelly and Andrew Wyckoff, of the government's Office of Technology Assessment, made a study showing that the statistics used by productivity experts are wildly skewed. They wrote, for example, "Government statistics treat spending on the intellectual capabilities of the work force no differently than spending on candy bars. The data suggests that a company is deemed to be investing if it purchases a new machine, but not if it pays for the employee training needed to use that machine efficiently."

A commonplace is that far more Americans now work in the service sector than in manufacturing. That statistical imbalance has created a fear that we're turning into a nation of low-paid hamburger-flippers, since the lack of productivity gains in services would rule out substantial pay increases. But improved calculations by the Bureau of Economic Analysis reveal a startling possibility: service-industry pay per worker has apparently been rising by 1.5 percent a year, while manufacturing pay has increased only 1.1 percent annually. The nation's net productivity must be higher than had been supposed. Thus we can move ahead on programs for putting more people to work with less fear of falling behind other nations.

Like running toward the wrong goal in a football game, dashing for higher productivity may be progress toward exactly the reverse of the objective that industry should be striving for. In our present economy, decreeing that a company must produce more with the same number of people, or even fewer, means that some of the workers are done for. The old Investment Credit--applauded as a productivity booster--was paying companies to lay off workers.

The proposed new credit would turn the principle around, granting companies tax breaks in proportion to the number of permanent workers they add to their payrolls. They wouldn't have to forgo improved equipment. Companies would be told, "Buy all the machines you want. But be aware that your corporate tax bill can be scaled down if you are able to take on more permanent employees. The money is yours. You decide."

Until such a plan is put into practice, no one can guarantee the result. Some factories have discovered that blending high tech with a little more human labor input can yield higher-quality production, and fewer rejects. The advantages of increased employment are even clearer in the service sector, especially retailing. The growing tendency to run drugstores, stationery shops, office-supply stores, hardware stores, and food markets, among other kinds of stores, with only a cashier up front and one person to stock the shelves is irritating to many customers. They may waste quite a bit of time finding the cough syrup they want, the right wrench, or a certain size envelope, just because they can find no one to answer a brief question. Their disenchantment must be showing up in sales figures, because several new stores are making a point of mentioning in TV commercials how much service they give. One kind of store that had moved very far away from personal service--home improvement centers--is stressing that the customer is always within easy reach of an employee who can even give do-it-yourself advice. If the centers got a tax credit, they might hire even more workers.

Would this plan strain the federal budget, as tax credits often do? No, just the reverse. A Human Employment Tax Credit would be virtually cost-free, for it is unlikely in today's climate that many workers hired in this way would have found jobs otherwise. The credit would take effect only when someone was hired. But that new worker would become a consumer and taxpayer, paying federal withholding tax at once, so the U.S. Treasury would take in new money months before the employer was granted the credit.

Don't Push on a String

Government should stop trying to "push on a string." That's an expression that has been used to describe the Federal Reserve's practice of lowering interest rates whenever the government wants to stimulate business. It's also called pushing on wet spaghetti. It hardly ever promotes new investment or expansion.

Literally hundreds of in-depth interviews with CEOs, as background for the books I wrote on management and finance from the 1960s through the 1980s, engraved this lesson on my mind: even in those days when they longed for their companies to grow, these decision-makers were flatly against expanding them unless they saw customer demand beginning to build. The idea of borrowing to grow just because interest rates were low got a frown or a laugh.

Even more vivid in my memory is the earlier time I lived through as a junior executive in a mid-sized manufacturing company. The firm had started small, making cast parts for dentistry and surgery. Then the firm discovered that our casting process was perfect for making the concave blades used in the hot end of a jet engine. That division quickly became the biggest in the company. When Pratt & Whitney, our main customer for blades, gave us a huge order that required more plant capacity, we broke ground for a whole new factory. A recession chose that moment to strike, and, as luck usually has it, the new building began to show big cost overruns. I can still feel the tension that spread through the whole office. We were in sound shape, so we could borrow. But every expenditure was made uneasily. Old equipment scheduled for replacement was repaired instead. I had the humbling task of going over the list of publications we subscribed to and reducing the numbers of copies. Our new plant had to go forward, but I remember the respected vice-president who was my direct boss saying, "We invest all these millions to triple our capacity. Then suppose the airline industry sags for a while. Suppose P and W says that's enough blades for the present. All that unused space will be a dead weight on the whole company." That's a picture of any business when things sour.

So when managers and directors meet in slow times, the fact that they can borrow money cheaply at that moment doesn't make them jump to vote for expansion. When they see signs that customers' orders are piling up, they'll find the money to grow on, whatever the rate.

But don't lower interest rates prime the pump by making consumers spend? Sure, when they are optimistic. Not when they're hearing about layoffs. Again, jobs are the key.

This doesn't mean that interest rates are of minor importance. But their tendency to make mischief when misapplied along with other measures is great. Many events of this century prove that point. When Franklin D. Roosevelt became President, in 1933, very low interest rates were among the first weapons he resorted to. The belief that he quickly ended the Great Depression is wrong. He improved some conditions, and his charisma quieted fears. But double-digit unemployment remained a problem through the 1930s and ended only when this country entered the Second World War.

An even more revealing sequence of events came after the oil-price shock of 1979 1980. When inflation rose above 10 percent, Federal Reserve Chairman Paul Volcker tried to fight it with very high interest rates. When you raise rates sharply, you're pulling on a string, and that does work if you want to slow business. Volcker did begin to cool inflation, but he also pushed unemployment up to a forty-year high of 9.7 percent in 1982. At that point he eased interest rates downward while the Reagan Administration, in the words of the Nobel laureate James Tobin, added "the most massive Keynesian fiscal stimuli ever given to the U.S. economy in peacetime. . . . In effect, the fiscal policy gave the Fed too much help." Eighteen million new jobs, many in defense, were created at that time, and the unemployment rate dropped from 9.7 percent in 1982 to 5.2 percent in 1989. Those huge defense outlays plus high consumer spending led to the enormous increase in federal debt and deficits that will burden us for years to come.

Now, in the recession just past and its sluggish sequel, rhetoric and low interest rates are being tried. The effectiveness of this policy in creating jobs can be judged from the statistics heard month after month. Ironically, they are often intended to sound like good news: "A Labor Department report today announced a drop in U.S. unemployment from 7 percent to 6.8 percent." A few sentences later, however, they are followed by words that have come to seem almost inevitable: "Unfortunately, most of the new jobs are part-time or temporary."

What, then, would be an appropriate interest-rate policy for today's situation? Bearing in mind that it would be only part of the therapy, like keeping a patient's room temperature right while providing medication, a moderately high interest rate would be best for our present condition. One of the reasons is an often overlooked factor: a considerable part of our population benefits from high interest rates. These are the people who earn interest, rather than pay it--on certificates of deposit, Treasury bills, savings accounts, and especially money-market funds. This part of America contains a great many retirees and those in their last decade before retirement--one of the most affluent groups in the country. They own stocks, but usually focus more on fixed instruments such as bonds. These are people who routinely buy good new cars, vacation homes, fine clothes, gifts, sports equipment, and expensive trips. They became ecstatic some years ago when they could earn 13 to 15 percent on money funds, and their confidence fueled the consumer spending that ran to excess. But today's other extreme truly depresses these former spenders. Many are living on just half the income they had when they retired. Earning sums like 2.5 percent and then seeing those earnings taxed really offends them. This helps the stock averages, because some of the savers are forced to try for gains they can live on. But we see that even stratospheric market flights no longer create jobs. We sometimes had less unemployment when the Dow Jones Industrials were between 600 and 800 than we do now that they are at 3,800. Only product sales, not stock sales, create a foundation for jobs.

Interest rates two to three points higher than they are now would actually increase consumer activity. They would also help to do away with the misleading notion that nothing more needs to be done because government is on a stimulative path. We are not on any path, and facing up to that is a step toward fixing it.

Some will say that this analysis borrows from Keynes's works on unemployment; others may say it clashes with them. I cheerfully agree with both assessments, while noting that Keynes, like other great innovators, was constantly rethinking and adjusting his principles to accord with new situations. Today Keynes would be contending with a labor force that has been transformed by technology, the two income family, and enormous immigration. These factors would normally make him call for heavy public deficit spending to spur aggregate demand. But Keynes would also see that the burden of debt makes such a new stimulus unthinkable. He would want to adjust the calculation of how much aggregate demand is needed to create new employment, perhaps basing it on a trading area larger than just our home economy. In the United States, where total foreign trade used to be a minor part of the economy, we must now recognize that several foreign countries have become in effect awkward parts of ourselves, draining money from us and then returning some of it in loan form. This means not only Japan but also those who sell us oil at many times the price it was in Keynes's day. So he might agree with the point I will now turn to--the need to augment our own aggregate demand with funds from the outside world.

Expand Foreign Trade

We must get to work at once on a long-term program for expanding our markets to include millions of potential consumers around the world. We have been trying to stretch our same old consumer base to make jobs for many millions more people. All our chronic poor, all our unemployed, all our recent immigrants, legal and illegal, need to be provided for out of a pot that they cannot at present contribute to. While we're waiting for them to become givers as well as takers, we should be reaching out to many in other countries who have the energy and resources to become consumers faster than these struggling Americans.

I am not talking about foreign aid. Most of that has been a great failure. I mean that we should give incentives to U.S. companies to expand their horizons and undertake more smart joint ventures and other direct investments overseas.

NAFTA is handing us a great opportunity in Mexico--with far, far more pluses than minuses. Canada is already a major partner for solid, though not explosive, growth. Now we must let most of Central and South America open the door they have been peeking through--in particular, Chile (already claiming to be first in line), Argentina (potential superstar if President Carlos Saul Menem can stay on), Brazil, Uruguay, Paraguay. Some of these are already a little trade group of their own. Venezuela is a definite candidate for admission. Some other countries must be handled more gingerly, because of drug and terrorist problems. But basically the whole hemisphere is asking to be our partners--for the first time ever. If we don't want to play, Japan and Europe do.

The NAFTA battle was a godsend, because it enabled the Clinton Administration to explain to voters the importance of international trade agreements. Workers' fears that jobs are being shipped abroad have scant validity. Again and again when one of our companies puts a plant abroad, sales from the United States to that country go up. This is because the foreign plant produces only a few models or styles, which make the firm name and quality familiar to locals and interest them in the whole line plus spare parts--made by Americans. Caterpillar and Motorola are among the companies that have followed this pattern.

In Asia we'll have to work hard--though the effort will be worthwhile. Those countries are playing the Japanese game with us, selling to the United States right and left, but balking at letting us come into their markets. President Clinton has the right idea: letting them know that we are interested only in equal treatment; otherwise we can close doors too. Since affluent consumers are ever more numerous in Asia, those countries can help to create many American jobs.

Trade, in other words, is the brightest spot in our bleak job picture. But one big problem remains: an adequate effort by our governments--federal and state. They should send skilled and resourceful representatives to advanced countries whose big companies might set up plants here. Some state governments already do this shrewdly and lavishly--with splendid results. South Carolina has attracted so many German plants to one area that the road leading to it is nicknamed the Autobahn. Low U.S. wages and costs are the main attraction (almost 35 percent below the German level!) but the states' attitude, tax breaks, and promises of improved roads and new schools are factors too.

Clinton should encourage the other states to imitate these examples. The same lesson should be learned by his Commerce Department, which keeps trimming the information services it offers to American businessmen. U.S. companies should be helped to negotiate with the foreign plants that are already here. Many could make parts on a subcontract basis. This is an immensely lucrative enterprise.

The three steps outlined above are safe, cost-effective, and definite. They can give us many real jobs within months, and then a long-lasting expansion of our markets which can also create gains for the world we operate in.

Scores of other initiatives are needed to make us again the prosperous America we have known, including a serious anti-poverty program. From 1959 to 1973 the proportion of Americans living in poverty was cut almost exactly in half--from 22.4 percent to 11.1 percent. By 1988, however, the rate was back up to 13 percent, and by 1992 it stood at 14.5 percent. That little percentage represents 36,900,000 people. By now the total must be well over 37 million. Even if we had no more-human reason to raise up our own neighbors, don't we have to do it because we frankly need their business? No nation has ever been rich enough to ignore a seventh of its people. Maybe thinking of them as potential customers will give us new strength.

Jobs won't be handed to our economy as a reward for our other merits. We can work on the environment, adjust taxes, vaccinate children, provide health care for all, even cure AIDS. But we still won't have enough jobs--unless we start creating them. Then we can do all the rest.