An Economic Workout

By William J. Holstein, Dan McGraw, Viva Hardigg

Headlines proclaiming a strong U.S. economy are a big reason Bill Clinton was re-elected. But forgive Sigmund Morris for not running a victory lap. The 31-year-old former Army sergeant is scraping by at a $7-an-hour job at a tool company just west of Chicago's O'Hare airport. In Bloomington, Ind., Bob and Sandra Griffin, ages 55 and 51, would love to know they, too, have jobs for four more years. But they fear that the Thomson Consumer Electronics plant where they work will be shut down and 1,300 jobs moved to Mexico now that South Korea's Daewoo appears on the verge of buying the company. In the West, Richard Avard, 61, of Fountain Valley, Calif., worries that a flood of underpaid immigrants working for his competitors will force him to close his small construction company.

All these Americans are caught up in an intense crossfire of structural change that is transforming the U.S. economy. Some of their compatriots already work for the world's leanest, savviest, most technologically sophisticated companies. For them, this era's "creative destruction" has been a boon because they've made the transition to an information-intensive, 21st-century economy.

Future shock. But millions of Americans--economists put the figure as high as 80 percent of the population--are at risk of being left behind as the entire postwar manufacturing model is overhauled. Some of the highest-employment industries, such as autos and auto parts, defense and aerospace, continue to undergo wrenching shakeouts. Old skills and work habits aren't needed anymore, thank you, as companies seek younger, highly educated, computer-literate, decision-making employees. Likewise, the service sector is undergoing dramatic transformation as banks consolidate, insurance companies merge, health care providers are snapped up and telecommunications firms undergo their umpteenth restructurings. Few industries have been spared: Even the funeral home business is being shaken out as the two largest companies in that industry engage in a hostile takeover battle.

Combine those pressures with the fact that the role of the federal government, whether in supporting a massive military complex or in providing welfare, is declining--and is likely to decline further. Then consider ever intensifying global competition and a tsunami of more than 1 million new immigrants washing over the workplace each year, triggering resentment from Americans seeking jobs in Silicon Valley as well as shoppers buying groceries in the inner cities. Into this crucible of structural change, add the fact that there are major mismatches--where jobs are located and where people actually live--and big gaps between the skills that new jobs demand and the skills that workers actually possess.

Small wonder that Americans feel a gnawing sense of uncertainty despite statistics showing that the economy is growing and unemployment is holding steady at a low 5.2 percent. The generally upbeat aggregate numbers simply don't capture the upheaval Americans are experiencing in their daily lives. "The aggregates really disguise the undercurrent of structural change," says Diane C. Swonk, deputy chief economist and first vice president at First Chicago, a financial group.

Tiers of frustration. Millions of Americans at risk voted for Bill Clinton. They know that a president cannot personally sweep in and save a factory from being closed or find a job for a downsized banker. But they fear that America is becoming a two-tiered society: an overclass of highly compensated people vs. an underclass of dead-ended, underemployed, dissatisfied, no-chance people. That's one reason the campaign debate about whether the economy is "strong" or "weak" rang so hollow in the heartland.

To identify the key structural economic challenges facing the new administration, U.S. News tapped a panel of eight experts from around the country who are known for their understanding of the "real" economy (see accompanying boxes). The magazine combined their voices with interviews with dozens of average Americans to come up with its own list of the challenges--and possible policy responses--for the second Clinton administration.

Americans have sent politicians a clear signal: They want a smaller government and a balanced budget. Yet they also want government to cushion the effects of economic dislocation. By re-electing a divided government, voters have demanded pragmatic, nonideological solutions. The new mantra has become: Find the middle ground--or as the victorious Clinton said, quoting the historian Arthur Schlesinger Jr., "the vital center." The government, in other words, will have to learn how to do more with less.

Challenge 1. Make the job-creation machine perform even better.

U.S. job growth is the envy of the world, but more needs to be done. The formation of high-quality jobs is the key to creating opportunities, encouraging savings and easing the inequitable distribution of income. Technology-intensive jobs also have what economists call a multiplier effect, creating other, less skilled jobs in the supplier network or service sector.

No one thinks the federal government should create make-work jobs. Instead, most economists believe Washington should ease the regulatory and environmental burden on small and medium-sized businesses in particular because they account for most of America's job growth. Eliminating overlapping federal, state, county and city standards and regulations would be a start. For example, First Chicago's Swonk says one simple step--relaxing environmental cleanup rules just slightly--might do more than any government program to encourage investment, and create jobs, in blighted urban areas.

The administration also has huge power in how it spends money on research and development. One notion is to accelerate the spread of large pools of technology into the commercial marketplace by giving a greater weighting to commercially viable research as opposed to "pure," or basic, research. For instance, universities that receive federal funding might be rewarded for seeding their communities with good ideas that lead to economic growth and jobs.

Current experiments with manufacturing extension services, patterned on agricultural cooperatives, can also be expanded to get the latest technology and know-how to small and medium-sized companies.

One promising model is what's happening at Wright-Patterson Air Force Base in Dayton, Ohio, where the Stealth fighter was designed. The military services have lagged behind other branches of government in commercialization, but their treasure chest of technologies is vast. In Dayton, Air Force scientists and engineers are working with a coalition of Dayton business leaders and the Big Three auto makers to transfer advanced composite technology--similar to what is used in a Stealth fighter--into the automobile industry. Three local universities also have joined in the consortium. The project is still in its infancy, with a $25 million facility located in a downsized defense facility. If engineers can learn to make the beds of pickup trucks from space-age composites, it would help Detroit reduce the weight of its cars--and therefore increase fuel efficiency--and spawn thousands of jobs in the process.

Challenge 2. Continue the rightsizing of government, carefully.

There's near universal consensus that the federal budget deficit is too big--and needs to be cut (story, Page 94). But cutting expenditures too fast too soon could cause major social dislocations. For example, Prof. Janet Currie at the University of California--Los Angeles argues that it would be tragic--not to mention economically unsound--to deny full funding to such programs as Head Start, because of their long-term payoff for children. In her view, there are also urgent needs for continued federal help for the structural problems that regions face, such as the burden of accommodating so many immigrants in California and Florida. Cutting the military too deeply and too fast, meanwhile, would deny entry-level jobs to high school graduates.

As the new administration grapples with creating a bipartisan commission on entitlements, the key, say experts, will be to balance any reductions among different age groups, regions and ethnicities to maintain what is left of the postwar American social compact. To be sure, the rate of increase in Medicare benefits must be slowed and the retirement age for Social Security benefits raised. Elsewhere, caps on mortgage deductibility for the highest-income homeowners may also have to be considered.

Then there's the cost of government itself. Philip Burgess, president of the Center for the New West in Denver, calls for radical reform of the government's entire approach to taxing, spending and regulation. He advocates wholesale privatization of government functions such as building infrastructure, providing social services and education. Such a move, he argues, might shrink the nation's tax burden--and thus spur economic growth.

Eyes center. But if there is one message from voters' decision to maintain different parties in control of opposite ends of Pennsylvania Avenue, it is that they want centrist solutions. Massive privatizations and complete revisions of the tax code are unlikely, but the pressure will intensify to resume the administration's search for ways of "reinventing" government. Says Jerry Jasinowski, president of the National Association of Manufacturers: "Government is simply too big, takes in too large a share of the nation's wealth and operates too inefficiently." If Americans see that government is tightening its own belt, they may be more willing to accept major reform of their entitlements.

Challenge 3. Make a dramatic new commitment to improving human capital.

Improving the first 12 years of education remains a long-term challenge. But a crucial immediate need is to find ways to encourage more companies to invest in their existing workers and to improve the way that displaced workers can be "retooled" for new jobs. The dramatic shift in skills that the workplace already is demanding means that millions of adult Americans, particularly over the age of about 45, are obsolete if they don't know the difference between CAD/CAM (computer-aided design and computer-aided manufacturing) and a CD-ROM. "It's a whole new skill set that a person needs to be economically viable," points out Emory University Prof. Jeffrey Rosensweig. "Some of us may have to be retrained three or four times in our lives because technology is changing the structure of the workplace."

There's some measure of consensus between business and labor that more needs to be done. Even the NAM's Jasinowski agrees that business ought to be investing twice the estimated $50 billion a year it currently spends on retraining. Ron Blackwell, an economist and director of corporate affairs at the AFL-CIO, also urges companies to take the "high road" in competing internationally--not by slashing their work forces and moving production offshore but by investing in workers to make them, and their companies, stronger. Companies known for excellent training programs include Ford, Motorola, United Technologies and Xerox.

One way the new Clinton administration may be able to help, say experts, is by combining its approximately 150 job-training programs scattered throughout the bureaucracy into a single agency. So far, the evidence is that very few industrial retraining programs actually work. When state and federal agencies tried to retrain thousands of workers displaced from the General Dynamics factory near Fort Worth, for example, they found relatively few workers had enrolled. The reason: The only jobs on the horizon paid just a third of what workers had made at GD. The lesson seems to be that specific companies or industries have to be directly linked to job-retraining programs so that workers get the precise set of skills that companies need and have confidence the retraining will lead to a real job. The federal government's mix of tax credits and other incentives might be sweetened to encourage companies to support training of all varieties and to encourage workers to seek it.

Job training. Community colleges, technical colleges and vocational schools are hugely important in retooling the work force--and could be bolstered. Again and again, whether in Albuquerque or Atlanta, these institutions are involved in coalitions with businesses and governments to train and retrain. "It may not be the fancy end of higher education, but it may be the more useful end," says Rosensweig.

Entry-level workers pose another challenge, but fortunately there are models worthy of emulation. One is the Chicago Manufacturing Institute, located in a working-class neighborhood in northwestern Chicago near the heart of the city's Polish-American community. Taking classes in quality control and industrial standards and other subjects are Russians and Vietnamese, blacks and Puerto Ricans who struggled through Chicago's public education system.

To find jobs for these new workers, the institute concentrates on a single industry--precision machine parts--and trains students on equipment donated by actual manufacturers. "We don't start a training activity unless there's a company that wants to dance with us," says President Ric Gudell. He and others suggest that the new Clinton administration encourage more businesses and educational institutions to dance.

Challenge 4. Create more "winners" from global trade.

It's conventional wisdom that America's engagement in a global economy creates winners and losers. But it may be possible to create more winners by moderating the worst impacts of international trade, such as downward pressure on wages and safety standards. Many economists agree that expanded trade is one of the factors behind the stratification of American incomes. "For some of us, the market forces that determine our economic well-being now depend on how much workers get paid in China, Brazil or Singapore," says Harvard University Prof. George Borjas.

One place for the new administration to start is by getting serious about deep trade deficits with China and Japan, which together this year are likely to top $100 billion.

At the same time, trade experts suggest that the new Clinton administration streamline the 19 agencies now involved in export promotion. Spurring more small and medium-sized American companies into the export race is a win-win strategy. Some make the case for combining the Department of Commerce and the U.S. Trade Representative's Office into one entity along with the Export-Import Bank, Overseas Private Investment Corp. and Small Business Administration. That would slash the paperwork requirements and bureaucracies and professionalize these important trade functions. Trade specialists say this entire export promotion and finance apparatus should concentrate more on the state and local level, where small and medium-sized businesses are hungry for help, than on helping big companies.

Challenge 5. Make immigration work better for long-term U.S. vitality.

Although many of the 20 million immigrants who've entered the United States since 1965 have been high-skilled engineers or business owners, the mix has been weighted toward poorer, less educated people. That's because U.S. immigration policies have focused on reuniting families. That, combined with a flood of illegals, has created a burden on state and local schools, medical services and housing as well as having an impact on U.S. wages, according to many studies. "Immigration plays an important role in widening the income gap between the skilled and less skilled," says Harvard's Borjas, himself a Cuban emigre.

The answer, he and others argue, is to shift the mix of new immigrants toward more highly skilled people and those with capital to invest, thereby creating jobs. This is similar to what Canada and Australia already do. That might at least take some of the sting out of the anti-immigrant backlash in California--and perhaps mute cries for militarizing the U.S. border with Mexico.

Now that the election is behind him, Clinton has a window to respond to these deeply rooted challenges if he can in fact establish "common ground" with a Republican Congress. Few Americans believe that the federal government should do anything that dampens the rate of American innovation or the ability of companies to compete. Growth is clearly needed and desired. But there are strong hints that pressures will build to moderate the disruptive impacts of an industrial cycle that started with wrenching change in the early 1980s, a massive restructuring that has left few Americans untouched.

John Fernandez, the mayor of Bloomington, Ind., could be speaking about millions of Americans when he talks about workers at the Thomson plant on the southern outskirts of his town. "These are decent, honest, hard-working people and they're scared," says the 36-year-old mayor, whose parents immigrated from Spain. "We have some responsibility to them. We shouldn't just write them off as structural change of the economy." The irony is that, despite Americans' dislike of big government, many now look to a second Clinton administration for answers.

ADVICE FOR CLINTON

PHILIP BURGESS, President, Center for the New West, Denver
1. Rev up economic growth. Rewrite the tax code to make it pro-growth, pro-savings and pro-investment. 2. Cope with the migration of people to the West. Protect the environment and quality of life as more knowledgeable workers, retiring baby boomers and immigrants relocate here. 3. Fix government. Privatize many government functions, including infrastructure, social programs and education. 4. Invigorate small towns and rural areas. Revise federal policies in transportation, power and telecommunications that now discourage investment in small towns and rural America. 5. Face up to challenges of energy and the environment. Resist international efforts to limit use of U.S. coal, which would deepen dependence on imported oil and nuclear power. Ê

JERRY JASINOWSKI, President, National Assn. of Manufacturers
1. Spur faster economic growth. A balanced budget would allow the Federal Reserve to lower interest rates; we should aim for 3 percent annual economic growth. 2. Reform Medicare and Social Security. Appoint a bipartisan commission to address the impending bankruptcy of Medicare and prepare for partial privatization of Social Security. 3. Encourage the use of technology. Expand the research and development tax credit and allow faster depreciation of new equipment. 4. Improve education and training. Consolidate federal job-training programs. Link the programs to real jobs through private employer involvement. 5. Modernize government. Functions should be reorganized, eliminated or returned to state and local government.

RON BLACKWELL, Director of Corporate Affairs, AFL-CIO, Washington
1. Reverse the 15-year decline in wages. The key is faster growth. The Federal Reserve must lower interest rates. 2. Apply our social and environmental standards abroad. The government should negotiate improvements in the social and environmental standards of workers overseas. 3. Preserve our pact with the elderly. Maintain and strengthen Medicare and Social Security. 4. Discourage companies from sacking workers while rewarding executives. The administration must use the bully pulpit and regulatory powers to discourage companies from downsizing their work forces. 5. Fix the imbalance in the workplace between employers and employees. Government should reform existing labor laws to restore the rights of workers to organize.

PROF. GEORGE J. BORJAS, John F. Kennedy School of Government, Harvard
1. Address income disparity. Subsidize investments in human capital for the less skilled. Moderate reduction in spending for military, post office and other federal programs that create entry-level jobs. 2. Reform immigration. Favor immigrants who have economic potential. 3. Ease dislocations caused by foreign trade. Some of the revenues of successful global companies should be used to ease the transition of displaced workers into new jobs. 4. Cope with the technology revolution. Offer greater school choice so that even poor families can send children to the best schools. 5. Prevent a federal budget meltdown. Fix Social Security and Medicare by raising the retirement age or reducing monthly benefits.

PROF. JEFFREY ROSENSWEIG, Goizueta Business School, Emory University, Atlanta
1. Ease the gulf between rich and poor and keep the middle class from hollowing out. The government must provide subsidies to foster training and adult education as well as retrain displaced workers. 2. Increase national savings. Undertake a major tax reform: Tax consumption more heavily and reduce taxes on wealth creation and savings. 3. Get a grip on federal government debt of $5.25 trillion. Cut the rate of growth of entitlement spending. 4. Gain more from foreign investments in the United States. Create a coordinated policy to prevent investors from playing states against each other through incentive wars. 5. Extend NAFTA to other countries of Latin America. Ease the way by offering retraining to displaced workers.

PROF. JANET CURRIE, University of California--Los Angeles
1. Ensure economic security for American children. Expand use of the earned income tax credit for the working poor, which rewards work not welfare. Beef up Head Start and the nation's supplemental feeding program. 2. Guarantee access to health care for children. Promote the use of Medicaid for children under 10 in impoverished families. 3. Reform K-12 education. Make it easier for qualified individuals with math and science backgrounds to become teachers. 4. Pay for the costs of immigration. Contribute more federal money to help California and Florida. 5. Tackle the federal budget deficit. Make Medicare and Social Security benefits taxable.

PAUL BALLEW, Chief Economist, J. D. Power & Associates, Detroit
1. Help displaced workers. Retrain workers so they can adapt to the new economy; welfare policies should be father-friendly, encourage family formation. 2. Encourage international trade and investment. Expand NAFTA to Latin America immediately and push global trade liberalization. 3. Encourage savings and investment. Balance the budget by capping entitlements and cutting defense spending while revising the tax code to encourage savings. 4. Reduce government regulation and unnecessary litigation, which cost nearly $1 trillion a year. Streamline onerous government regulations and undertake tort reform. 5. Revitalize inner cities. Continue experimenting with enterprise zones, school choice and privatization of public housing.

DIANE C. SWONK, Deputy Chief Economist, First Chicago, Chicago
1. Curtail the demographic push on the budget deficit. Medicare recipients should enroll for managed-care coverage and pay more for nonpreventive, non-life-threatening treatment. Limit hospital visits. 2. Maintain an advantage in trade. Push trade partners to open markets; expand NAFTA to Chile, Argentina, others. 3. Encourage savings over consumption. Limit mortgage interest deductibility for the wealthiest; implement aggressive, tax-deferred savings programs and limit tax credits for higher education. 4. Invest in human and physical capital. Offer credits for job training; spend more on new technologies and research. 5. Manage welfare reform. Programs that break the cycle of welfare, such as Head Start, should be given priority.