What's the Deal?

The Clinton administration seems to be forgetting its promises to ordinary Americans. If he wants to follow in the tradition of FDR, Clinton will have to confront a deeply divided electorate, Wall Street Democrats, and his own wishful thinking.

Bill Clinton and his administration officials, once dour about the economy's prospects, are now celebrating what Labor Secretary Robert Reich calls a "jobs recovery."

In his January State of the Union address, Clinton proclaimed, "Our economic program has helped to produce the lowest core inflation and the lowest interest rates in 20 years. Auto sales are way up, home sales at a record high; millions of Americans have refinanced their homes."

In a Jan. 3 television interview, Reich predicted that 1994 will be a banner year. "I see nothing on the horizon to indicate we are not going to have an additional two million jobs."

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Spirits were also up at Laura Tyson's Council of Economic Advisers. Tyson declared the United States to be in the midst of a "moderate expansion," and CEA economists put out a memo attacking those who had warned of unemployment and falling wages. "People in two generations will look back on today's fears as we look back on the inaccurate forecasts of past predictors of large-scale technological unemployment and worker immiseration," the memo declared.

But Americans remain deeply uneasy about the economy--and with good reason. While the United States did create 1.7 million jobs last year, this total lags well behind most previous recoveries. In the year after the 1982 recession, American business created four million jobs; in the next year, three million. And the kind of jobs being created now are primarily in lower-paid services. The old, well-paying factory jobs that provided a ladder of opportunity for millions of Americans are fast disappearing.

Even white-collar college graduates--often pictured as the vanguard of the new postindustrial economy--are feeling anxious as their job opportunities shrink and their wages begin to decline. As Americans look toward the next century, they have little idea of what they or their children will be doing for a living, and little assurance that their standard of living will be better than, or even as good as, it is now.

Of all the recent candidates for president, Bill Clinton was the most acutely aware of the economic insecurities of what he called the "forgotten middle class." His campaign platform contained a host of innovative programs for public investment and lifetime learning. Once elected, he convened an impressive group of economists and policy intellectuals in Little Rock for a summit on new approaches to the economy. And he appointed officials, including Reich, Tyson, and Ira Magaziner, who had been among the first to warn of and propose remedies for the job-and-wage decline.

It seemed like the administration was about to launch an ambitious assault on the country's economic problems. As Clinton took office, comparisons were rife to Franklin D. Roosevelt's first hundred days and the New Deal.

But to those who expected another New Deal, Clinton's first year has proved to be a disappointment. Faced with a public and Congress deeply divided on what kind of change is necessary and a host of powerful Washington lobbies determined to prevent any change whatsoever, Clinton abandoned some of the programs he'd touted during the campaign and diluted others to the point where they are barely distinguishable from Reagan and Bush administration initiatives.


Clinton's platform contained a host of innovative programs for public investment and lifetime learning.

At first, Clinton and his administration were angered by the opposition their program aroused. But like other politicians and policymakers who have come to Washington full of hope, they adjusted their vision of reform and their criteria for political success to what was immediately possible. By last August, the very passage of a budget--never mind the details!--had become a cause for rejoicing. And when the economy inevitably began to turn upwards in November, the administration took it as evidence that its program had not only passed, but succeeded. In his December radio address, Clinton boasted that his plan had put "our own economy in competitive trim." The sense of urgency about reform was gone--and with it an understanding of the underlying trends that continue to threaten Americans' standard of living.

Two deep trends in today's economy have converged to create an economic situation that defies simple and immediate solutions: First, the economy continues to produce new goods much faster than it produces new jobs; and second, the expansion of the economy is bringing not an increase, but a decline, in wages.

Output and employment: There has never been anything quite like the recent "jobless recovery." Between March 1991 (the official end of the recession) and October 1993, employment grew only 36 percent as fast as its average increase in previous recoveries. Manufacturing employment actually fell 2.7 percent.

This tendency toward what economists call "structural unemployment" first emerged in the 1920s, when dramatic increases in productivity--brought about largely through the introduction of electricity and the reorganization of work--made it possible to increase goods production while reducing the overall number of workers. It was an underlying cause of the Great Depression, which the United States escaped only because of the immense demand for labor and goods created by World War II.

In the decades after the war, the U.S. government dealt with structural unemployment through massive deficit spending on the military, housing, and highways. American business, meanwhile, spread into such areas as home appliances, ready-to-wear clothing, and new service industries tailored to leisure, health, and entertainment. And banks created sophisticated forms of consumer and commercial credit--from the credit card to the leveraged buyout.

Over the last decade, however, the United States has been forced to abandon many of the measures that have held structural unemployment in check, from huge military expenditures and deficit spending to freewheeling business and consumer credit. At the same time, the introduction of computer technology has brought enormous changes to manufacturing and even to white-collar services like banking and telephone communications--the ATM replacing the bank teller, and the computerized relay the old switchboard.

Almost three million manufacturing jobs were lost between 1979 and 1992. With last fall's cyclical upturn, new jobs are being created, but they are concentrated in lower-paying service occupations. Also, according to Lawrence Mishel and Jared Bernstein of the Economic Policy Institute, 25.9 percent of the jobs created during the recovery were part time and 27.7 percent were temporary. Even college graduates have reason to worry. Kristina Shelley of the Bureau of Labor Statistics predicts that between 1990 and 2005, "the average annual openings in jobs requiring a [college] degree will be fewer than the opportunities available during the 1984-1990 period."

If this trend toward structural unemployment persists, it will continue to destroy higher-paying manufacturing and service jobs. When the next downturn comes, it could bring about an even more pronounced slump than occurred over the last five years.


New technology, world competition, and the decline of unions have all depressed wages.

Output and wages: For most of the country's first 200 years, Americans grew accustomed to rising incomes. But beginning in the late 1960s, real wages stopped growing, and in the 1980s, they began to fall. Measured in 1977 dollars, private nonsupervisory workers made $189.44 a week in 1969; in 1988, they were down to $167.81 a week.

This decline in wages was due in part to the same disruptive forces that created the disparity between output and employment. Higher-paying manufacturing jobs have been increasingly replaced by lower-paying service jobs. Fierce economic competition from Western Europe, Japan, and East Asia has also forced down wages and has spurred American manufacturers either to move their manufacturing overseas or to use the threat of doing so to hold down wages. The decline of unions (which once represented about 40 percent of nonagricultural workers and now represent fewer than 15 percent) has also eliminated the 15 percent to 25 percent wage premium paid to unionized workers.

Within the Clinton administration and the Democratic party, two different approaches to structural unemployment and declining wages vied for the president's attention last year. Liberal Democrats, intellectuals identified with the Economic Policy Institute, and labor leaders argued that the United States is at an impasse similar to those it faced in the late 1920s and early 1960s. They have called for a systemic approach to the economy based on redefining and expanding government's role. They want to use public investment in technology, infrastructure, and education to provide jobs, raise wages, and make American industry more competitive.

By contrast, Wall Street Democrats, policymakers identified with the Democratic Leadership Council, and economists from the Brookings Institution have recommended an evolutionary tack based on confidence in the market and the private sector. They blame sluggish job growth primarily on rising public debt, and wage inequality on regressive tax policies and neglect of education. If the deficit is reduced and education spending increased, they believe that jobs and wages will grow apace.

Both groups were represented within the Clinton campaign and administration. The systemic reformers included Reich, Tyson, and Magaziner, who was put in charge of formulating the administration's health plan. The proponents of market adjustment included former Goldman, Sachs co-chairman Robert Rubin (who was appointed head of the new National Economic Council), Secretary of the Treasury Lloyd Bentsen, Budget Director Leon Panetta, and his deputy director, former Brookings economist Alice Rivlin.

During the campaign, Clinton consistently gave voice to a systemic approach to economic reform. His campaign platform, "Putting People First," proposed major public investment in infrastructure, education, environmental technology, and defense conversion. It also included an ambitious national service program that, like the G.I. Bill of 1944, would have covertly kept millions of young workers out of the labor market; a national health insurance plan that would have discouraged part-time and temporary hires and eased job changes and early retirement; increases in the minimum wage and the earned-income tax credit received by lower-income workers; and support for a bill to prohibit hiring permanent replacements for striking workers.

Together, these measures amounted to the most ambitious legislative agenda since Lyndon Johnson's Great Society. But during his first year, Clinton, under pressure from Congress and the proponents of market adjustment within his administration, retreated from his initial proposals.

Most accounts date the disintegration of Clinton's reform program from the March defeat of his $16 billion job stimulus package, but it really began in his first month in office. Under pressure from what Reich termed the "Gang of Four"--Rubin, Bentsen, Panetta, and Rivlin--Clinton cut his four-year public investment program in half, dropped his plan to require employers to pay 1.5 percent of their payroll tax for worker training, and turned national service into a Peace Corps-style venture for the best and brightest.


The Wall Street Democrats in the administration appear to have bested the reformers.

After the defeat of the stimulus package, Clinton backed away from what remained of his investment program. By the time Congress approved his budget, public investment was down to $20 billion for four years. According to Todd Schafer of the Economic Policy Institute, real dollar spending on education and infrastructure will fall nearly 1 percent from the Bush administration budget of 1993 to the Clinton budget of 1994.

Although Clinton pushed the increase in the earned-income tax credit through Congress, he postponed asking for an increase in the minimum wage and put the striker-replacement bill and labor-law reform on the back burner. Under pressure from Rubin and other proponents of market solutions, he postponed consideration of national health insurance--originally promised for his first year--and in the proposal that he finally submitted, delayed its implementation until 1998.

Clinton also supported measures that, whatever their merits, may exacerbate the problems of structural unemployment and wage decline. In his fight to get the North American Free Trade Agreement passed, he failed to secure side agreements that would protect U.S. workers from the export of jobs. He heartily endorsed Vice President Al Gore's program for "reinventing government," which proposes to eliminate 252,000 federal jobs. And he backed a plan to force welfare recipients to take jobs after two years, which, if not adequately funded, could further depress the low-income job market.

As Clinton enters his second year, the advocates of market adjustment not only hold the upper hand within the administration, but appear to have partially co-opted the main advocates of systemic reform.

Laura Tyson has steadily backed away from her original position. In November 1992, Tyson was arguing that "the most obvious prescription for both the long-run wasting disease and the short-run recessionary headache from which the economy is suffering" is "increased public and private investment in machinery, technology, infrastructure, and people." She insisted that "investment should take precedence over . . . aggressive reductions in the federal budget deficit."

By last fall, however, Tyson was endorsing Rubin's argument that the most important thing was to reduce interest rates by cutting the deficit. In a year-end press conference, Tyson attributed the year's job growth to the deficit strategy. "We have had to make some very tough choices in a quite inhospitable economic environment," she said. She saw the response of the financial markets as a "vote of confidence."

Meanwhile, Tyson's CEA has itself become a voice for market adjustment. "There is overall shrinking of manufacturing, but the service sector will expand," explains one CEA member. "The official council position is that it is a natural process that will equilibrate itself."


Education creates workers, not jobs. We need to create jobs that demand educated workers.

Of all Clinton's advisers, Reich alone publicly continues to call for more public investment and to bemoan the fall in wages, but even his arguments have altered subtly. Where he used to insist that increased spending on education had to be paired with funding for new jobs, he now argues that education alone can solve the problems of structural unemployment and declining wages. "All of the studies show that if you get long-term training, a year or more, you're going to affect your future incomes by an average of 5 percent to 6 percent," Reich declared in a speech last October.

Unfortunately, it's just not so. A study of worker retraining, conducted for the Labor Department last year by Mathematica Policy Research, expressed grave skepticism about training's effect on wages. The report concluded that "more than three- quarters" of the workers who had received training "earned less in their new jobs three years after their initial unemployment insurance claim than they did in their pre-layoff jobs."

Clinton himself goes further than Reich. Now when the president talks of "public investment," he defines it as spending on worker education. This new obsession with retraining meshes nicely with the position of Rubin, Panetta, and Bentsen that the market will eventually cure the economy's ills. Laments Ruy Teixeira, a Department of Agriculture expert on labor demographics, "The theory is that a supply of new educated workers creates its own demand. But there have to be jobs demanding workers. You should concentrate on creating jobs that need workers rather than on creating workers that need jobs."

When confronted directly with the wreck of their original program, most administration officials practice a form of denial. When I wrote last year that the Clinton program was "eviscerated," a Treasury official wrote me back, saying the program was "'lamed,' yes; 'eviscerated,' no." And he added, "We will be back with another attempt to boost public investment next year." When I asked Rubin and economists at the CEA about what had happened to a program such as high-speed rail--a Clinton favorite during the election campaign--they expressed disbelief that it had been removed from the budget. (It was axed.)

As the administration prepares to fight for its 1995 budget, it is displaying the same kind of denial, insisting (like the Treasury official) that it is expanding its programs while continuing to reduce them. Clinton's original reform program has been reduced to a single initiative: national health insurance. This program is already under withering attack from conservative Republicans and market-oriented Democrats, and it will take all of Clinton's passion and ingenuity to prevent it, too, from being eviscerated.

In trying to understand why the systemic approach fared so poorly during Clinton's first year, it is important not to underestimate the dilemma that Clinton and administration policymakers faced. While Clinton needed to raise spending to create jobs and raise Americans' standard of living, he also needed to reduce the deficit, which, if allowed to spiral, would have kept real interest rates high and private investment low. To do these things Clinton had no recourse other than to raise taxes. During the campaign, he had proposed raising taxes on the wealthy, but even a large hike in the upper brackets would not have produced sufficient revenue to accomplish the antithetical goals of public investment and deficit reduction. Those who advocated systemic reform were forced to recommend raising taxes on the middle class--a surefire way to draw the wrath of an electorate hostile to increased claims on their diminishing income.


Clinton and Tyson are backing away from systemic reform.

In a more fundamental way, Clinton's initial program was a victim of the circumstances created by structural unemployment and declining wages. America's manufacturing industries sustained the large industrial unions and urban machines that won Americans over to the New Deal and the Great Society. Now, with the decline of manufacturing jobs and industrial unions, the disappearance of ethnic machines, and the growth of urban underclass ghettos, the Democrats lack a political base for significant economic reform. The very groups that most need reform are not powerful enough to secure it. And the spread of economic malaise upwards to the middle and even upper middle class has had a contradictory effect--creating a mandate for change but not for serious reform, which would inevitably require new taxes.

Looking at today's economic problems dispassionately--insulated from the winds of political partisanship--one can chart a course of action that would address structural unemployment and declining wages. As in past eras, much of the initiative will have to come from workers and businesses. Workers need to organize--whether in unions or not--to improve their wages without undermining their firms' competitiveness. Businesses need to find inventive new ways of earning money and creating jobs--as inconceivable to us now as laser discs and gene-splicing were to Americans of the 1940s.

And the role of government will have to expand and alter. With the military-industrial complex shrinking, the government will have to fund something like a new social-environmental-medical-industrial complex, based on such ventures as high-speed rail, biotechnology research, a national information network, new environmental technology, and the renovation of roads, bridges, and public buildings. Like the military-industrial complex, this new public-private complex could supplement and subsidize the private demand for jobs and spur American competitiveness.

The government also has to help redefine work--making work begin later in life through subsidies of higher education, and end earlier through pension reform. (European countries, facing massive structural unemployment, are now discussing the four-day workweek.) Government will also have to discourage companies from exporting their jobs overseas, giving them incentives to stay at home and help their workers become more productive through retraining.

Finally, government can help stem the decline of wages by encouraging unionization and other forms of workplace organization, raising the minimum wage, providing tax credits for the working poor, and expanding the social benefits that all Americans receive. Simply by reforming labor law, government could probably increase union membership by 15 percent to 20 percent.

Between present reality and these kinds of measures, however, stands a yawning gulf of politics and ideology into which even the most well-meaning and intelligently conceived policy can tumble. America will eventually adjust, but if the first year of the Clinton administration is any indication, it may take a decade or more of lurching backward, forward, and sideways before the country finally comes to terms with its underlying economic problems.

John B. Judis is a contributing editor for The New Republic and Washington correspondent for In These Times.