How Washington Can Create New Jobs

FLYING time from New York to Houston is only a little over three hours. Yet judged by the rhetoric from the Democratic and Republican conventions, the two cities could be on separate planets.

Jobs are the obvious, overriding issue in the election. For all the hoopla, however, the parties have not come to grips with the basic structural problems that caused the great American job machine to stall in the past three years.

Proposals to roll out the public-works pork barrel won't do the trick. Long-term job growth has been concentrated in services since World War II. It will remain there. Pouring money into a bankrupt system of public education would have little effect. Real outlays per pupil rose fourfold since the 1950s, but student performance deteriorated.

The United States added 18 million new workers in the 1980s. The service sector added 17.8 million jobs and the government 2 million, while jobs in mining, manufacturing, and construction dropped. Sadly, the job machine ground to virtual halt in 1990.

New business formation provided more than 80 percent of the new jobs in the private sector in the 1980s. For practical purposes, business start-ups have since stopped cold. Many factors account for this collapse. In no particular order of importance, these include:

* A sharp increase in capital-gains tax rates in 1986. To no one's surprise, this cut deeply into the incentive for entrepreneurs to invest in risky new ventures. As Housing Secretary Jack Kemp says, employers are an essential ingredient of employment.

* A massive long-term escalation in federal mandates for spending for health, safety, and environmental purposes. Such mandates add up to several hundred billion dollars in implicit federal taxes on corporate income. When effective corporate tax rates went up, rates of return fell. As a result, net investment plunged as a share of net national product.

* A growing reluctance of the nation's bankers to lend money to people who need to borrow. In part, this is due to new, punitive federal banking regulations that threaten bank directors (and their families) with personal responsibility if loans go sour and the bank is impaired, even in the absence of personal culpability.

At the same time, regional disparities in employment have widened. The 10 largest states in population - including most of the nation's major cities - were hit especially hard by the recession. They have unemployment rates of 8.5 percent, a point over the national average. The big states gained 170,000 jobs thus far in the recovery. The 40 smaller states have an unemployment rate of 6.6 percent. Jobs in these states rose 830,000.

Politically, the 10 big states are crucial. California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, New Jersey, and North Carolina account for about 55 percent of the voting age population. Their electoral-vote total is just shy of that required to win the election.

The nation must address the limits to its growth. Federal health, safety, and environmental regulation is "absurdly inefficient," as Robert Crandall of the Brookings Institution has charged.

The principal result of this approach was a drop in profitability of US corporations over the last decade to levels far below the norm of the last half century.

Clearly the decline in profitability has undercut the incentive for business investment. The substandard level of investment has deprived US workers of the tools they need to maintain their standard of living. This is the root cause of the slow-motion syndrome in the US economy.

Many factors contribute to the national malaise. Slow growth - which saddles families at the bottom of the income scale with a disproportionate load - has played the critical role. By taxing investment rather than consumption to fund health, safety, and environmental regulation, the US has saddled its economy with an onerous burden. Unless the nation rids itself of these investment disincentives, stagnation will continue.

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