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Business in the '90s: This Is Not Your Father's Corporation

Prof. Murray Weidenbaum ("Labor Secretary Reich Versus US Business," Jan. 18) caricatures my views about the responsibility of corporations to their employees and communities, and then shoots down the straw man he has created. Let me set the record straight.

The modern corporation is unlike its predecessors in an important respect. Decades ago, it was common for chief executives to explicitly balance the demands of shareholders against the needs of employees and the communities in which they operated. Highly profitable firms did not, as a rule, lay off large numbers of employees. Nor did they leave town at the slightest economic provocation. An implicit social contract guaranteed that if the company was profitable, its employees could expect rising wages and steady jobs.

This is no longer the case. The advent of "electronic capitalism" - almost instantaneous movement of money around the world in search of the highest rate of return - has focused the modern corporation on the singular goal of maximizing shareholder returns. Even profitable firms feel it necessary to cut payrolls in order to achieve this end. Thus it should be no surprise that the stock market has soared while pink slips have proliferated and paychecks of most employees have gone nowhere.

Ironically, the old implicit social contract between business and its employees has come undone just at a time in our nation's history when government's capacity to respond to economic insecurity has come under sharp attack. Regardless of how the current budget negotiations conclude, it is unlikely that Americans will have a "safety net" to catch them that is nearly as broad as before. Nor will they have access to all the educational and job-training opportunities that this administration sought when it came to Washington.

If the federal government is to do less, then the private sector will have to do more. Corporations will need to increase investments in the training of their employees, provide bonuses linked to profits or productivity gains, and, when "downsizing" is necessary, help employees receiving pink slips obtain new skills and new jobs. Corporations typically are in a better position than individual workers to reduce the social costs of unemployment as well as the transaction costs of gaining new skills.

But corporations are unlikely to do this on their own without an economic inducement, as we are witnessing. One possibility is to reduce or eliminate corporate taxes on corporations that meet certain minimum standards with regard to work-force training, profit-sharing, and outplacement.

Mr. Weidenbaum apparently sees a plot on my part to put government in "control" of business. But corporations do not exist in the state of nature. They are products of law. Laws can be changed if circumstances warrant. The tax code already treats different types of organizations differently - partnerships, charitable enterprises, the self-employed. It does not require a great leap of logic to think that corporations that meet certain minimum standards of responsibility to their employees might warrant special tax treatment.

It is time for a constructive discussion about the role of the modern corporation in America.

Robert B. Reich


Secretary of Labor

Author's response

Secretary Reich is absolutely right. I do view with alarm his suggestion that the federal government reward companies that follow his notion of social responsibility (or punish those that do not). It would be an unprecedented extension of federal power over the private sector of the American economy.

Mr. Reich starts with the conclusion that more government intervention is the answer. Belatedly, he now wants a "constructive discussion" on the role of the modern corporation. I'll be glad to oblige, having wrestled with this topic for decades. As the author of a widely used textbook on the subject, I am ready to cite chapter and verse about "government failure" in the whole gamut of business-government relationships. Meanwhile, as the custodian of a large bureaucracy, Reich would do well to heed the ancient admonition, "Physician, heal thyself."

Murray Weidenbaum

St. Louis

Chairman, Center for the Study of American Business

Washington University

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