Contract with America: is the GOP's contract a hit on Black America?

THE REPUBLICAN CONTRACT With America comes along at both the best and the worst of times for African-Americans. The socioeconomic realities we face are chilling. With federal and local governments committed to doing more with less and affirmative action on life support, the percentage of blacks in need remains high. But there's also hope: A strong black middle class is emerging.

Two recent studies by the Census Bureau and the Joint Center for Political and Economic Studies, a Washington-based African-American think tank, highlight these trends. These reports are the most comprehensive demographic analysis of America's 33 million black citizens in 20 years.

How does the Republican's sweeping agenda for change affect this new picture of black America? Recently, the BLACK ENTERPRISE Board of Economists (BEBE) gathered at the magazine's New York head-quarters with black America's economic welfare in mind--and a copy of the Contract With America in hand. Their goal was to analyze the social and economic shifts within black America, and consider whether the contract can come to grips with these changes, particularly in the light of the new data.

On the positive side, the Census report shows a growing black middle class. The median family income of black married workers was $44,420 in 1989. At least 50% of black America's 7 million households have two or more workers; 83% have one worker. In 1994, 13% of black adults held bachelor's degrees, up from 8% in 1980. Among college-educated black men who work full-time, 28% held executive, administrative or managerial jobs in 1993.

But the flip side is undeniably grim. Black family median income (about $21,550) hardly changed from 1969 to 1993. White family median income ($39,310) rose 9% over the same period. In 1993, black children--only 36% of whom live with both parents--were three times more likely than white children to live in poverty. And the median incomes of black college-educated men was only 86% of that of their non-Hispanic white counterparts.

SIZING UP THE CONTRACT

With this duality in mind, BEBE members considered the implications of the contract's proposed initiatives that will more directly impact African-Americans: a balanced budget amendment, line-item veto, restructured welfare system and broad tax relief for many families and individuals. Taken in isolation, some of the points in the contract are valid, the board agrees. But the contract is not a good economic strategy for what ails America's poor and minority citizens.

Specifically, the BEBE decided that:

* A balanced budget amendment will limit federal ability to respond to economic cycles. Blacks will suffer disproportionately when federal programs are cut and taxes are inevitably raised, despite GOP promises.

* GOP welfare reform will shift the federal burden and social engineering to the states--which don't seem to want that responsibility.

* The contract's time limit provisions could exclude 1 million black families, including more than 2 million children, from Aid to Families with Dependent Children (AFDC).

* Reducing taxes to increase savings is a positive goal. But the black poor and working class have few capital gains or IRA opportunities.

The raw emotion behind the GOP Contract surprised none of the board members. While convening the all-day session, BE publisher Earl G. Graves held up several periodicals, each headlined with a variant of the sentence, "White Male Rage Sweeps America." He then noted, "We are living in the midst of an environment typified by that expression."

White male Republicans intend to take back the jobs and opportunities they "gave" to women and minorities, he continued. Many white males also feel the playing field is level, he added, and now say "we want the jobs, the professions and the opportunities that you [minorities and women] have gained."

BEBE members who participated in the session included: Margaret C. Simms, research director at the Joint Center for Political and Economic Studies; Gerald Jaynes, professor of economics and African-American studies at Yale University; Marcus Alexis, professor of economics at Northwestern University; Andrew F. Brimmer, president of Brimmer & Co., a Washington-based economic consulting firm; Edward D. Irons, dean of the Clark Atlanta University School of Business; and David H. Swinton, president of Benedict College in Columbia, S.C.

Former BEBE member Courtney N. Blackman, recently appointed ambassador to the United States from Barbados, was present as an auditor. Cecilia A. Conrad, professor of economics at Barnard College, led the discussion.

ON WHOSE BACKS IS A BUDGET BALANCED?

Before BE went to press, the first--but not the last--version of the balanced budget amendment was defeated in the Senate by one vote. But the bill's solid House passage and narrow loss ensure that a revised version will appear.

On the surface, a balanced budget initiative is a no-brainer that inspires pithy slogans: "Families and businesses balance budgets. Why can't the federal government?" "Make government live within its means. It works on the state level, why not on the national?"

But this rhetoric bothers Barnard professor Cecilia Conrad. While the analogy has some credence, family and federal budgets are still very different, she feels. Families make capital investments without balancing a budget. Will the proposed amendment give governments the same leeway? Will Washington ignore economic cycles or cut spending during a recession? If so, Conrad says, the amendment "would act as a drag at exactly the wrong time."

Irons, dean of Clark Atlanta University School of Business, agrees: "They [the Republicans] are trying to make it analogous to families, states, cities. But none of them are responsible for managing fiscal policy during periods of instability. Suppose we have a war, and we need to have more revenue?"

By interfering with the government's ability to raise taxes, the amendment stymies attempts by future Congresses to raise revenue even during emergencies, warns David Swinton, president of Benedict College. What happens if the U.S. is "a little inflated and fat?" he asks. Will government expenditures be disallowed? Responsible public officials "should recognize that we have to finance our government."

But economic sense and political naivete undermine Swinton's argument, says the Joint Center's Margaret Simms. Politicians, she says, want to be known for giving things back--not for taking them away.

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ONCE AGAIN WELFARE REFORM

In previous BEBE discussions of welfare reform, the conclusion has been that its proponents--mostly but not all Republicans--were interested in two results. One, they want to save federal and state money. Secondly, they want to punish welfare recipients who they see caught in a cycle of unemployment, government dependency and broken, fatherless homes.

The GOP Personal Responsibility Act was being debated in the House as BE went to press. The act will cut AFDC payments and housing benefits to unwed mothers under the age of 18. Additional payments to mothers having more children while on welfare will also go. There will be no benefits to mothers who withhold paternity information, and all welfare recipients will have time limits on program participation. Furthermore, the House wants to combine food stamp and school lunch programs into reduced block grants and give them to the states--a move many senators and governors are fighting.

The point of the GOP program, says Brimmer, is to ensure that no one will get welfare under any circumstances. The new program will also have a spending cap, unlike historic models which had more or less money available as caseloads fluctuated.

One thing is sure: Welfare reform will have a major impact on African-Americans. Yale University Professor Gerald Jaynes sees more discrimination against blacks, particularly in the South. State officials will have more discretion to determine who is on or off welfare rolls, and they may protect people they know, particularly if they are white. Both Conrad and Brimmer agree, noting that the situation could regress back to where things stood in the 1960s, when there were no real restrictions on how states handled welfare and blacks were routinely kept off the books.

The states have other draconian options, says Simms. If welfare reform is passed, states will not be required to provide training before taking welfare recipients off their books. They will also have to make tough choices if the number of applicants rise. Do they deny benefits to the new people, lower benefits for everybody or raise state taxes?

The BEBE concludes that the contract's welfare provisions, even if viewed nonideologically, will punish its recipients rather than make them independent.

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WHO BENEFITS FROM CUTTING TAXES?

At face value, the American Dream Restoration Act is Reaganomics redux, and not a bad idea. No one likes to pay taxes. But will lowering federal revenues ultimately hurt the poor and middle class--those who most need government programs? The proposal's first component repeals the income tax "marriage penalty." The second establishes a $500-per-child nonrefundable tax credit for families with incomes of up to $200,000. The third establishes an American Dream savings account; it allows tax on deposits but not withdrawals for specific retirement, home purchase or educational purposes. And the fourth is a 50% cut in the capital-gains tax.

On many levels, these proposals sound fine. But when revenue is lost, what programs will be cut? Conrad supports the idea of bolstering the U.S. savings rate. Andrew Brimmer says that while he can understand the political motivation for tax cuts, at present they are unwise. Other members think the process is illusory, ignores the working poor and has most appeal to the middle class and wealthy.

Jaynes, for instance, supports a tax structure shift to attract savings. But he feels that the GOP plan is just another facet of the balanced budget battle to limit government. The benefit of tax cuts "is going to be disproportionately outside our community," he says. "If you look at who is in the position to save or to have an IRA, you have to be [talking about] a pretty high level of income distribution. You're talking about maybe 25% of our population, if that much."

Northwestern University Professor Marcus Alexis finds the whole tax reform battle ironic. When all is said and done, Alexis contends, the entire estimated savings will range from roughly $5 billion to $20 billion, depending on which provisions are passed. But in 1994, the total U.S. budget deficit was $203.6 billion, while the value of the entire U.S. economy was $6.7 trillion.

A more logical economic approach to stimulate savings and cut the deficit would be to put the Social Security system on the operating table. But this would be tantamount to political suicide. "Social Security is a regressive tax," Alexis says. "You get taxed going in and then you get taxed when you get the benefit of the income you've put in."

THE FINAL ANALYSIS

Republicans, Swinton says, don't so much want to reinvent America as to create a new country based on a fantasy. The angry white males who transformed Congress want to limit government's capacity to act, while trying very hard to figure out mechanisms to keep additional funds from going to the poor. The odd thing, he says, echoing Alexis, is that the battle is not over a lot of money, perhaps $20 billion.

The amount may be relatively small, but the impact of this loss in terms of severed services and programs will be huge. In the final analysis, Swinton warns, "when this thing passes, it's going to do more harm to African-Americans than other groups because these are the programs our poor and working poor depend on."

RELATED ARTICLE: A SLOWER ECONOMY MEANS FEWER OPPORTUNITIES FOR AFRICAN-AMERICANS

THE AMERICAN ECONOMY IS about to slow down, but it probably won't go into reverse, predicts Andrew F. Brimmer, president of Brimmer & Co. in Washington.

The African-American community, which saw moderate improvement in its economic status in 1994, will feel the deceleration, he believes. The slowdown will be a reaction to less consumer spending, fewer new homes built and lower business fixed investment.

Brimmer predicts that the entire economy will be affected by the Federal Reserve's continued restrictive monetary policy. The Fed raised the federal funds rate (the interest rate banks charge one another on overnight loans) seven times between February 1994 and February 1995. The federal funds rate is the lowest rate available and most other interest rates ratchet up from it.

As a result of increases in the federal funds rate, Brimmer projects that the 1995 gross domestic product corrected for inflation will grow 2.6% this year vs. 4% in 1994. By the end of the year, he projects subpar GDP growth in the second, third and fourth quarters--with rates of 1.8%, 0.9% and 1.5%, respectively. This could push the economy to the brink, but not over the edge, of recession.

Consumer spending, which represents two-thirds of GDP, is expected to slide from 3.4% in 1994 to 3% this year. Additionally, nonresidential fixed investment may grow only 10% in 1995 vs. 13.7% in 1994. New housing starts are projected to decline 7.8%, from 1.4 million last year to 1.3 million in 1995.

If there is a bright spot, it may accidentally occur in the balance of trade. The recent precipitous plunge of the U.S. dollar versus the Japanese yen and German mark makes American products more attractive abroad. It may also induce U.S. consumers to think twice about making a foreign purchase.

Brimmer's calculations, made before the currency flap, projects exports will increase 7% and imports 9% in 1995. The wild card is whether the Fed will respond to the dollar's plummet by raising interest rates to attract foreign investment.

If that happens, the impact will ripple through the economy, raising prices and shifting all projections downward. Brimmer thinks inflation may climb moderately this year. He projects that the consumer price index may increase to 3.1% vs. 2.6% last year.

Brimmer's belief rests on the economy's continued expansion, lower unemployment and a decrease in excess industrial capacity as output keeps rising. If the Fed sees the specter of inflation the way Brimmer does, expect it to maintain a tight monetary policy and restrain the growth of money and credit.

But all other things being equal, Brimmer does not project interest rates changing much during 1995. Long-term and short-term interest rates will rise during the first two quarters, then decline through the rest of the year. Federal funds rates are projected at year-end to be 6%; three-month Treasury bills will maintain a 5.85% rate; and 30-year Treasury bonds may shift from 7.7% in the first quarter to 7.6% by year-end. And the prime rate will remain at a projected 9% for the year.

A MIXED BAG FOR

AFRICAN-AMERICANS

In 1995, Brimmer predicts the black civilian labor force should increase to 15 million or 11.3% of the total U.S. workforce vs. 14.5 million or 11.1% in 1994. African-American employment will grow to 13.4 million or 10.7% of total employment, vs. 12.8 million or 10.4% last year. According to Brimmer, this means that there will be roughly 1.6 million more blacks who could be employed in 1995 than there are jobs for them.

The slowing of GDP growth in 1995 will contribute to a black unemployment that decreases as a percentage of the total unemployment rate but only goes down slightly from 1994 to 1995 in real numbers. In 1995, black joblessness is projected to average 1.6 million or 21.7% of all those unemployed vs. 1.7 million or 20.8% last year. That translates into a black unemployment rate of 10.8% this year vs. 11.5% in 1994.

During the same period, total U.S. unemployment is projected to fall to 5.6% for all workers vs. 6.1% last year, and to 4.8% for whites vs. 5.3% in 1994. But African-American unemployment will still be 2.2 times that of whites.

Of course, Brimmer notes, when African-American employment rises, so does black money income. But the parity share of money income would be larger if blacks were employed in numbers equal to their share of the civilian labor force.

This year, total U.S. money income is projected to be $4.4 trillion. The black share may rise to $353 billion or 8% of total U.S. income vs. $325 billion or 7.8% in 1994. If blacks received a parity share of income, their total money income would rise by $145 billion this year.