The big job boosters that everyone's missing.

I have this fantasy. Pat Buchanan, Ted Kennedy, and my father are having dinner together. My dad's the odd man out, so to speak. Buchanan and Kennedy are both Irish Catholic politicians; he is a Jewish Canadian engineer, with a small business testing construction parts for safety. Despite some unpleasant rhetorical tendencies on Buchanan's part, they all get along well. They're around the same age; they have healthy appetites for food and humor; and they like to talk politics. They're mulling over an issue weighing heavily on the country: how to create more good jobs and more job security. And since it's my fantasy, my father is the one giving the advice.

Buchanan, of course, lays a good deal of the blame at the feet of immigrants who take American jobs and argues that's reason enough to exclude them. Indeed, more than a few of my father's 50-some employees are immigrants--primarily from India and Iran. But he didn't hire them to skimp on wages. He employed them because they have engineering skills hard to find among American workers. It's not who we let in, my father tells Buchanan. It's that we've let our education and training capacity go to seed.

Then he turns to the senator from Massachusetts. Kennedy has recently proposed tax breaks for "responsible" corporations that avoid layoffs and treat workers well. My dad happens to be a Democrat, but he thinks this is crazy. He patiently explains to Kennedy that this noble scheme would be an enforcement nightmare. How, for example, would the government determine whether an employee was laid off because of greed or economic necessity? What he thinks is, "That's what you get from someone who's never worked in business."

It's not just Kennedy and Buchanan who are off-base on remedies for these vexing economic problems. The whole country seems at a loss. Robert Rubin snipes at Robert Reich's support for designating responsible corporations--but affirms the status quo by not offering solutions of his own. Clinton cautiously hovers between Rubin and Reich; Most Republicans either deny the problem or give it campaign lip service. After an epic series on downsizing, The New York Times offers a formulaic round-up of solutions, from lowering CEO pay to government regulation. After disparaging the Senate Democrats' plan, The New Republic goes out on a limb to call for "training," "social spending," and "improving ... education."

It's not that these solutions aren't worthy, and in some cases wise--especially beefing up education. But considering the total IQ being applied, they are surprisingly limited. Despite the sturm and drang of major corporate layoffs, for example, most Americans do not work for big companies; only 14,500 American companies have more than 500 workers. Even more important, most new jobs are created by small and new businesses.

And creating new jobs is the surest path to improved economic conditions for all working Americans. Of course, Congress can't snap its fingers and make this happen. But government policies can encourage job creation--or thwart it. In several crucial ways, our policies are doing the latter.

The Big Squeeze

Economists and journalists tend to write about flatlining wages the way a weatherman describes a high pressure system, as if stagnating pay is as natural as rising temperatures. In fact, wage stagnation comes from millions of employers making decisions not to raise pay--and knowing they can get away with it.

A simple supply-and-demand equation operates here: With more than 7 million unemployed, and many more consigned involuntarily to part-time or temporary work, workers are competing so intensely for jobs that employers can get away with lower wages for all but the most skilled workers. Once, unions were a bulwark against wage stagnation (sometimes too much so, as in the seventies when they pressured employers to raise wages despite low productivity). But now unions are in decline, and the balance of power has tilted dramatically towards employers. It's true that the overall number of jobs isn't decreasing--the 700,000 jobs created last month were the most since 1983--but the new jobs usually don't pay as well. Where people once had the employment equivalent of houses, they now have mobile homes--or tents.

The obvious, but important, conclusion is that the quality of jobs is directly impacted by the number of jobs. For some historical evidence, consider the origins of employer-provided health insurance. In 1942, American businesses were actually scrambling for workers. The war was on and civilian labor was in short supply. Wages were limited by government price controls, but some benefits were exempt. So to lure and retain workers, employers began offering their employees health insurance. Today, one of the surest signs that we're moving in the opposite direction is the gradual withdrawal of that benefit, as the number of employer-insured employees drops and the percent of health insurance costs borne by employees increases.

So significant unemployment isn't just a problem for the jobless--it's also a problem for those with jobs. Yet unemployment is maintained at a consistent rate of at least 5.5 percent because the Federal Reserve believes that unemployment beneath that threshold will trigger inflation. So the Fed keeps interest rates high enough to control growth. It's not quite this neat--the Fed alone doesn't navigate the economy--but its control over interest rates is a key lever of economic growth. The Fed is egged on by a bond market that panics at the inflation ostensibly augured by an unemployment decrease. Ancient societies sacrificed virgins to placate the gods. We condemn over 5 percent of the population to idleness to appease inflation.

But lower unemployment does not automatically trigger inflation. The idea that it does is based on outdated assumptions. Once, for example, we feared that a shortage of goods prompted by spend-happy consumers could trigger inflation; now we have overcapacity in almost every aspect of the economy. Free trade and foreign competition also keep wages, and inflation at large, low. The Fed's calculus doesn't seem to account for that.

Nor does it seem to account for history before the 1970s, which is where our assumption that unemployment below 5.6 will trigger high inflation originates. But between 1944 and 1968, inflation averaged 3 percent--and unemployment averaged 4.73 percent, nearly a full point below what it is now. Inflation, in fact, went above 5 percent in only four of those years. In 1952, unemployment was 3 percent, and inflation only 1.9 percent. In 1966, unemployment was 3.8 percent--and inflation only 2.9 percent. Why don't the individuals who make up the bond market, as well as the Fed establishment, study this history as carefully as they do the 1970s?

It's Start-Ups, Stupid

If the key to a healthy economy is new jobs, the key to new jobs is, by and large, new businesses. From 1990 to 1994, companies four years old or less generated more than 10 percent of all job growth; companies more than 30 years old, in contrast, saw their job growth decline by close to 2 percent, according to Cognetics, Inc., a Boston-based firm that tracks employment demographics.

Plenty of new businesses get started all the time. Yet plenty more could. My father describes American capitalism as "self-perpetuating": If you already have capital, everyone will back you. If you don't, they won't. He started his business in 1967. He had just left a job, he had no capital cushion, and sure enough, the banks wouldn't touch him. He was lucky--he and his partners had immediately marketable skills that landed them an initial contract. Twenty eight years later, he's still going. But getting funding from a bank for a new business can still be like trying to squeeze water from a stone.

The same is true, by and large, of venture capital firms. Much of venture capital doesn't go to new firms, but to provide financing to take already existing firms public. This means that the firms' founders, and the venture capitalists who put up money for the public offering, can cash in. But going public rarely means a windfall of new jobs. It's true that, recently, the amount of venture capital going to start-ups, rather than to expansions or public offerings, has increased. From 1993 to 1994, the formal venture capital that went to start-ups increased by 88 percent, according to Venture Economics Inc. But on closer inspection, the picture's less rosy: That dramatic increase brought the amount invested in start-ups to only 15 percent of venture capital. And most of this money funnels into a few overflowing pools in the technology field.

Our tax code, meanwhile, also funnels money to already existing businesses, because we give a break for all capital gains. The capital gains tax break encourages not investment, but trading: If you buy and sell AT&T stock, you can get a capital gains tax break; yet AT&T isn't, to put it delicately, adding jobs. The same is true of capital gains on everything from Chrysler to Xerox--most of the money pouring in goes not to investments in human or physical capital, but into jacking up the stock price. Even if you buy and sell Merrill Lynch & Co. stock, which essentially amounts to betting on the success of traders, you get a capital gains break. To make a bad idea worse, the Republicans want to enlarge the capital gains tax reduction; doing so, they insist, will encourage growth and create jobs. But as Wallace Peterson shows on page 28, there's no evidence to support that contention. hi truth, the only jobs an increased capital gains tax break is likely to create are on Wall Street.

What we really need is a capital gains break that rewards only investments in new jobs, whether new businesses or new plants. Gains from investments in new enterprises would initially be taxed at a reduced rate, then the tax would decrease for each year the stock was held without sale; after five years, the tax would be zero--that's right, zero. And to make sure that investing in new jobs would be irresistable, all other capital gains would be taxed as (steel yourself, Dick Armey) regular income. A tax break for investment in new enterprise isn't a new idea--a version of it was advocated by Gary Hart while he was in the Senate--but given what more jobs could do for the economic status of struggling Americans, its time has come.

Born of Burden

There's something else clogging up the jobs engine: For some businesses, hiring a new worker can be like strapping on a 50-pound weight before going for a jog. My dad treats his workers well, but he'll go pretty far to avoid putting another full-time employee on his payroll. When possible, he'll use subcontractors. Call me biased, but he's hardly a greedy CEO out to gouge his workers; most years, he's just trying to keep the business going. My father tries to avoid hiring because for every employee he hires, on top of his or her salary, he faces the following costs: Social Security and Medicare taxes, 7 1/2 percent of pay; state and federal unemployment insurance, 4 to 6 percent; two to four weeks a year vacation, 4 to 8 percent; one week of sick leave, 2 percent; health insurance, 4 to 10 percent; matching employees' 401(k) contributions, up to 2 percent.

The total is anywhere from 25 to 30 percent of wages. This doesn't include any of the administrative expenses involved in divvying up, maintaining, or reporting employee taxes and benefits. While employee taxes and benefits may be especially tough on smaller businesses, they're no light load for corporate behemoths either. Ford Motor Co. estimates that it spends $14,054 per worker on employee taxes and benefits annually, close to the average for employers surveyed by the U.S. Chamber of Commerce. All in all, the Bureau of Labor Statistics estimates that employers spend 28 percent of payroll on employee taxes and benefits.

No wonder some employers try to cut costs by avoiding hring fulltime employees. It's cheaper to hire people part-time or on contract without benefits than it is to take them on as full-time employees. Some companies absorb the cost of benefits but then sock it to workers with lower wages. Lower-income workers pay the price in two ways: Their wages are held down, and they feel the biggest pinch from payroll taxes. Today, employer and employee each pay 6.2 percent of wages in social security taxes; in 1956, they each paid 2.5 percent. And unlike the progressive income tax, we all pay the same payroll tax--but only on the first $62,700 of income. For professionals earning $200,000 a year, then, the payroll tax is a pittance. For lower income workers, it's an albatross (as it is for the self-employed, who pay the employer and employee share of the tax--that's 12.4 percent of pay).

The employee tax and benefit burden isn't just a deterrent to high-wage or full-time jobs; sometimes it's a deterrent to jobs, period. Some employers would rather pay for overtime--and incur both higher risks of accidents or mistakes and lower productivity--than hire another worker at the regular wage; that's one reason that the length of the American work week has hit a post-World War II high. There have been several strikes in recent years, at GM and elsewhere, by overworked employees who wanted more people hired.

Western Europe has seen a similar, if more extreme, version of the same phenomenon. The cost of employee benefits and taxes for a new worker-up to the equivalent of 80 percent in wages for German workers, for example--is even more exorbitant than it is here. So while German workers have formal protections against layoffs that Robert Reich and Ted Kennedy would kill to have here, unemployment in Germany is over 10 percent. Employers will bend over backwards to avoid hiring. Here, we have an economy with lots of people not working even though they want to, and lots of people working more than full time--even though they don't want to. Couples work 100 hours between them to support children they never see. By discouraging employers from offering more reasonable work shifts--say, 35 hours, at decent wages--we encourage absentee parents and kids raised on VH-1.

The answer is to ease the burden on employers. We need to change how we knit our social safety net and separate social security taxes and health insurance (the cost of which is essentially a tax on employers and workers) from the corporate payroll. We should fund those benefits through a value-added tax, which could be made progressive, and increased income taxes from the middle brackets on up. Think this will slow growth? See "Why Higher Taxes (On the Wealthy) Won't Slow Growth" on page 28. (A system of national health insurance, without employer mandates, could also control costs and decrease the number of uninsured.)

Ending employment-based social security taxes and health insurance also makes sense because corporations are not the paternalistic social institutions they once were. And as companies rapidly shift to new products and projects, a high rate of job turnover will become routine. Workers need to know that their future health and welfare doesn't hinge on the maintenance of a job-for-life. (That's why increased pension portability is important too.)

Paying for health care and social security through taxes other than employment-linked ones will reduce financial stress on working people. It will lower costs for employers, thereby encouraging them to create more and better jobs. And it could make employers more open to a higher minimum wage since other labor costs will be lower. If these suggestions sound radical for a Washington accustomed to incremental change, that's because they are radical. But so are the changes in our economic landscape. Americans now feel greater economic insecurity than at any time since the 1930s, and that means that radical reform has a chance. Remember, the kind of capitalism we have wasn't created by God on the eighth day; it's the product of specific decisions we've made about how to structure our economy. It's within our power, and it ought to be our ambition, to change.