New prescriptions for an ailing economy

New prescriptions for an ailing economy – Black Enterprise Board of Economists Report

Frank McCoy

Every recession has its own internal logic and economic ancestry. But most end similarly after economic sparks ignite and growth adopts a prairie fire pace. That did not happen in 1992 and few are convinced it will happen this year. Yet, faith in economic change has become the new credo. Political leaders respond to the fact that the U.S. economic transformation during the Reagan/Bush years was structural not cyclical. Creating new and sustainable economic growth also motivates the American people, who mouth “change” but agree that the path is neither sure nor short. This desire for economic and political change was the hallmark of the 1992 presidential campaign and still consumes most citizens’ hope.

Although the BLACK ENTERPRISE Board of Economists (BEBE) convened in Washington, D.C., last September, their insights and conclusions ring true in this administration. The BEBE sorted through the economic chaff and decided if 1993 bodes well for the nation at large and particularly for African-Americans. For two days, the eight economists under the charge of BLACK ENTERPRISE Editor and Publisher Earl G. Graves debated topics including: the nation’s macroeconomic future and black America’s economic status; why President-elect Bill Clinton’s economic plan best meets black needs and desires; the efficacy (or lack) of enterprise zones; and what really drives “welfare reform.”

Board members Andrew F. Brimmer, David H. Swinton, Marcus Alexis and Gerald D. Jaynes presented papers at the sessions. Bernard E. Anderson, Courtney N. Blackman, Earl G. Graves, Edward D. Irons and Margaret C. Simms participated as discussants. Lawrence Johnson, dean of the Howard University Business School, was a guest for the first day.

The group left the sessions with renewed optimism. Their consensus: Black concerns may not drive economic policy but the unavoidable need for America’s leaders to respond to structural problems cannot but help better black prospects as well.

Agreed. But African-Americans must work to ensure that our voices are part of any new economic chorus.

Economic Trends And Prospects For 1993

The 1980s’ party is long over, but its hangover lingers. This will be another year of slow growth says Andrew F. Brimmer, president of Washington, D.C.-based Brimmer & Co. Inc., an economic and financial consulting firm. And there is “little likelihood that the pace will accelerate anytime soon. . . as employment and income, and sales and profits will improve only slightly.”

The result: gross domestic product (GDP), which grew by only 1.7% in 1992, is projected to increase by just 2.6% this year. This rate is just one point above the 2.5% needed to ensure new job growth. This is not heartening, since jobs provide income, fueling consumer demand and economic growth.

Brimmer, a former Federal Reserve Board governor, does not foresee any quick return to robust growth. He notes that the GDP rate projected through 1993 is one-third to one-half of the level recorded during the two years after other post-World War II recessions.

What’s the difference? The traditional cure for recession–lowering interest rates to inspire plant and equipment investment–has not worked. Since 1991, multiple long-term interest rate cuts have been made. But the inexpensive cash flowed into the stock market. True, stock value soared, but it was an artificial ascent not based upon actual or projected productivity, revenue or income. The CEOs of companies receiving the share boost understood this duality and have been loath to increase worker salaries, hiring or capital expenditures.

In this atmosphere, nonmonetary factors affecting the economy acquire more resonance. The three most powerful in percentage impact on GDP growth are consumer spending (66%), business investment (15%) and residential construction (5%).

These factors reflect individual and corporate confidence levels in the economy. Consumer spending depends upon disposable personal income, relative prices, consumer debt and interest rates, in that order. Business investment is influenced by expected investment return, tax rates and borrowing costs. Residential construction depends upon disposable income, demographic factors, mortgage interest rates and monthly amortization schedules.

Housing starts, personal consumption expenditures and outlays for nonresidential fixed investment have all increased substantially less since the recession ended than 10 years ago. In the five quarters ending June 1992, real disposable income grew just 2.4%. In 1982, it grew 4.7% in the five quarters after the recession.

Brimmer says the minimal increase in income “reflects the virtual stagnation in employment.” Only 900,000 new jobs were created through June 1992. “The meager increase in job opportunities is itself a mirror of the modest expansion in aggregate demand,” he says.

Anemic growth has one benefit low inflation. But the other side of low inflation is that there is little room for companies to raise prices. Thus, it has been difficult to improve profit numbers in the face of lower consumer demand. Fortunately, as the economy slowly heats up in 1993, profit margins should also rise. They will not recover as quickly as after other recessions, however.

To spur growth, the Federal Reserve adopted a stimulative monetary policy in late 1990. The first cuts were in the discount rate (the interest rate that the Federal Reserve charges member banks for loans), which was cut from 7% to 3% between November 1990 and July 1992. Since November 1990, the federal funds rate–the rate that banks charge for lending money to each other overnight to meet reserve requirements has dropped from 8% to 3%. This rate is an important indicator as it is one of the first ripples showing whether other interest rates, which affect consumer and business decisions, are climbing or dropping. For example, in the long-term markets over the same two-year period, yields on 30-year U.S. government bonds were shaved from 8.8% to 7.5%. During the same period, conventional mortgage rates also dropped from 10.1% to 8%.

Looking forward through the end of 1993, the Federal Reserve will probably keep a tight rein on interest rates. The federal funds rate remained in the neighborhood of 3% in 1992. This year it may rise gradually to 4.1 % by the end of the fourth quarter. Thirty-year U.S. government bonds, which averaged 7.4% in the final months of 1992, may grow to 7.9% by the end of 1993.

The African-American Economic Outlook

A weak economy holds no attraction for blacks. Brimmer says such conditions predict “relative stagnation in the economic status of black Americans. Jobs will rise slowly, and unemployment will remain high. . . the income gap faced by blacks will widen further.”

Do not expect Washington, D.C., to provide more than guidance in 1993 either. More than 125 new legislators are entering Congress. And even if now project funding is approved, it still may take more than a year for its impact to reach many people.

Not everything is negative or delayed. The economy is making slow progress and blacks will get more jobs. This year, Brimmer projects that African-American unemployment will fall to 12.9% from 13.3% in 1992. But that figure is still 6.6% higher than projected unemployment rate for whites.

High unemployment naturally trims income potential. In 1993, African-American money income is projected to be $313.6 billion-based upon official U.S. Census Bureau figures–a 6.7% increase over the previous year. Brimmer, however, adds that if black income was truly proportional to their total representation in the labor force, the figure would be as high as $436.3 billion.

The Clinton Factor

In many ways, African-Americans serve as barometers to forecast the U.S. economy. As the first fired and last hired, they feel the cutback before white men or women even see the blade. Declining black unemployment is also a clear indicator of growing economic strength.

During the Reagan/Bush years, as trickle-down economics was washed out to sea, blacks usually got wet first. They were the first to: lose high-paying manufacturing jobs; be squashed by corporate middle management downsizing; and accept or compete for newly created, low-paying service positions. Noting this trend, the BEBE analyzed the Republican, Democratic and Perot economic plans to see which projected the most desirable economic future. Their conclusion: Arkansas Gov. Bill Clinton’s Putting People First A National Economic Strategy for America’s positive, potential impact upon black workers makes it the best guide for addressing seriously our national economic malaise.

Gerald D. Jaynes, who presented a paper on the topic, says blacks and the entire nation will gain most if Clinton’s plan is implemented. It also shadows a model Jaynes created after reading the economic proposals of the NAACP, the National Urban League and the Joint Center for Political and Economic Studies. The Clinton plan includes: a jobs program; an urban policy; an education program; national health care; and welfare reform.

Jaynes, a Yale University professor of economics and Afro-American studies, was not so sanguine about the Clinton economic strategy initially. He now says the merit of the “proposal to revitalize the American economy offers African-Americans the greatest opportunity to realize their potential and gain a greater foothold in the mainstream than has been possible for a generation.”

The key is what the Yale professor calls Clinton’s “pragmatic liberalism.” This philosophy undergirds a strengthening program for the middle class, which he says “requires creating fairness and opportunity for all Americans.”

The BEBE sees strength in the Clinton plan, even if not every member shared Jaynes’ enthusiasm. Key plan components correspond to topics stressed by African-Americans.

Job Growth: Clinton has several ideas to create new employment: * boosting investment tax credits for businesses

putting up new plants and equipment, particularly in

enterprise zones; * making the research and development tax credit

permanent; * developing a youth opportunity corps and national

apprenticeship program for noncollege-bound students;

and * requiring employers to set up training and retraining


Margaret C. Simms, director of research at the Joint Center for Political and Economic Studies, agrees with the need for training and retraining. But she asks “for what jobs and how many? Will a job training program have any effect on the structural problems that have arisen?” Courtney N. Blackman, former governor of the Central Bank of Barbados, echoes her. “You can only train people in a general way for the long-run changes,” Blackman says.

Urban policy: Clinton advocates spending $20 billion a year for four years to rebuild America.

He’ll use the money to rebuild and refurbish transportation networks and provide investment in bridges, highways and low-income housing. The policy also requires companies bidding on such projects to set up a portion of their operations in low-income neighborhoods and employ local residents. Clinton further promises to try to set up a national network of community development banks to provide small loans to low-income entrepreneurs and to create urban enterprise zones.

The strength of the strategy, Jaynes says, is its stimulation of private sector investment opportunities, which create jobs and income. He says, “black Americans have much to gain if this program is enacted and much to lose if it is not.”

Maybe so. But the plan hinges on getting money from a friendly Congress. This may take some time. Congress is trying to absorb more than 125 new highly individualistic members. What if it listens quietly but balks at spending money that would raise the deficit to $450 billion by 1995? Clinton says the deficit will be fought with higher taxes on the wealthy. But members of that group may use Clinton’s own investment credits, lower capital gains tax and R&D tax credits to reduce their tax burden, raising the deficit anew.

Education: Clinton’ team projects that growth and full employment stem from an educated work force. Under his plan, anyone can borrow for a college education. The money is to be repaid with future earnings or two years’ community service.

An activist theory of government drives this strategy. Jaynes says, “The American economy is usually able to solve most problems without a large amount of aid from government, but in times of great economic change, such as now, government must play a leading role in directing the economy and relieving some of the pain.”

One way a Clinton plan could do that is to unveil a national industrial policy directing U.S. investment into industries designated as must-haves for the 21st century. Economic consultant Brimmer is convinced Clinton will do that. “While he won’t come right out and say it, fundamentally he would be in the business of picking winners and losers. And he would do it through a combination of tax incentives. I think we ought to do that.”

Not all the BEBE members are enraptured. Simms of the Joint Center says Clinton’s plan shows where we are going, but not how we get there. “What gets done first and what gets done last? How do you separate the federal programs and coordinate them with where the states are?” she asks.

Caveats aside, the BEBE agree bold change is needed. And whether blacks will benefit still remains unknown. Perhaps a paraphrase of a comment by a politician who sat out this race points the way: African-Americans are looking for a tide that lifts all boats. And Bill Clinton has the best plan to stir the water.

How Enterprising Are Enterprise Zones?

Ten years ago when the BEBE reviewed enterprise zones (EZs), it concluded they amounted to a public relations dream, not a serious effort. Reflecting, BLACK ENTERPRISE Publisher Earl G. Graves asks: “Wasn’t the original concept of an EZ for it to be placed in a depressed area to help to bring it along?” This is true, but the concept of EZs as a revitalization strategy was never accepted at the federal level. Now, in the wake of the post-L.A. uprising, EZs, which only exist on the state level, are firing new interest and debate (see Washington Page, September 1992).

With good reason. Marcus Alexis, Northwestern University professor of economics and management and strategy, delivered the 1982 paper as well as this year’s. He says, “the success of enterprise zones [in providing jobs and developing local communities) has been mixed. There is great variation in stimulus packages, administration and potential for success in the more than 200 EZs in operation in 37 states and the District of Columbia.”

This year, the BEBE is reviewing EZs’ second coming. It asks not only if they work but how well? The answer, like EZs, is a bit of this and some of that. This ambiguity leads Alexis to ask: “How do you know if an EZ works? You essentially have to know economic conditions that existed prior to the stimulus of the zone package. . . only then can you compare the growth in that EZ compared to similar areas either in that state and other places in the country, to see if there is a disproportionate rate of expansion in the area that has been designated as an enterprise zone.”

Translation: Did any businesses set up shop that didn’t exist before and how many jobs were created? Sound simple? It isn’t. If it were, every municipality would have an enterprise zone. Alexis says, “You can designate an area as an EZ, but it doesn’t mean that you’re going to get firms to come into the area.”

Right now, states can create EZs for any reason that they see fit. Some are targeted to put disadvantaged workers back to work and others on encouraging investment and economic development. EZs are also used to invigorate distressed areas and as tools of state economic development. Their goal: to attract new industry or persuade currently operating companies from leaving the area.

Unfortunately, there is no sure explanation as to why EZs succeed or fail at attracting businesses. Now, according to Alexis, there are several characteristics that successful EZs have in common: * tax credits a nd incentives to reduce capital costs; * an ample supply of productive labor at competitive wages; * proximity to customers and suppliers; * good transportation, affordable land and reasonable construction costs.

But success means different things to everyone. Many African-Americans stress the importance of creating jobs over setting up new businesses. Alexis says EZ businesses should not be, able to gain incentives such as income and property tax credit without agreeing to hire zone residents. If so, they may make windfall profits yet create few new jobs for areas with endemic unemployment.

Alexis highlights some of the positive changes EZs can provide. Among other things he finds that average enterprise zones: attract new and expanding businesses, with 73% of all jobs in manufacturing. They do better at attracting businesses than at preventing contraction and closures. EZs under study created an average of 464 new jobs per zone or 46 new jobs per company. Median new-capital investment for EZs was $4.5 million. EZs do better in states that have few of them than in states with a large number and that they can’t turn around economically distressed areas.

Maybe. But a successful national EZ program must have an impact on local economies. Alexis says such a program can be set up if: The number of zones is limited to 50 and not every state gets one; each zone has its own economic stimulus package; EZs are targeted to depressed but salvageable areas; program incentives include employing area residents and encouraging local business development; job training, counseling and health care are part of the program; and the zone and surrounding areas receive additional resources to reduce crime.

But developers must remember why EZs exist. Lawrence Johnson, dean of the Howard University School of Business, says the reason is “because of job discrimination and racism in the marketplace. Black people are not allowed or not given an opportunity to work in plants that happen to be in the suburbs.” Edward D. Irons, dean of the School of Business at Clark Atlanta University agrees that EZ boosters may be too optimistic. EZ supporters should acknowledge, he says, that there are “contravening forces at work. Blacks want new businesses, but also want them to promise to hire local workers, which they may not want to do.”

To clarify his point, Irons, who has been a member of the Atlanta Economic Development Corp., cites several examples to show how the mere creation of enterprise zones may not satisfy the desires or needs of a particular community. In one instance, he cites an Atlanta-based company that threatened to leave the city for a suburban enterprise zone if it did not receive certain economic incentives. Other companies simply moved from one part of Atlanta to another “with no appreciable increase in employment.”

Irons also says companies cannot be made to hire “a targeted workforce.” He reported the example of a 175-acre enterprise zone that was contiguous to a low-income housing complex with high unemployment. “Our objective was to get the businesses in the enterprise zone to hire the people in the housing project. But there were all kinds of excuses. |We couldn’t train them. We couldn’t find them. We couldn’t keep them,’ just one excuse after another. It was hard to refute some of this. . . but we felt that we were being circumvented,” Irons says.

The way enterprise zones are measured complicates the issue. If EZ managers are judged by the number of companies that set up in the zone and by the number of jobs created or maintained, can the surrounding community demand the work force be composed of a certain group? If a company gets into a zone and violates a prior agreement, can or should it be kicked out? Which is more important: social engineering or economic development?

Alexis says economic development wins every time. Not one of the EZs he is familiar with has a majority of local, targeted or minority workers.

Gerald Jaynes says this is an important distinction. Enterprise zones should be seen as vehicles bolstering economic growth, not as minority business reservations. Jaynes says blacks must not allow EZs to become “the policy for blacks” the way urban renewal was once. He says that will relegate black needs to sideshow status.

Reforming Welfare

In its last attempt at large-scale welfare reform in 1988, Congress chose a balanced approach (see Washington Page, July 1992). In the 1988 Family Support Act, legislators set a goal of self-sufficiency. The act initially required 20% of eligible welfare recipients to seek a job or an education, while providing increased day care, transportation and other services to help them meet the goal.

Many states, however, felt that the act was not enough to solve their problems. And shortly after it passed, the economy collapsed, making it impossible for most states to come up with the required matching funds to implement designated programs.

Since then, the number of people on welfare has shot up. In 1990,14.8% of blacks and 3.5% of whites over age 15 were receiving public assistance income. In fiscal year 1992, the number of families receiving Aid to Families With Dependent Children (AFDC) had grown to a monthly average of 4.4 million families, or more than 13.5 million people. By year-end, 4.7 million families were on AFDC. That was over a 10% increase from fiscal year 1990. Most recipients are children; in 1991, nearly 13% of U.S. children received some form of welfare.

Last year, 40 states responded to welfare caseloads they could no longer afford by either freezing or cutting AFDC benefits, which provide financial assistance primarily to poor women and children. The reason: AFDC is funded by states and the federal government with state-matched funds.

This action prompted an outcry. But David H. Swinton, dean of the School of Business at Mississippi’s Jackson State University, says “the resurgence of interest [in welfare reform] has not been motivated by a desire to find a more effective income maintenance and support system as much as it has been motivated by budgetary considerations to cut funds that were budgeted for the poor.”

The new initiatives are supposed to provide incentives for welfare recipients to behave in ways their authors believe are conducive to achieving greater self-sufficiency. But welfare recipients are not monolithic or programmable. About 55% of people who go on welfare stay on for less than five years and less than 25% stay on for 10 or more years.

The welfare population is less than 5% of the total population, and they did not go on welfare because of desire. “If we look at the recent upsurge in welfare response, the consensus appears to be that most of this has been caused by the recession,” says Swinton.

He explains that contrary to the radical right’s pronouncements, “deteriorating family values” do not place people on welfare. “Clearly, the impact of rising unemployment over the past few years has been compounded by the impact of a rise in the proportion of jobs that pay lower wages,” he says.

And blacks are not the majority of new recipients. Between 1989 and 1990, more than 500,000 blacks and 1.2 million whites became impoverished. A larger proportion of whites, 11.5%, earned less than $5,000 a year in 1990 than in 1970, when 6.8% earned that little, Swinton says.

The welfare system as it currently stands pleases no one. The goal of the Family Support Act was based upon the belief that a compact could be drawn up between states and welfare recipients whereby mothers would become more self-sufficient and fathers more supportive. The idea unraveled during latter Reagan/Bush years. And Swinton says those administrations ignored hard data, preferring to believe the fallacy that “there is something wrong with those people. That is why they are on welfare.”

States responded to the upsurge in caseloads with a combination of financial sticks and carrots. One stick has been the elimination of welfare benefits for the able-bodied. Both Illinois and Michigan cut those benefits. Carrots include reduced tax burdens for women who do not have additional children and return to work.

Swinton doesn’t buy the process. Poor people, he says, “end up on welfare because they lack viable alternatives for reliable, steady, remunerative sources of income.”

He also takes issue with the Clinton welfare reform plan. It would limit the time on welfare. Swinton says unless other means to assure minimum income support are created that could turn welfare poor into destitute poor. “Little real progress can be made in reducing welfare dependency without improving the structure and accessibility of opportunities for education, training and better paying, more stable jobs,” he says.

Bernard E. Anderson, president of the Philadelphia-based Anderson Group, an economic and management advisory firm, agrees. The poor need “human capital investment” if they are ever going to become self-sufficient and productive, he says.

Outlook For 1993

Looking into the new year, the BEBE offered some observations and prescriptions: * Gross domestic product (GDP) is projected to increase by just 2.6% this year. * The African-American unemployment rate may fall to 12.9%, from 13.3% in 1992. * Black money income is projected to be $313.6 billion, 6.7% increase over 1992. * Clinton’s “pragmatic liberalism” is a strengthening program for the middle class requiring the creation of fairness and opportunity for all Americans. * A successful national enterprise zone program will: include individual economic stimulus packages; target depressed but salvageable areas; and have incentives to include employing area residents and encourage local business development. * Welfare reform must acknowledge that people take aid because they have no alternative.

COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2004 Gale Group