The Reich Reich: the Clinton crew has embraced the German model - just as the Germans have realized it doesn't work - emphasis on government-run economic programs as supported by Bill Clinton and Labor Sec Robert Reich - includes related article on the Europeanization of the American economy

National Review, July 11, 1994 by David Gitlitz, Lawrence A. Kudlow

In the 17 months since Bill Clinton took office, his Administration has demonstrated a faith in state-directed economic management that may be unprecedented in American history. From health-care reform and technology development to worker training and labor-market activism, the Clinton agenda calls for government action to address an array of purported social challenges. This may appear to be bold innovation. But there is a time-worn model for this approach: the Western European "social market."

"We Americans have a lot to learn from Europe," Clinton told a gathering in Brussels during his first presidential trip to Europe, in January. He was enthusiastic about European job-training and apprenticeship programs, and spoke glowingly of European-style health care, income protection, and industrial policies.

This affinity for the social-market model comes as the Europeans themselves are finally acknowledging the dismal results of over-generous social benefits, high and rising tax burdens, and inflexible labor markets. In fact, in early June Labor Secretary Robert Reich, the chief architect of the Europe-in-America approach, was on hand in Paris as the Organization for Economic Cooperation and Development sought to grapple with the continent's economic stagnation.

The OECD employment report could not have been music to Reich's ears. It takes dead aim at European obstacles to job creation and entrepreneurship.

This is not the first time the group has confronted the issue. In a little-noticed working paper last year, the OECD reported that the 12 countries of the European Community (now the European Union) have not experienced a net addition to private-sector employment in twenty years. The only job growth has come in government bureaucracies. High minimum wages are pricing young and unskilled workers out of the market, while generous safety-net policies are reducing incentives to seek work.

Unit labor costs have been rising faster among European economies than in other industrial countries for the past two decades. As of 1992, German unit labor costs were 20 per cent above American ones. Non-cash social-welfare benefits are the reason. Of the nearly $27 per hour in total compensation received by the average German factory worker, just less than half ($12.50) is non-wage compensation. Add in a business income tax whose top rate is nearly 60 per cent, and German enterprises pay about 37 per cent of payroll - split equally between employer and employees - to finance the country's generous safety net: health care, unemployment, sick pay, retirement pensions. Not only is this a disincentive to new hiring and business creation, it penalizes additional work effort.

Among the most controversial recommendations in the OECD's latest report are its calls for an overhaul of these benefit programs and labor-market provisions. The open-ended unemployment benefits amount to "quasi-permanent income support" and should be curbed. So should restrictions on employee layoffs. And high minimum wages "often end up damaging opportunities for unskilled labor." Establishing a lower rate for young workers would encourage hiring, the report said.

But Reich is intent on moving the opposite way. On a stopover in London en route to Paris, he rallied the Labour Party faithful with talk of his plans for a higher, indexed U.S. minimum wage. The OECD, Reich complained, was full of "a lot of loose talk about flexibility. Rarely has a term moved so rapidly from obscurity to meaninglessness without passing through an intervening period of coherence." Once ensconced in the City of Light, Reich talked of governments channeling money to such endeavors as ensuring that employees can change jobs or even careers without losing income.

"What we need in all countries is to make the labor market better by providing workers with greater job-search assistance, job counseling, information about labor markets, and training where necessary," Reich said. And as a last resort, if they can't get any other form of employment, perhaps they can be given subsidized work."

Twin Technocrats

He and the technocrat responsible for Clinton's byzantine health-care reform proposal, Ira Magaziner, built their reputations advocating adoption of European-style welfare-state capitalism. Harvard lecturer Reich and management consultant Magaziner were co-authors of Minding America's Business, an early 1980s tract proposing a full-blown U.S. industrial policy. In the late 1980s Reich penned The Power of Public Ideas, in which he argues that the government should not allow the "pre-existing selfish preferences" of individual citizens to take precedence over "what is good for society."

Clinton was so fond of Reich's 1991 opus, The Work of Nations, that before announcing his candidacy, he brought a well-thumbed copy of the book to a Reich-hosted seminar at Harvard. Bob Woodward writes in The Agenda that this work became the comerstone of the Clinton campaign's domestic platform, and echoes of Reich's themes ring throughout the Administration's economic strategy.