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Labor Secretary Reich Versus US Business

SECRETARY of Labor Robert Reich unwittingly provides an unparalleled service to the economics profession. More than any other cabinet officer, Mr. Reich generates a continuing array of economic bloopers that cry out for correction.

In his latest jeremiad, Reich vacillates between wanting to punish companies that do not conform to his personal notion of how a socially responsible organization should conduct itself - and rewarding those that do.

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His first suggestion is to limit the ability of business to incorporate - to use the corporate legal form of organization. The lucky few would be those profitable companies who keep more employees on their payrolls while maintaining their wages and benefits and sharing profits with them.

Reich's alternate proposal for enforcing his personal notion of business's social responsibility is to reduce or eliminate the corporate income tax for complying firms. Somehow, he finds such federal action appropriate "in this era of smaller government."

It isn't surprising that he would try to put a positive spin on his idea, but it's incredible for him to try to sell this expansion of government power over the private sector as part of the ongoing effort to downsize government.

Reich's justification for the feds determining how companies should operate is faulty on both factual and conceptual grounds. By focusing on the layoffs announced by one large company (AT&T), he leaves the public with the impression that jobs in the US are evaporating; therefore, government must step in and help.

He ignores information published by his own department. The data issued by the Bureau of Labor Statistics make it clear that the number of people employed in civilian jobs in the United States has been rising - from 109 million in 1985 to 118 million in 1990 to 122 million at present.

Why then are the headlines dominated by news of layoffs? Part of the answer lies in the unexpected side-effects of well-intentioned government regulation. Federal law requires companies to give 60 days notice of any layoff of 50 or more workers. The penalties for failing to do so can be substantial. But there is no penalty for overestimating the number of people who will lose their jobs. Moreover, there is no requirement to announce new hires. Thus, the public gets a biased view of what is really happening in the labor market.

Because government charters corporations, Reich believes that government should control business behavior. Savvy lawyers would have a field day if charters were limited to companies meeting Reich's social-responsibility standard. A cottage industry would develop to help convert businesses into partnerships, proprietorships, and other structures not requiring corporate charters.

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A corporate charter is a right (with corresponding obligations), not a privilege - and is granted routinely to all manner of applicants. With few exceptions, states charter corporations. That hardly provides justification for the federal government deciding which businesses "deserve" a corporate charter. It is surprising that a lawyer such as Reich would propose such a basic restriction on the legal right of private companies to organize.

The idea of granting tax reductions and tax exemptions for "good behavior" is no better. Vesting such arbitrary power in government provides opportunity for the party in power to award its friends and punish its enemies. The basic shortfall of Reich's proposals is that they shift attention away from more fundamental economic policy concerns.

If the administration wants to promote retention of "good jobs" in the US, it should consider undoing some current policies. Actions by our government are arbitrarily causing a number of American firms to locate many of their new operations overseas. Burdensome regulation and legal reform heads the list of concerns of many domestic companies.

The serious challenge is to make the US a more attractive place to do business and to hire people. Sensible reforms of regulation and liability law would help substantially. Reich could become a constructive force in this debate by reversing his position and supporting reform legislation to enhance American productivity and competitiveness.

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