Robert Reich and the NYT indulge in voodoo economics

[ClaytonB]

Not that that should surprise anyone. But I think it is useful and instructive to see what specific kinds of voodoo economics that the political elites believe still “play” to the public.

I don’t understand the arbitrary applications of fair-use laws to the Internet, so here’s the article I’m discussing and I will quote snippets of it.

THIS promises to be the worst Labor Day in the memory of most Americans. Organized labor is down to about 7 percent of the private work force. Members of non-organized labor — most of the rest of us — are unemployed, underemployed or underwater.

His opening sentence implies that employment and other financial problems are, at root, a result of the decline of unions and organized labor. I think this is true insofar as you consider the terms of employment to be something that is to be laid down by the government. All modern employment legislation assumes this. Of course, the alternative of letting individual employers and employees work out their own terms of employment in a free wage market isn’t even on the table.

That’s because the real problem has to do with the structure of the economy, not the business cycle.

This is Reich’s thesis. By “structure of the economy”, he means a set of voodoo economic central-planning policies which he will propose.

No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.

This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.

The implication is the competition with “foreign labor” - whatever that is - is somehow making us all poorer. Of course, the thought that labor is expensive and reducing the labor costs of production of any consumer good is a crucial part of what is increasing our standards of living is not even up for consideration.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

And the Federal Reserve and Washington cronyism have had nothing to do with it!

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What the hell?

Actually, I think this is a pretty dangerous voodoo myth … I used to puzzle over it. It works because people do not understand sound money. In a sound money system, the Scrooge McDucks of the world who just “hoard” and store their piles and piles of gold in a giant steel silo so they can go swimming in it are doing us all a favor… they’re increasing our standard of living by increasing the purchasing power of our money. By not using that money to consume, it’s as if they are destroying it, it’s no longer bidding against our money, thus lowering prices. This is called deflation. For all the belly-aching about deflation, deflation is only a “threat” to entrenched interests (borrowers and producers) that failed to plan ahead for the possibility that money could become more valuable. Bad planning in a natural order economy results in bankruptcy or financial failure. Those involved learn their lesson and either do better next time or never again succeed in building enough capital to hurt the rest of us with their tomfoolery.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.

This is a pretty blatantly populist appeal, even dropping “Cayman Islands” in there to make “the rich” sound like they must rub shoulders with drug dealers and gun-runners … or at least with their bankers. As a bonus, he throws in the myth that inflation is caused by speculators (“animal spirits” or “irrational exuberance” anyone?)

Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better.

The poor don’t? The rich don’t? Just the middle class? This is what you get when you don’t start with a solid foundation in human action.

This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.

Implicit in this is the voodoo myth that money = wealth which, in a fiat money system, just isn’t true. Inflationary money only reinforces the business-cycle (which Mr. Reich believes is not the cause of the economic recession), it doesn’t result in any real increases in prosperity.

THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.

Translation: They want a New New Deal. It is interesting that the myth that the New Deal primarily helped the little guy and primarily hurt large business interests still persists intact. Of course, the New Deal did hurt large business interests who didn’t get on the bandwagon but the primary effect of the New Deal was to protect producers from competition which can have only one result: reduction in consumer sovereignty (hurting the little guy).

What else could be done to raise wages and thereby spur the economy?

Here’s that old FDR-era myth that higher prices cause prosperity. Anyone who has to live on a shoe-string budget automatically understands that this is pure nonsense.

OK, here comes the good part. Our good witch-doctor Reich is going to solve all our economic woes with a few bold, broad strokes of policy:

We might consider, for example, extending the earned income tax credit all the way up through the middle class, and paying for it with a tax on carbon. Or exempting the first $20,000 of income from payroll taxes and paying for it with a payroll tax on incomes over $250,000.

… Early childhood education should be more widely available, paid for by a small 0.5 percent fee on all financial transactions. Public universities should be free; in return, graduates would then be required to pay back 10 percent of their first 10 years of full-time income.

Another step: workers who lose their jobs and have to settle for positions that pay less could qualify for “earnings insurance” that would pay half the salary difference for two years; such a program would probably prove less expensive than extended unemployment benefits.

I think we should also give free pink mohawks and a VW Beetle to anyone who wants one (you have to get the mohawk to qualify for the Beetle). I mean, what the hell do these policies have to do with anything? They’re just pulled out of thin air. They’re grasping at nothing. They’re pure voodoo economics.

Clayton -

[Smiling_Dave]

Great post, Clayton. really enjoyed it.

[billott1]

The real problem with clowns like this is that all these practices were tried in the Soviet Union and failed miserably. But that was over 20 years ago and there is nearly a generation that has grown up without that horrible example of what not to do to run a society. So the standard of comparision between their Progressive economic stupidity is the slightly less progressive and more militant conservative version of economic stupidity.

For example when the price of gasoline was “regulated”, really fixed, the predictable result was long lines and shortages, people would say that the idiots in the Soviet Union and China were doing this and see we did the same thing and got the same result. But now that it is Venezuela and some other scattered dumb asses doing these things, like Western Europe, the comparision is not nearly as striking.