REFRAMING THE DEBATE

Robert Reich former Secretary of Labor is at it again. Under a long title:

“Reframing the debate: not that most Americans have been living beyond our means, but our means haven’t kept up because of widening inequality”

Reich indulges himself once more in his favorite sport of class warfare:

All the gains have been going to the top. Get it? … Widening inequality is the culprit.

Oh dear: but perhaps not all that surprising when you come to think of it. Has there ever been any problem that could not be solved by taking the money from the wealthy and giving it to the poor? It’s much easier than learning that redistributing form savers to consumers depletes the savings pool and that lower investment rate leads to reduced productive capacity. Businesses then either pay less in worker wages or reduce labour force and unemployment goes up. As unemployment goes up, people like Reich call for more government interventionism and more wealth redistribution thereby exacerbating the problem they created. He goes on:

… government-haters and deficit-hawks are sticking to their same story: Americans have lived beyond their means and must now learn to live within them. The reality is quite different: The means of most Americans haven’t kept up with what the economy could and should provide.

Obviously not. But this does not disprove that Americans have lived beyond their means. It is like saying; if my spending is equal say 105% of my income: I did not spend more than I earned, rather my earnings did not keep up with my spending. Clearly a contradictory statement. If we say that we have lived beyond our means, than, by definition, we are also saying that our means haven’t kept up, regardless of the level of the means. It is the unfavorable ratio of income to spending that makes one spendthrift, not the level of one’s earnings. Reich then extends this blissful state of denial from personal to government spending habits:

The notion that we can’t afford to invest in the education of our young, or rebuild our crumbling infrastructure, or continue to provide Social Security and Medicare and Medicaid, or expand health insurance is absurd.

Nice example of just the kind of attitude that perpetuates living beyond the means. The “absurd” notion of fiscal prudence is disregarded while plunging the nation deeper into debt is commendable. If it was true that we can afford this level of spending would the US be running a trillion dollar budget deficit? And how did we amass a 16 trillion dollar national debt that translates into staggering $148,000 per taxpayer? Not to worry, Reich has got the solution:

If the median wage had kept up with the overall economy, it would be over $90,000 today — and tax revenues would be more than adequate to cover all our needs. If the wealthy were paying the same marginal tax rate they were paying up to 1981, tax revenues would be far more.

What Reich illustrates above is his usual fallacy of considering the effect of wage-rates only on workers’ incomes and never on employers’ costs, the effects of tax rate only on public sector and never on private sector. He calls for a return to pre-1981 marginal tax rate but not for pre-1981 government spending rate.

Predictably, Reich concludes that wage-rates are too low. To fix the problem, he increases one variable (labour cost) and leaves all other unchanged then complacently ignores any adverse effect on economic growth and goes on triumphantly from there. In reality economy is a highly dynamic and interdependent system. Did Reich consider that rising wage-rates reduce labour demand leading to increased unemployment? That wage-rates equal the amount of output the worker can produce, not some arbitrary number most pleasing to a bureaucrat? Instead of price-fixing most efficient economies rely on unrestricted labour markets that allow employers to compete for best available labour thereby ensuring that wages and productivity are equilibrated.

But I realize that it makes little sense to try to convince former Labour Secretary that his expectation of a higher worker wage is unrealistic. As Henry Hazlitt puts it:

… borrowers always consider interest rates too high, just as workers always think wages too low, producers always think prices too low, and consumers always think prices too high. But to appeal to these interested sentiments is political demagogy, not economics.

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