Defining Ideas

Robert Reich: Obama's False Friend

Sunday, January 9, 2011

In a thinly disguised editorial, Saturday’s edition of the New York Times business section (January 8, 2011) featured an interview with Robert Reich, former labor secretary under President Bill Clinton, over the sad state of the United States economy.

It is no coincidence that this interview comes hard on the heels of President Obama’s appointment of the centrist William Daley, brother of outgoing Chicago mayor Richard M. Daley, to serve as his Chief of Staff. The interview, titled "Obama the Centrist Irks a Liberal Lion," affords a convenient platform for Reich to express how disillusioned he is with the new direction in which the Obama administration is moving, which Reich thinks gives cover to the Republican narrative that high taxation and extensive regulation are the source of the current economic malaise.

Epstein
Photo Credit: Barbara Kelley

After noting how Obama has managed to preserve his personal popularity in the midst of a slow and painful recovery, Reich then waxes expansive:

If you widen the lens, the public is being sold a big lie — that our problems owe to unions and the size of government and not to fraud and deregulation and vast concentration of wealth. Obama’s failure is that he won’t challenge this Republican narrative, and give people a story that helps them connect the dots and understand where we’re going.

Reich delivered these remarks from his elegant office at the University of California, Berkeley, where he teaches. Berkeley, a public school, has recently been racked by budget cuts, driven in large measure by the package of pension and benefit goodies given to public union members. These benefits strip California of the revenues it needs to perform other essential functions, essentially bankrupting the state.

California’s growth-stifling policies are by now well known: real estate developers in the state, for instance, are at the mercy of a maze of permits and regulations that choke off new development as though it were some form of contagious disease. Meanwhile, the state also sports an extensive set of protections for employees that are in many ways more stringent than the national rules, on such issues like the duration of lunch breaks while on the job. These restrictions drive California’s unemployment rates up even further. As those restrictions go up, the state’s revenues go down. And yet, if Reich could have his way, California’s failed economic model is precisely what he would impose on the nation.

What is astonishing is the juvenile economics that drives Reich’s critique of Obama’s belated and partial attempt to improve his relationship with business. Reich said in the interview:

By freezing federal salaries, by talking about deficits, by extending the Bush tax cuts [Obama is] legitimizing a Republican narrative….Why won’t he tell the alternative story? For three decades we’ve cut taxes on the wealthy while real wages stood still.

Like his economic soul-mate Paul Krugman, Reich’s economic policy-mix involves more taxes on the rich and more government spending for the poor, a recipe that will stifle job creation.

If Reich could have his way, California’s failed economic model is precisely what he would impose on the nation.

Trying to bolster his argument that income inequality is at the root of our economic malaise—and that we should, therefore, tax the rich—Reich is correct to note, as he does, that the top one percent of American earners have done well in the current economic downturn. But it is not because they (or, in the case of Reich and myself, we) have shirked public duties, like our taxes. Rather, the statistics for 2008 indicate that individuals in that group have an oversized 20 percent share of the total national income but pay a whopping 38 percent share of the overall taxes. Those numbers were down from 2007, where the top one percent earned 22.8 percent of overall income, while paying 40.4 percent of total taxes. The reason for the decline from 2007 to 2008, simply, was that the stock market crash had a greater effect on the portfolios of the affluent than the remainder of the population.

When the bottom 95 percent of income earners pay about the same amount in taxes as the top one percent do, the political TNT is at dangerous levels. Keep the situation as it is, and there is a permanent constituency who wants to increase the level of redistribution through taxation. This could, in turn, create a climate that drives both capital and labor away from our shores, just as capital and labor have been driven away from California and into business-friendly Texas.

Though Reich eagerly talks about taxing the rich, as a general maxim of political economy, you cannot make the poor rich by making the rich poor. What you have to do is find ways to unleash productive forces that create jobs and wealth for everyone.

On that score, Reich makes a colossal mistake when he cites "fraud and deregulation" as causes of our economic woes. It is hard for anyone to be in favor of fraud, least of all a libertarian such as myself who thinks that the major function of government (a government funded by tax revenues) is to control against the risks of force and fraud. Generally speaking, though, fraud is not the path to wealth and riches for the top one percent of income earners, as Reich implies. Honest labor has that distinction.

You cannot make the poor rich by making the rich poor. Instead, you have to unleash the productive forces that create jobs.

Reich also opposes deregulation, especially of the labor markets. Yet deregulation could unleash those productive forces that lead to job creation. Apart from lower taxes, we should revisit, revise, and even abolish the full panoply of job regulations from the minimum wage laws, to the antidiscrimination laws, to the collective bargaining statutes, to the employer mandates in health care, to the Family and Medical Leave Act.

Deregulation, as such, would have two obvious virtues. First, deregulation saves administrative costs, which in turn lowers the need for the high levels of taxation that can stifle growth. Second, deregulation increases the opportunities for gains from trade by removing the obstacles that stand in the path of job creation.

The statistics for December 2010 revealed that the rate of job creation is too slow to make a serious dent in the overall unemployment figures. The current unemployment rate is down to 9.4 percent, but that is in large part because the federal government continues to expand. The stimulus programs, which Reich would have us repeat, have failed because we diverted far too much national wealth into the creation of dead-end jobs in government. Meanwhile, those tax revenues lost to government stimulus projects could have otherwise been plowed into new investments. After all, the source of investment capital—and jobs—comes from the demonized top one percent of earners.

President Obama should ignore his strident critics on the left and ease back to the center. The best way he can do so is to emphatically reject the bogus advice that he receives from his false friend, Robert Reich.