Robert Reich is the American left’s most enthusiastic demagogue. His propaganda pleases swaths of barely educated Americans into thinking that there is careful analysis and “science” deeply embedded into their predictable policy preferences. Every now and then I seek his Internet presence out, hoping to find titterworthy nuggets of nincompoopery. I am rarely disappointed.
On January 23, 2015, at his Facebook site, I grabbed the above post, and its first three responses. It is actually above the usual quality. Reich presents three theses, each sporting a sort of superficial plausibility. But each is, nevertheless, wrongheaded. It’s long past midnight as I write this, so I’m not going to essay anything other than a hit-and-run point-by-point commentary:
Herewith the three biggest mythologies that prevent us from seeing what’s really happening to our political economy:
It is “myths,” not “mythologies.” Reich tarted up his post with the wrong big word.
1. The “job creators” are CEOs, corporations, and the rich, whose taxes must be low in order to induce them to create more jobs. Rubbish. The real job creators are the vast middle class and the poor, whose spending induces businesses to create jobs. Which is why raising the minimum wage, extending overtime protection, enlarging the Earned Income Tax Credit, and reducing middle-class taxes are all necessary.
Literally, CEOs, corporations, and entrepreneurs are the job creators. They are the ones who take capitalists’ (investors’) wealth and invest it into productive processes that include labor, which is hired and paid from the funds managed by CEOs and other managers, corporations, proprietorships, partnerships, and entrepreneurs. The funds come from savers — mostly but by no means exclusively “the rich” — or any who have a stock of capital that can be devoted to production.
So what is Reich trying to say here?
Well, he is echoing a point made most strenuously by several strains of economists since J.-B. Say, at least: that it is consumers who ultimately pay the wages, and indeed the profits, of business. But Reich simplifies the story too much.
It is one thing to say “consumers ultimately pay” as a theorem of advanced economic reasoning. It is another to deny the reality of who pays what, or of the inconvenient fact that Reich does not ever mention: the possibility of loss.
For while it is true that all capitalist production is directed for ultimate consumption — Carl Menger made this point most clearly — it is also true that many business enterprises fail to satisfy consumer demand. Fickle horde that they are, consumers are free to balk at paying the amount for the goods produced at prices that would cover costs. The spurned business then fails to make a profit — indeed, suffers loss — and the prospect of satisfying consumer demand (not “spending” as such, but expected spending) that “induced” the enterprise in the first place failed. Didn’t pan out.
So, who lost here?
Not the consumers: they didn’t buy what they didn’t want.
Not the workers in the business that ultimately failed: they got paid, even if their work turned out to be, in the ultimate sense, “unproductive.”
That is, they produced goods that no one wanted, so it would have been better had they done something else. The trades with consumers did not amount to enough to make the effort worthwhile, but, meanwhile, the workers got paid. Their wages, which served (from the business’s and investors’ point of view) as an advance on the expected profits, were paid not ultimately by the consumers (who did not go along with the hope) but by the capitalists (investors via entrepreneurs or managers). The sense in which workers jobs are paid by consumers does not hold true when the business fails to supply enough goods at the right prices for profit. In cases of failure, value has been lost, and the hit gets taken by the investors.
This is important because it shows that merely inducing investor and entrepreneurial production is not enough. It has to be successful production. Unsuccessful businesses are also induced by consumer demand. But they are of little or no use.
So when you take wealth (money) away from those with savings (“the rich”) to give to those with less in savings, so that the latter (“the poor”) can spend money for goods the better to “induce” investment . . . that money taken away was money that would have been used to invest. Or spend.
Here is the tricky part. In the model provided by Reich, the rich have money and the poor do not; the “vast middle class” has some. So, apparently, he believes that when the rich spend or invest their money, it does not matter for “the economy.” Only spending by the non-rich matters. Why on earth would that be? To the extent that “the rich” spend money on consumer goods, their money “induces” productive processes, too. Which would employ non-rich in the process.
Further, the money the rich save for later tends not to be hoarded in vaults or under four-post beds, but invested directly or lent out at interest, where it either spurs investment or consumer spending (depending on whether the loans are commercial loans or consumer loans). Thus the third commenter to Reich’s post gets the award for most witless point possible.
The truth is, taking from some to give to others hurts those some to help those others. And in context of the fact that it is in mutually beneficial trades that advances in wealth get made (as goods make their way to those who value them most) the unseemly fixation on robbing from the rich to pull a Robin Hood act flouts that principle of increasing value, advancing wealth creation. Indeed, taking from the rich not only hurts the rich, but it also has the unfortunate effect of decreasing (by some margin) jobs.
It is Reich’s point that is “rubbish.” Robbing from the rich may seem wonderful if you are poor, but if your best hope of a job evaporates because you have taken the wealth that would have gone to creating the job, then no advance has been made at all.
There is an embedded assumption in Reich’s scenario that not only seems true, but is. For this appears to be the universal rule: people, rich or poor, try to meet their most urgent needs first, consuming to stave off hunger first, then to stave off malnutrition, the to satisfy more aesthetic cravings; folks marshal their resources to fend off homelessness, then lack of good clothing, etc. etc. Saving for tomorrow (or tomorrow’s morrow) is what you do after you have covered the basics. This is why Reich thinks that new money in the hands of the poor or the middle-class swath will lead to immediate spending. Because their needs are more immediate. The more wealth you have, the more likely you are to save. And invest.
But Reich’s little scenario has a flaw in it. What is it? Because the poor are more likely to spend (we both agree, Reich and me) than the rich are, by taking wealth from the rich you are decreasing the stock of wealth that would likely be devoted to risky endeavors. Like being induced by possible profit to ramp up a business enterprise, hiring on more people.
By fixating on the wealthy as targets, he has also targeted job creation itself.
His assertion to the contrary is merely that: assertion.
“Inducing” production by having wealth to trade (money to spend) is not production itself. Consumption is not production. It is not creation. Consumption is the final stage of commerce, wherein all that added value in the production process (including trade by middle-men) is, as J.-B. Say put it, “the destruction of value.” Production, when done right, produces value. And that value is finally consumed.
Consumers qua consumers do not create. Producers qua producers create. Reich inverts this and calls it profundity.
Reich, by aiming to rob from the rich takes from them their most vital function: providing the capital for creating goods that, in a free society, are mass produced for the masses.
What Reich misses in all this is the problem of relative prices. Businesses try to set prices that people will pay. That includes labor, too. That is, wages must be high enough to induce a consumer off his ass and go to work.
We live in troubled times, now, economically. There is, like in the 1930s, mass unemployment, endemic unemployment. Permanent unemployment. Much of this is the result of the boom-and-bust cycle in business activity, caused mostly, I believe, by bad monetary and banking policy, and cheap credit. This easy money induced (heh, there’s that word again!) businesses to invest in processes that couldn’t be sustained. So they went bust. And the financial system took a huge hit. And government got involved at every level, in even more intrusive and destructive ways than usual.
One way government messed things up is by trying to prop up labor prices (wages) and other prices. So Reich’s panacea, increased minimum wages, is the last thing we want.
Now, I know: It sounds good, “the minimum wage,” because it sounds like you have given everybody a wage increase. And if that were true, fine.
But what has happened is a labor price floor has been mandated, prohibiting lower rates. So, those who keep their jobs have more money. But those who lose their jobs, or who don’t find jobs because they are increasingly scarce at the new, higher rate, are penalized.
The poverty of Reich’s myth-busting argument can perhaps best be seen in his proposals.
2. The critical choice is between the “free market” or “government.” Baloney. The free market doesn’t exist in nature. It’s created and enforced by government. And all the ongoing decisions about how it’s organized — what gets patent protection and for how long (the human genome?), who can declare bankruptcy (corporations? homeowners? student debtors?), what contracts are fraudulent (insider trading?) or coercive (predatory loans? mandatory arbitration?), and how much market power is excessive (Comcast and Time Warner?) — depend on government.
This is a point that has a modicum of merit. Free markets are unregulated markets in the sense that they have no prohibitions on trade, or mandated (coerced) trades, or price floors and ceilings set. That is what is meant by a “free market.” But markets do require a legal (and political) substructure. That substructure defines rights to property, and defends those rights. Even some anarchists call this level of institution “government” — they just think the government should not have taxing power or an ability to force someone to sign up for the service in providing rights protection. So if an anarchist can agree with Reich on this, what is his point? Reich is no anarchist.
Reich is actually playing fast and loose with dichotomies. Like with his conflation of production and consumption, above, here he is trying to say “free markets require government — so shut up about the dangers of government, you laissez faire dopes!”
Well, there is a difference between laissez faire (French for “let them be”) and dirigisme (French for “control”), and that difference pertains to the scope of government. Laissez faire requires government to be limited by a rule of law. Dirigisme, as F. A. Hayek ably argued in The Road to Serfdom, necessarily erodes that law, because government bureaucracies insert themselves into all processes, always meddling. A rule of law concentrates on bringing order to the means, on establishing limits to action; central planning, whether by bureaucracies or directly by legislatures or dictators, is concerned with the ordering of ends. Under laissez faire, you take care of the means by government; under dirigisme, you take care of the ends by government. Or try to.
The modicum of a point that Reich has, here, is used to deceive. He is trying to fool people into thinking that very different things are not different because they share an element in common. But the differences remain. And since I have taken to using the old French terms, let me just say, Vive la différence!
3. We should worry most about the size of government. Wrong. We should worry about who government is for. When big money from giant corporations and Wall Street inundate our politics, all decisions relating to #1 and #2 above become biased toward those at the top.
Once again, I begin by agreeing with Reich. The problem of government isn’t size as such. It is proportion. Scale.
And let us go further with Reich: we should worry about who government is for. Yes. Undoubtedly.
It should be for everybody — everybody willing to forgo gains from plunder for gains through co-operation. The basic “moral deal” is a reciprocal agreement not to exploit, but to deal straight. Government should apply the same set of rules to all.
And that is what laissez faire does. It defends the rights of all. And by limiting coercion to the defense of just those rights, everything else is let be, decided by the people who are valuing, acting in society.
By forbidding governmental institutions as well as businesses and individuals from stealing, the laissez faire rule of law prevents a parasite class from developing. A parasite/predatory class.
By forbidding coercion and duress in the making of contracts, proscribing price floors or ceilings, and making no room for the allotment of privileges, government grants no advantages to some at the expense of others.
Reich, of course, immediately wanders off, talking about lobbying and donations in politics. In this, he evades the real issue: the reason those groups do all that lobbying, all that influencing. The reason is clear. When government is allowed to decide anything, any trade, any rate, any level of plunder (taxation), any granting of favor, everybody has cause to defend himself, and then, further, opportunity to obtain specific advantages that others don’t.
When everything is permitted in theory, everybody scrambles to get special permissions in practice.
For some reason, modern progressives play the part of witless Caliban, unable to look in the mirror and see the monster for what it is. It is they who have eroded any constitutional limits on government taking and giving, and have thus unleashed the whirlwind. It is they who allow some rich folk, and some businesses, to gain the upper hand in the marketplace. Why? They have replaced free markets with managed markets. This political swap has real-world consequences. Managed markets entail a political bidding war for who gets to control management, and thus determine winners and losers.
Robert Reich thus proves himself a useful idiot of the class of people he says he fights against, “the rich.” (Or perhaps not so “idiot”: he is well-paid for his assistance.)
Please, please, do not buy the brummagem he is selling. Do not allow yourself to become the useful idiot of a useful idiot.
If you want to restrain the forces of class warfare and plutocracy and what Thomas Jefferson called “the parasite economy,” opt for a rule of law.
That is, opt for laissez faire.