The Rise and Fall of the Reich

  No- this is not an entry about German history, Hitler, or Nazism.  Instead, Bill Clinton’s Labor Secretary, Robert Reich, has an article circulating that was originally published in The Nation.  It has showed up in other venues like Politico, Huffington Post, Realclearpolitics, and other on-line sources.  The gist of his argument is that the underlying cause of the financial crisis is the inequality in income between the haves and the have nots.  Drawing on historical economic data, Reich notes that in 1928, the richest 1% of Americans received 23.9% of nation’s income which was almost identical to the ratios in 2007.  In the period in between- largely attributable to Democratic programs according to Reich- that disparity became less- as low as 9%.  In short, he argues that Democratic programs like the New Deal, the GI Bill and the Great Society successfully redistributed wealth equitably in the United States.  But, he hints that it was the policies of Reagan and later George W. Bush that reversed those gains.  He cites the sometimes negative Census or Labor Department reports showing that median American household income declined for the first time in a specified period or something to that effect.  However, all this is relative.  For example, from 1967 to 2008, median income levels for the lowest 10% increased 24.6% while in the same time period, the average at the median level increased 24.8%.  Among the highest 1%, the average increase over this time period was a slightly higher 32.2%.  Admittedly, among the top 10%, median income increased 63% over this time period.  Unlike Reich, we can look at this one of two ways.  Through Reich’s myopic glasses, it means that Republican policies allowed for a greater concentration of wealth among the already wealthy.  Or, we can look at it from a different light- namely, more households moved into the higher income percentiles over this period.

     Reich states: “When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing.”  Hence, the only way to boost personal spending power, he argues, was for the average consumer to use their homes as ATMs.  Then he seems to negate his own argument: “The problem isn’t that typical Americans have spent beyond their means.  Its that their means haven’t kept up with what the growing economy could and should have been able to provide them.”  He states that when wealth becomes concentrated at the top, those people invest that wealth in whatever assets seem most likely to attract other investors causing those asset prices to soar, leading to bubbles, leading to bursts, leading to worthless collateral, leading to financial crises.  While it may be true that the wealthier invest in assets like this, they do so at their own risk.  The problem is when those risks draw in innocent players along the way.  No one denies that wrecklessness on Wall Street led to this financial crisis and credit freeze and even Republicans, except the strick laissez-faire capitalists, agree that regulatory reform is needed to avert this systemic risk, or at least mitigate it and/or shield the innocent players- the so-called Main Street players.  But the difference between Republican beliefs and Democratic beliefs is that forced redistribution of wealth is not the means to those ends.

     Reich argues that technology- arguably an area where the United States excels- is actually the partial undoing of America.  Technological advances reduced the costs, he argued, of outsourcing jobs.  Other technological advances merely displaced workers (bank tellers, telephone operators).  Interestingly, Reich uses as examples of these jobs replaced by technology low-paying entry level positions.  Yet, if unemployment is low while entry level jobs are being deleted while the population (and labor force) are growing, does it not make intuitive sense that more people are entering the higher paying jobs?  Would you rather be a telephone operator at $8.50 and hour or a telecommunications programmer at $16.50 an hour?  Reich overlooks that as the low paying jobs were being eliminated higher paying jobs were being created.  This while he laments and pines for the return of operators, bank tellers and service station attendants.

     Reich then goes into some solutions that should have been enacted during better economic times, which essentially boil down to an even bigger government and higher taxes.  He suggests:

     (1) giving employees greater bargaining power to get higher wages especially in areas sheltered from global competition concerns (the hospitality industry, big-box department stores, etc.)  In short, make unionization easier through crap like Card-Check and the like.  If the workers themselves reject the union, then there must be something wrong with them so the government is obligated to step in and make it easier to unionize.  Reich should ask the tax payers of New Jersey and California how well that worked out for the public worker unionized sector.

     (2) “safety nets could have been enlarged to compensate for increasing anxieties about job loss.”  I like this one.  Potential unemployment insurance?  This tends because although Democrats like to point to Clinton’s budget surpluses, they were achieved through welfare reform which went against this amorphous suggestion from Reich.

     (3)  unemployment insurance for part time work- of course, he doesn’t explain where the money would come from for this expanded pool of potential unemployed.

     (4) wage insurance if pay drops- again, he fails to, at this point, mention how one pays for this program.

     (5) assistance for job transition- unfortunately, the Federal government has some 38 programs in several Executive Departments, not to mention state programs, that are dedicated to this.  Perhaps better coordination is required in which case we have the right man in the Oval Office since he could always appoint a Czar of Job Transtion Programs to do that.

     (6) insurance for communities that lose large employers so that they can attract new employers- here Reich fails to mention why large employers move out of communities- namely, the cost of doing business in those areas due to taxes, regulations, etc.  Again, Reich should visit New Jersey where taxes and regulations have driven more than $70 billion in capital out of the State in a decade.  Or perhaps, he should visit Detroit where ridiculous union demands and wages and government mandates on car makers destroyed the car industry driving it to more business-friendly states and countries.

    (7) big profitable companies could have been barred from laying off large numbers of employees at one time-  so Reich wants the government to step in and make the tough business decisions that businesses have to make every day.

    (8) they should have been required to pay severance pay like a year of wages:  this is not surprising since it roughly mirrors his pro-labor philosophy where, for example, auto workers are paid for reading the newspaper.

     (9) America’s trading partners should be forced to establish minimum wages: unfortunately, that would have increased the cost  of goods in which case Reich would probably call for price controls (they worked real well in the 1970s under Nixon, right?).

     (10) if more money was needed, taxes could have been increased on the rich.  So we finally get to the crux of the matter.  We penalize success by taxing the successful and the profitable.  In the mind of Reich and so many liberal Democrats, profit is necessarily bad and needs to be redistributed to the have nots through a series of nice sounding, feel good proposals and programs.

     I may be in the minority here, but when it comes to executive compensation, I have no problem with rewarding profitable behaviors based on risk-aversive business practices.  In fact, I don’t care if their bonuses equal 300 times the salary of their average worker…if they are successful.  I have a problem with executive compensation and bonuses going to people who take an average company and drive it into the ground, or who cook the books to show profits where none exist (I also realize there are existing regulations and fraud statutes to address this).  Success should be rewarded.

     Unfortunately, in Reich’s reich, the only solution is a redistribution of wealth under the heavy hand of government control and regulation.  This works for Hugo Chavez and Fidel Castro and a few other socialist tyrants out there.  But what Reich argues for is a scapping of a free market capitalist system and replacement of it with by government control.  That control is achieved through the tax code.  Success is penalized.  Profit is not good.  In Reich’s reich, corporations are there to fill only a social need to lift the masses from the oppression that they wrought on the poor workers.   Sounds like socialism to me. Unfortunately, he has an ally in the White House in Herr Obama and his many czars. 

     Fortunately, we have a Constitution that dictates Congressional elections every two years and a Presidential election every four years.  We can and should cease the march towards socialism- Obama/Reich style- this November and finish it off in 2012.  Otherwise, there may be the rise of the first reich in the United States.