Friday, February 14, 2014

Correcting Robert Reich's "three biggest economic lessons"

In a recent blog post Robert Reich lists and discusses the 3 biggest economic lessons since WWII. I am going to comment on each one in turn and show how they are not really lessons at all, but simply Mr. Reich once again doing bad economics and misleading his readers.

Lesson 1:
First, America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth.

I have heard that the real job creators are consumers from several liberal pundits over the last 6 months or so, mostly in arguments for raising the minimum wage or increasing transfers to the relatively poor. It sounds good until you start using your brain and really thinking about it; how can people consume stuff unless it is first produced? Growth and jobs are produced because entrepreneurs see wants and desires that are currently not being satisfied. The entrepreneur then creates a good or a service to satisfy these unmet desires. The consumer learns about this new good/service and how it can make his life better off by fulfilling his previously unmet desire and so he purchases it for consumption. That is a story that has a logical order and fits reality. I do not see how Mr. Reich's proposition, that the consumer creates jobs by consuming, can be the starting point. Something can only be consumed if it is first produced. Thus the entrepreneur, the producer, the capitalist is the TRUE job creator and the producer of economic growth. That's why economists who want growth want to reduce regulation in order to free the entrepreneur and allow him to create goods and services that will make our lives better off.

Lesson 2:
Second, the rich do better with a smaller share of a rapidly-growing economy than they do with a large share of an economy that’s barely growing at all.

First of all, the same is true for the poor. The question is not whether the rich (or poor) would benefit from growth (of course they would) but whether taxing the rich will lead to actual growth. Moving money around from one pocket to the other does not make a person wealthier. The same is true for an economy; taking money from one group and giving it to another does not create any new goods and services and thus cannot make people on average any better off. Mr. Reich's mistake from lesson 1 has led him to believe, along with others, that if money is taken from the rich (the entrepreneurs and capitalists) and given to the poor  the poor will consume and create jobs. But as I pointed out above this is nonsensical. Taking money from the rich, who save and invest it, will hurt growth in the long run because as any economist will tell you savings and investment is what increases economic growth. If Mr. Reich wants a rapidly growing economy he should not advocate taking resources from the entrepreneurs and capitalists who actually grow the economy.

Lesson 3:
Third, higher taxes on the wealthy to finance public investments — better roads, bridges, public transportation, basic research, world-class K-12 education, and affordable higher education – improve the future productivity of America. All of us gain from these investments, including the wealthy.

The government quit doing these things with any sort of effectiveness a long time ago (assuming they ever did of course). The chart below taken is based on data from The Office of Management and Budget shows where the nation's tax dollars really go.

 Currently 74% of our tax dollars go to Social Security, National Defense, Income Security, Interest on the debt, and Medicare. If taxes are raised it is not going to education (2.57%), transportation (2.63%), or general science, space, and technology (0.82%). Social Security and Medicare need all the money they can get. Increasing taxes on the rich will not even cover the cost of those programs and the U.S. will continue to face an increasing national debt unless spending is curtailed. There would be plenty of money for transportation and education if politicians would cut spending on entitlements that have gotten out of control. The government does not need more revenue it needs some self control. Here is a breakdown of spending by the dollar:


 Liberals like Mr. Reich use the investment ploy as a way to sucker people into increasing tax dollars that will inevitably be spent on transfer programs and entitlements. The government is a bad steward of our money and should not be trusted to invest in things that will increase growth. Both democrats and republicans have a solid track record of squandering money on special interests, cronyism, and other wasteful spending. Even if Mr. Reich is correct that we would all benefit from more spending on transportation and education the reality is that the money will never go there.

Hopefully this post clears up the falsehoods presented by Mr. Reich.

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