by Rob Schwarzwalder
September 10, 2010
Readers of my occasional contributions to this site realize I have written several times about the going economic commentary of former Clinton Labor Secretary Robert Reich.
I do this out of no personal animus: By all accounts, Mr. Reich is a lively, warm, and indisputably intelligent man. However, he is a man whose economic misunderstandings border on the fabulous fabulous in the literal sense, the sense in which Gullivers Travels was fabulous. Absurd, gigantic, the stuff of satire. And just plain wrong.
Last evening, during his weekly Marketplace Radio commentary, Mr. Reich commented on the Presidents plan to provide tax reduction for businesses. Mr. Reich was intellectually apoplectic, reduced to explaining his understanding of the rudiments of the American economy:
The reason businesses aren’t investing in new plants and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity.
Well, Ill grant him this: capacity is related to productivity. However, capacity exists because capital is inaccessible (see below). And then, Mr. Reich persists:
Obama’s proposed corporate tax cuts won’t generate more jobs, because they won’t put any more money in worker’s pockets … Obama’s whopping proposed corporate tax cuts help legitimize the supply-side dogma that the economy’s biggest obstacle to growth is the cost of capital, rather than the plight of ordinary working people.
Two broad observations:
(1) Mr. Reich argues that we should put more money in workers pockets so they will spend more and thereby foster greater demand and thus stimulate corporate output, which means new hires and more jobs.
As usual, Mr. Reich is wrong. Most of the workers to whom he refers already pay, at best, modest taxes. Although I strongly support tax reductions for virtually everyone who pays them, the fractional amount of money a tax cut for the working lower-income (not quite the same ring as tax cuts for the rich, but more accurate) would put in their pockets would do little to induce economic growth.
Or perhaps Mr. Reich is thinking of some kind of direct federal payment to workers, of having the Treasury Department fabricate yet more money and dispense an arbitrary but politically potent amount of it to a favored group. Naturally, this would create more federal debt and serve as an at-best temporary infusion of capital into the economy. Sort of like a fiscal heroin injection.
Heres a better idea: If we lower taxes on corporations and provide incentives (e.g., making the R&D tax credit permanent, as Republicans have long advocated and which the President now suggests) to enhance innovation and improve Americas global competitiveness, companies will begin to hire more employees (i.e., workers, in Mr. Reichs parlance). These people will then start paying taxes, buying things of all types (from new cars to groceries) and thereby stimulate the market through wonder of wonders the private sector itself!
(2) Mr. Reich asserts that President Obama wants corporate tax reductions to lower the cost of capital.
This is part right, but misses the larger point. Corporate tax reduction encourages investment, productivity improvements, and frees up capital itself. A business that is not growing cannot access capital. A business that is growing and private sector growth happens, in large part, when the tax burden is not excessive creates jobs, eases the plight of those in the lower income brackets, and builds a stronger America.
Robert Reich has a marvelously mellifluous voice which is a delight to the ear. His obvious passion for people on the down-side of advantage is compelling. But he is wrong, in fact, philosophy, and policy. Thats what makes him, and his compeers in the American Left, so dangerous.