Robert Reich Jumps Off a Cliff

Last night on NPR’s Marketplace segment, Robert Reich gave his commentary on the European debt crisis and the supposed results of the austerity measures taken to correct the crisis there. From the onset of the first sentence of Reich’s opinion, I was appalled and disgusted by what I heard. Let’s break down this rather ignorant synopsis of Mr. Reich’s and see where he’s wrong on so many levels.

We’ll begin with the first paragraph; the one that set me off so badly:

We now know austerity economics is bad for weak economies facing large budget deficits. Much of Europe is in recession because of budget cuts demanded by Germany. And as Europe’s economies shrink, lower tax revenues there will force their debt loads proportionally higher, making a bad situation worse.

Firstly, why is it that we “now” know? It seems a bit early to conclude what impact any of the meager austerity policies in Europe have done, much less that they were successful in accomplishing their intended goal. Any economist, regardless of what stripe they wear, would admit that economic policy can take years to play out fully. This detachment of chronology from crisis is so pervasive in media today because it’s easy to make off-the-cuff remarks that portray cause and effect in an immediate sense.

In other words, merely cutting a few million Euros out of a multi-trillion Euro crisis and expect fruits to appear as soon as the tiny seed is planted is not only unrealistic, but is ignorant of economic processes. Even the US housing crisis was built up over the span of 15 to 20 years, stemming from policy in the early 1990’s that enabled illegitimate borrowers from obtaining credit to purchase homes. So, Reich starts out by making an unfounded statement and showing that he is just all-too-eager to claim Dead on Arrival.

The way to avoid this austerity trap is to get growth and jobs back first, and only then tackle budget deficits.

The U.S. hasn’t yet fallen into that trap, but it could soon. We could slide into a new recession early next year if the Bush tax cuts end as scheduled on January 1, and if more than $100 billion is automatically cut from federal spending, as required by Congress’s failure last August to reach a budget deal.

Predictably, Capitol Hill is deadlocked. Democrats refuse to extend the Bush tax cuts for higher earners and Republicans refuse to delay the budget cuts.

Jobs and Growth. It seems to always come down to these two factors, doesn’t it? Both sides of the aisle talk about jobs and growth, but are the policies enacted by either party promoting the intended goal, or are they exacerbating the overall problem?

The “conventional wisdom” is that government is the author of employment; that the state can miraculously create a job with no consequences. The same for growth by injecting “stimulus” into financial institutions and select industries and BAM, the economic machine is primed and ready to go.

But this is a fallacious assumption. The state can’t really create anything for one simple reason:  all the resources used to create jobs or growth, especially money, is taken from other places, namely taxpayers and property owners. The prior owners of money and property are now poorer because of it, and the government is left sole responsibility of dictating where those resources are allocated. This is a gamut for politicians. Which area should they concentrate on? What industry should be the proud recipients? Which “class” of workers should get employment first? These are all hard questions to answer because the ultimate survival of any of those expenditures lies with the consumer. Simply put, the consumer (ie, the marketplace) decides who rises and who falls in the market. If government funnels wealth into an area of the economy that is largely not supported by current or potential consumer demand, then the whole policy runs the risk of crashing. This is the true definition of boom and bust that’s so lauded in the media today.

The uncertainty surrounding the choices needed causes problems. What mechanisms does the government have to properly and successfully invest garnered funds into a select area? I would argue no more than any other individual or group does in the open marketplace. And because of that, the sole responsibility of growth and job creation lies with each individual in the populous.

Now, I will say that he has one thing correct — that the Bush tax cuts for the wealthy would have an adverse affect on the economy, namely the ability to invest in their businesses (or someone else’s business), effectively stymieing the two things that Reich is setting out to achieve:  jobs and economic growth! So, retaining those tax cuts is a great way to start the path of recovery. But wouldn’t more be even better? Why shouldn’t every American deserve to retain more of their income? Wouldn’t that put more money in the pockets of those with the responsibility of deciding what parts of the economy will succeed or fail? Or, by extension, what businesses expand because of their successes in meeting consumer demand, thereby creating additional jobs and providing more people with their products or services?

In a roundabout way, government garnering wages in order to create jobs and growth is actually saying that they know how to better spend other peoples’ money; that individuals don’t deserve the right to do with their income and property as they see fit. Reich promoting both the tax cuts and a jobs/growth policy is a contradiction.

If recent history is any guide, a deal will be struck at the last moment — during a lame-duck Congress, sometime in late December. And it will only be to remove the January 1 trigger. Keep everything else as it is, the Bush tax cuts as well as current spending, and kick the can down the road into 2013 and beyond.

Which means no plan for reducing the budget deficit.

He’s probably right here, as well. Congress is notorious for compromising on their ideologies and jointly arriving at legislation that does more harm than would either party philosophy being carried out unilaterally. Hopes of that lame-duck session being carried out prior to the elections in November are probably in vain.

I’ve got a better idea — a different kind of trigger. Instead of a specific date, make it the rate of growth and employment we should reach before embarking on deficit reduction.

Say 3 percent growth and 5 percent unemployment. At that point the Bush tax cuts automatically expire, the wealthy pay a higher rate, and $2 trillion in spending cuts begin.

This way we avoid the austerity trap that Europe has fallen into. And we get on with the long-term job of taming the budget deficit when the economy is healthy enough to do so.

A few things are being said here.

Firstly, Reich again makes an assumption — that a weak economy cannot survive any amount of deficit reduction. And this makes it clear that he is ignorant of what really caused the crises present in both North America and Europe; for the former, it was government policy in inflating the housing market beyond consumer demand; in the latter, it was reckless and luxurious spending on social welfare that was unable to be fully propped up by real wealth. The consequence of these public policies is recession. When the level of government investment (ie, artificial investment) outweighs the real demand for a particular good or service, it’s on a course for that “fiscal cliff” that Reich is drawing attention to. In the case of the US housing crisis, the first cliff has come and gone; housing prices plummeted back to somewhat sustainable levels, and new home construction was largely halted for the better part of four years. But the new policies put in place by both the Bush and Obama administrations (and their accompanying legislative bodies) are lining us up for the next cliff on the horizon — a double dip where housing prices and new home construction rise to unsustainable levels once again. After all, that’s the point of all the measures being taken to boost the housing market.

Point being that the reason the crisis exists is because of exorbitant spending levels, and the deficits accrued are proof that we can’t properly afford the government programs and investments that are taking place, much less any further policies that require even more spending.

Secondly, the numbers he pulls out for “goals” for growth rates is arbitrary at best. There’s absolutely no proof that reaching 3% growth and 5% unemployment would set us on a straight path, as if they were magical numbers. Even the way he presents them is as if he just randomly pulled them from his bearded head. Why 3% and 5%? Why not 5% and 3%? Why not 10% and 1%? Hell, let’s go all out and say 100% and 0%! There’s absolutely no reason given for his figures, and this leads me to believe that he doesn’t really have a concept of the economic mechanisms at work here.

Which leads me to my final point — with his suggested formula, Reich is essentially offering the status quo. The thing that irritates me the most about pundits like Paul Krugman or Robert Reich or any of the countless talking heads you see on the news channels is that they are content with the conventional wisdom that the doings of a few groups or individuals without any real power on the macro-economic level have somehow caused all of these problems. The question of “What about past government policy?” never arises. And if it does, it’s laughed off the stage.

So we see here a blatant disregard for thinking outside this mainstream economic box that people like Krugman and Reich are propagating. And so the true economic mechanisms in action are lost on them and the majority of the population that believe what they say. But I digress…

The major economic mechanism at play here is namely that a further increase to spending will result in more debt, and an even bigger hole to dig out of. At what price is Reich or any other “economist” willing to pay to attain an arbitrary rate of 3% growth and 5% unemployment? And, mathematically, are those costs outweighed by the eventual savings of $2 trillion in spending cuts? I would wager that Reich and his sympathizers would resort to the severe near-sightedness that he displayed earlier and simply look at the short-term and immediate effects of the numbers, saying that cost is miniscule to the savings. But this doesn’t factor in the wasted wealth that’s allocated to industries or sectors that eventually crash again due to mal-investment. It doesn’t factor in the additional bureaucracy that is created to oversee the implementation of his plans. And this doesn’t even consider the non-quantitative factors like promoting the businesses of those that end up harming consumers with poor products; the emotional harm done to individuals and families when the business that was promoted via government funds comes crashing down on their heads; or the additional tax burden people will be forced to accept in the years to come.

In other words, the costs are high.

When it all boils down, the advice of these so-called economists is akin to a high school class presidential candidate saying they’re going to get Kool-Aid in the drinking fountains and a “No Homework on Weekends” policy enacted; it’s pie in the sky talk. All the postulating and the throwing around of arbitrary numbers and the lack of reasoning or the lack of analysis is proof of this. It plays into what I said earlier about the belief that government has some divine ability to create and fix and restore. Government is not super-human. And the policies they enact are no better than predatory lending practices or credit default swaps. The only difference is that when the consequences finally catch up to the actors, those private people are usually rendered obsolete through bankruptcy or a horrible reputation. While the public sector simply shrugs it off with a new policy and prettier words.

Everyone seems to somehow continue their faith in the policies of the state. Meanwhile that second cliff is fast approaching, and Robert Reich and his cohorts are the navigation system. It’s just a shame that no one updated the maps on the GPS.

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