Liberal Economics -- Insular, Misguided, and Obsolete

A prominent Democrat has unwittingly provided an in-depth view of all that is misguided, incorrect, and vacuous regarding the ultra-liberal perspective on the economy, business, and the global market. In a recent op-ed piece, "How to End the Great Recession" by Robert B. Reich (September 2, 2010, The New York Times), the former Clinton cabinet officer, pundit, and Berkeley professor offers little of value in the way of solving the current economic problem, but the piece does showcase the limitations of contemporary American liberalism.

Mr. Reich asserts that "[t]he national economy isn't escaping the gravitational pull of the Great Recession. That's because the real problem has to do with the structure of the economy, not the business cycle." 

The critical point that is missed is the underlying reason why low interest rates, borrowing costs, and small business tax credits are not working. And that is the paralyzing uncertainty created by the Obama administration. 

The seizure of large segments of the automotive industry and the redistribution of investor assets to the UAW created an exceptionally troubling precedent. 

The massive Obamacare bill holds extremely serious implications. Employees and businesses alike will be paying more for less. 

Further, uncertainty as to long-term value in the housing market has destroyed the ability to collateralize many real assets.

All of this has caused many businesses to hold off on expansion or hiring. It has even impacted the normal replacement cycle for capital goods. 

Mr. Reich comments that "[t]his crisis began decades ago when a new wave of technology ... made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage." This is not what occurred.

Following the Second World War, Europe and Japan lay in ashes. Through the Marshall Plan, they were able to rebuild, and in the process, they created a great demand for American products. Here at home, four years of privation resulted in incredible pent-up demand for goods and housing. New products helped fuel the boom, as did the mass migration to the suburbs, the Cold War, and later, the "space race." And the population was expanding. The postwar baby boom created immediate demand and the promise of a large future market. 

By the late '50s, however, Europe and Japan had rebuilt their industrial base. They also enjoyed lower wage rates and overt governmental support. Their American counterparts continued to operate with badly outmoded facilities and methods and had to deal with increased labor costs.

At first, Americans laughed off the threat, but then things took a more serious turn.  As competition intensified, industry contracted and jobs were lost. 

American manufacturers also had to contend with ever-growing government interference and regulation. Compliance was expensive, and passed-on costs translated into a further loss of jobs. 

Mr. Reich mentions the entry of women into the paid workforce as a means of keeping up with spending and the fact that "everyone put in more hours." 

The entry of women into the workforce was spurred by more than a desire to keep pace with spending. Many opted for careers as a means of personal fulfillment. As to the idea that "everyone put in more hours," it was changes in technology and lifestyle that brought people into positions that were no longer based on an eight-hour workday.

Mr. Reich states that "[w]hen American families couldn't squeeze any more income out of these two coping mechanisms [women working and longer hours], they embarked on a third:  going ever deeper into debt."

Whether necessary or not, many government policies (promulgated by both Republicans and Democrats) certainly encouraged it, and in many areas, both technological change and cost inflation mandated it. 

Reich states, "[T]he debt bubble burst. ... Even if nearly everyone was employed, the vast middle class still wouldn't have enough money to buy what the economy is capable of producing." Mr. Reich has brought up a point and a problem. Thanks to technology and the growing world economy, in many sectors, there is a vast over-production capability. 

At the same time, some formerly significant global markets are shrinking and population demographics changing. In Japan and America, population growth has lessened, and the base has aged. Markets that could serve older individuals, such as health care, may now be so contaminated by government interference that they are unable to function efficiently. 

In decrying the "rich," Mr. Reich states that they "spend a much smaller proportion of their incomes than the rest of us." Even so, their spending patterns are significant and contribute largely to the economy. Many are small business owners, and if their income isn't spent, it is at least invested in their businesses -- especially in slow times.

Mr. Reich states that "the rich don't necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe. ..." Again, this neglects the reality of a world market and, just as money invested in American companies does not all stay in America (check the stimulus program), so money invested offshore frequently comes back, in part, to the United States. So do the returns on the investment. 

Mr. Reich's solutions to the current problems include "extending the earned income tax credit all the way up through the middle class, and paying for it with a tax on carbon." Any tax on carbon will raise energy costs across the board. It will affect the poor and the middle class most of all and make our businesses less competitive.

Other ideas include making "early childhood education ...  more widely available, paid for by a small 0.5 percent fee on all financial transactions. Public universities should be free; ..." 

In the real world, early childhood education programs are a lot less relevant than expanded and improved vocational and career training efforts, and this is where the dollars should be placed. A tax on financial transactions would be a burden on citizens and businesses alike.

As to free public universities, a far better goal would be to make the educational system more efficient all around, and a big part of that would involve reining in teachers unions and runaway administrative costs. 

That we can plan a national economy without considering the world market, changes in existing populations and markets, or the historical antecedents that bought about the present situation is patently absurd and clings to obsolete notions.

Nothing is more emblematic of backdated liberal thinking than the term "shovel ready" used to sell the stimulus. Today, roads are built with multimillion-dollar equipment that requires an operating engineer's license, and individuals laid off from jobs in white-collar pursuits could not be considered "shovel ready" even if the programs were.

Ultimately, the idea that recessions can be fixed with ever-increasing taxation is fatuous on the face of it. Increasing the amount of taxation and redistribution of income to a non-productive class will not stimulate business -- it will destroy initiative.