Why Robert Reich is Both Right and Wrong

August 15, 2011

I’ve seen this 2 minute economic summation from Robert Reich floating around in a bunch of different places and it has bugged me, so I’ve been trying to figure out why. Reich has clearly thought about this a lot, but my first reaction is that nobody can really explain what’s going on in 2 minutes. After watching it, I still think it’s impossible. Here’s why:

My biggest problem with his quick thinking is that most of those super rich he talks about in the last thirty years earned their money. The economy since 1980 has been a knowledge economy, and that doesn’t follow the more traditional daddy model of wealth creation. In large part, those super rich didn’t take away wealth from the average worker to get their money. They innovated and prospered, and so did the average consumer. Take a look at the Forbes 400 as an example dataset. Look where all that wealth came from - 45 alone are from Technology. You are richer now because Steve Jobs made billions on iPods. I am richer now because of Page and Brin’s search engine. They made the world better, not worse. A lot better. Why shouldn’t they prosper? Why shouldn’t the early Googler millionaires prosper? There will always be exceptions to this - I count 3 billionaires who made their money from casinos. We should be willing to accept that, given the huge upside from other wealthy folks. And even the casino owners are typically shrewd businessmen who worked for their money.

It sort of makes sense to me that the average worker salary has remained fixed when adjusting for inflation. They’re the average. Their great gain in wealth comes not from a huge increase in wages, but from what those wages are able to buy. Their productivity, as the average, may not warrant higher wages. Those workers who can make great gains in productivity (we’re talking orders of magnitude, not small percentage increases), they’re the ones who make the tremendous leap in income possible today.

Take this manufacturing tale as an example. Certainly an average machine operator in a plant doing good work should earn a respectable wage. But say there’s another worker who really knows his stuff. He understands how the machines operate intimately and has some improvements to suggest. So he seeks a machine design firm and goes into business building the next generation machine that improves plant productivity 20% and drops machine operator error 15%. He has increased not only his own wealth exponentially, but also the capability of the companies that use his machines, and the consumer who will now except a lower price for the same product because it costs less to make.

The next problem is the statistical model of saying that the super rich own more of the wealth in the country. Well, yeah. In a system of only positive numbers, the only place large variation happens is when you get farther away from zero. This sort of statistic is a red herring. The very rich got rich faster - the world has changed quickly - but the average person has gotten richer too, if not in inflation adjusted wages, than in what those wages can buy. Look around at all your gadgets and tell me that’s not true. Our minimum standard of living is far higher than 1980.

The taxes is where I start to agree. Our tax code just SUCKS. It’s 9,000 pages. If you’re not using an accountant, you’re missing out. If you don’t have some way to use capital gains, you’re missing out. FICA only goes up to $106,800 in payroll. And the top tax bracket hits at “only” $379,150. In a country with millions of millionaires, that’s just not enough granularity. There absolutely should be a higher tax bracket for the super rich.

But, saying the rich don’t pay their fair share is ridiculous. Reich says the top 1% own 40% of the country’s wealth. They also pay 34% of all the income taxes. The top 5% pay 54%. The bottom 50% of earners, literally everyone below average, pays less than 5% of taxes total. (2002, from US Treasury Office of Tax Analysis)

Budget deficits are definitely a big problem today. But the discretionary spending examples he provides - schools and roads - are superfluous. The big problems are the old standbys: Social Security, Medicare, Medicaid, and our two wars. The wars have a guaranteed sunset to their cost (at some point), so it’s important that we don’t get distracted by the effect that they make in the next five years. The big entitlement programs, on the other hand, are enormous and have no end in sight. Our budget deficits are a problem, but it’s not just low taxes that are the problem.

I take “vast middle class” to mean the huge number of people in between those below the poverty line and millionaires. All these people aren’t one big class, there’s too much variability.

The phrase “unable to borrow as it did before” is a really veiled point. The whole reason the middle class is described as the driver of the economy is it’s purchasing power, which is driven directly by the debt the middle class is willing to take on for it’s lifestyle. Do you like this conclusion? I don’t. If the middle class drives the economy by “buying and borrowing”, then there’s a cyclic argument to the very debt crisis that we’re in now.

Oh that’s right, the Fed can print money whenever it’s needed. Who cares about our tax revenue, bring on inflation!

There’s a lot he’s right about, especially the changes in the economy since 1980 (in my mind, a net positive) and the problems with taxes. But my main conclusion is actually unrelated: Left-minded public figures persuade the middle class (and thus the vote) by catering to their perception of self-importance as the main consumer-driven, debt-driven economic force. Meanwhile, right-minded public figures persuade by catering to the independence of the middle-class. Our stand-off between entitlement programs and taxes at this point is just a symptom of the fight for elected offices.

The full 2:15 video:

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