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Article posted Jan 31 2012, 7:35 AM Category: Economy Source: Rod Rojas Print

The Seven Lies of Robert Reich

by Rod Rojas

Robert Reich who was secretary of labour under Bill Clinton wrote an article that he called "The Seven Biggest Economic Lies". I intend to show the reader how deeply flawed this article is in the hopes that sound economic principles may get the attention that they deserve. I will not take his statements out of context but rather quote them in their entirety.
Robert Reich's writes: 1. Tax cuts for the rich trickle down to everyone else. Baloney. Ronald Reagan and George W. Bush both sliced taxes on the rich and what happened? Most Americans' wages (measured by the real median wage) began flattening under Reagan and have dropped since George W. Bush. Trickle-down economics is a cruel joke.
If you cut taxes and keep spending like a drunken sailor like G.W. Bush and Reagan did, you need to make up the difference by either printing money or borrowing, which are forms of taxation as well. So in fact, using those two presidents as examples of why low taxes don't work is inaccurate. Money printing and borrowing are less visible than outright taxation so politicians can claim that they cut taxes while taxing us through the back door.

On the other hand if you really cut or eliminate taxes, and at the same time reduce or eliminate government spending, there will be more accumulation of capital which leads to higher real wages.

About 100 years ago, about 98% of the population worked the land in food production. Today, farmers in advanced economies have all kinds of machinery and technology which has made them more productive. This has a twofold effect of improving the earnings of farmers and lowering food costs for the entire population. People will object by saying that farmers today do not earn much, but if you compare the standard of living of a farmer today with that of a farmer 100 years ago, you will understand what I mean.

This whole process of wealth creation is made possible through the accumulation of capital which is what farmers in poor countries do not have. Today only 2% of our population is engaged in farming thereby allowing the rest of the population to produce goods and services that were not available or were too costly for widespread consumption back when we were all farmers.  This higher productivity leads to a better standard of living for everyone and government taxation impairs this process.
Robert Reich's writes: 2. Higher taxes on the rich would hurt the economy and slow job growth. False. From the end of World War II until 1981, the richest Americans faced a top marginal tax rate of 70 percent or above. Under Dwight Eisenhower it was 91 percent. Even after all deductions and credits, the top taxes on the very rich were far higher than they've been since. Yet the economy grew faster during those years than it has since. (Don't believe small businesses would be hurt by a higher marginal tax; fewer than 2 percent of small business owners are in the highest tax bracket.)
Ask yourself: Would you put your capital at risk and work hard only to retain as little as 9% of what you produced?  When people are faced with such punitive tax rates they take their capital elsewhere, avoid taxes, or stop working altogether.

Reich believes that the rich stood idle while the government took 70 to 91% of their income, which is very naive. Not only were there endless loopholes in the tax code, but each time taxes are raised the rich put their money into tax free investments. Let us not forget also that those were the golden days of bank secrecy and offshore money heavens, and taking money out of the country was very easy.
Robert Reich's writes:  3. Shrinking government generates more jobs. Wrong again. It means fewer government workers -- everyone from teachers, fire fighters, police officers, and social workers at the state and local levels to safety inspectors and military personnel at the federal. And fewer government contractors, who would employ fewer private-sector workers. According to Moody's economist Mark Zandi (a campaign advisor to John McCain), the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs this year and next.
If this were true then why not employ everyone in the government.

Mr. Reich talks as if the government paid for all those jobs with resources dropped from heaven. The truth is that every dollar spent by government is a dollar that has to be taken from somewhere. If I spend my money on a suit, or if I invest it, I also generate jobs, and they will be productive jobs. I don't need the government to spend the money for me.

Governmental employees and contractors piggyback their jobs on the rest of us.
Robert Reich's writes:  4. Cutting the budget deficit now is more important than boosting the economy. Untrue. With so many Americans out of work, budget cuts now will shrink the economy. They'll increase unemployment and reduce tax revenues. That will worsen the ratio of the debt to the total economy. The first priority must be getting jobs and growth back by boosting the economy. Only then, when jobs and growth are returning vigorously, should we turn to cutting the deficit.
There are so many economic fallacies concentrated in that short paragraph! I will simplify my answer by asking you to ask yourself some simple questions: When you have personal economic troubles, do you spend more? Do you borrow to spend more?

Remember, economics works in exactly the same way for one individual, a family, a company or a country. What is true for one individual is true for a country. To claim the opposite is like to claim that there is no gravity in government offices.
Robert Reich's writes:  5. Medicare and Medicaid are the major drivers of budget deficits. Wrong. Medicare and Medicaid spending is rising quickly, to be sure. But that's because the nation's health-care costs are rising so fast. One of the best ways of slowing these costs is to use Medicare and Medicaid's bargaining power over drug companies and hospitals to reduce costs, and to move from a fee-for-service system to a fee-for-healthy outcomes system. And since Medicare has far lower administrative costs than private health insurers, we should make Medicare available to everyone.
Mr. Reich talks about "bargaining power" but why doesn't this great bargaining power work with the military industrial complex?  Or with the post office which the government could never run profitably in spite of having a monopoly?

The reality is that government never does anything efficiently and always uses its leverage to benefit special interest groups which is why healthcare is so expensive. Why do you think insurance companies supported Obamacare?

When the government restricts the number of medical schools we can have, the number of doctors we can have, or if it restricts supply of services with licensing hurdles, it benefits corporations and professional groups at the expense of the rest of the population, at your expense.

If we want lower costs and better service, we need more competition, not less.
Robert Reich's writes: 6. Social Security is a Ponzi scheme. Don't believe it. Social Security is solvent for the next 26 years. It could be solvent for the next century if we raised the ceiling on income subject to the Social Security payroll tax. That ceiling is now $106,800.
Well, actually, Social Security fits the definition of a Ponzi scheme to the letter, which is "an investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation".

Mr Reich claims that Social Security "is still solvent" for another 26 years, but this is a feature of all Ponzi schemes: they are solvent for a while until their new incoming money is less than the payouts. Bernie Madoff was "solvent" until he no longer was able to pay. Raising the ceiling on income merely postpones the inevitable end of all Ponzi schemes.
Robert Reich's writes:  7. It's unfair that lower-income Americans don't pay income tax. Wrong. There's nothing unfair about it. Lower-income Americans pay out a larger share of their paychecks in payroll taxes, sales taxes, user fees, and tolls than everyone else.
For once I agree with Reich. It is not unfair that the lower-income classes don't have part of their income taken from them by force, this is a great thing.

What is unfair is that the rest of the population is subject to this theft. Remember that slaves did receive part of what they produced in the form of food and shelter. The difference between taking 90% of someone's income as in the case of slavery, and taking 30% in taxation is only a difference in degree.

Most of the failures in Mr Reich's reasoning have to do with not looking at the unseen consequences of the policies he advocates. The reader may be interested in Bastiat's famous essay "That which is seen and that which is not seen" which is a wonderful explanation of this common fallacy.
__
Rod Rojas is a holder of the Canadian Securities Course designation and performs as a financial adviser in personal, corporate, and public-policy matters.





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