Thought Experiment
Here is a little film clip about two and a half minutes long, where Bill Clinton’s Labor Secretary Robert Reich lays out our basic economic and political dilemma, using little cartoons.
Robert Reich: Artist and Scholar
Since the clip is from Moveon.org, which we know is at the very heart of the liberal beast, there may be a strong temptation for many to either embrace the argument or dismiss it out of hand. But don’t.
Instead, let’s use this as an exercise on how to test the veracity of two minute elevator speeches. Totally disregarding Reich’s or Moveon’s intentions, we have the following four things we can test and discuss:
- Reich makes what are, in effect, statistical statements (i.e. wages have been flat for workers since 1980). Are these facts themselves true. If not, what is the truth?
- Reich takes groups of facts and draws links between them. Even if the facts are true, are the links of cause and effect that he is proposing reasonable? If not, why?
- Reich selects groups of facts to draw his relationships. He presumably selects the facts that bolster his argument. Are there other facts that should be inserted that modify or oppose his reasoning?
- Reich is making a case from which to draw a certain political conclusion. Is his conclusion warranted by the facts? Or can other conclusions be drawn?
For this experiment, you are only allowed to discuss this clip in terms of these four aspects. In the interests of free speech, something that I would never dare suppress, you can actually talk about whatever you want. But anyone who puts out purely partisan remarks, trollish statements, or non-sequiturs is going to be “cheesecaked” by me. That is to say, I will non-respond to you by posting a line from my late mother’s famous secret cheesecake recipe as a way of acknowledging you without actually engaging you.
Have at it. I think Reich is spot on.
I agree with Mr. Reich. My only question is whether the super-rich,with their increased political clout, are the ones driving the train to lower taxes for the wealthiest people. Is that a fact? I know there are lots of people who oppose increasing taxes on the rich, but as far as I can tell, it doesn’t seem to be the rich themselves. This has actually always puzzled me a little. So, I believe the campaign to preserve low tax levels for the wealthy hurts our economy, but I’m not sure whether the increased political power of the rich is necessarily what’s fueling that campaign.
Fueling the campaign? Some of the rich like the Koch brothers; the libertarian and right-wing think tanks (Cato, the Heritage Foundation, AEI, the Peterson Foundation, etc.). That’s my hypothesis. But I am always surprised at how much poor and middle-class people identify with the interests of the rich and very rich. Where does that factor in?
I question whether it is accurate to say (dot 1) that the economy “doubled in size.” Exactly what quantity has doubled? GDP? If the growth in GDP was fueled by unsustainable consumer debt (dot 6) and irresponsible consumer spending, then the growth was not real growth, but just an illusion. The statistic should be adjusted to account for increased debt.
The implication “growth in GDP should cause growth in wages” (dot 1) is debatable. If the labor the wages pay for is not causing the growth, the wages should not necessarily rise.
I agree with Irene that it is not only the political power of the “super-rich” that fuels the campaign for lower taxes (dot 3). Many people, both rich and less-rich, believe that taxes have an adverse effect on growth. Other people believe using taxation for other than a few narrowly defined purposes is morally wrong. (I do not myself subscribe to this belief.) This, more than middle class fear and division (dot 5), explains why the middle class does not use the power of numbers to effect higher taxation.
I also do not accept the proposition (dot 4) “low taxes imply budget deficits.” The question of spending enters this calculation too. I would say “low taxes and unrestrained spending imply deficits” is more accurate.
Background info about Point #1:
According to the Brookings Institute, the median wages of male workers in 2009 were lower than they were in 1970, part of a wage stagnation trend among men. Women, whose wages had been going up since 1963, are beginning to experience wage stagnation.
http://www.brookings.edu/opinions/2011/0401_jobs_greenstone_looney.aspx
Everyone from Richard Posner to David Frum seem to accept this.
Wages are only part of the picture, however; you have to compare wages to rising costs to see what’s really going on. A reason wages have stagnated is b/c employers are paying ever-increasing health care premiums. Workers are getting “raises” in the form of continued health care insurance, but their ability to keep up with other rising costs (of, say, gas and food) is reduced.
That would have taken Reich’s dots in a different direction, but the pictures would have been no less depressing
Irene said: “My only question is whether the super-rich,with their increased political clout, are the ones driving the train to lower taxes for the wealthiest people.”
Reich is doing a little sleight of hand, which he has to do in order to keep his presentation short. He talks about the “super-rich” and even refers to 400 of them, which is a reference to a group of individuals. Then he refers to the middle class, which is a reference to a class. When he talks about the state of the middle class, he is talking about it in sociological terms. Politically, he wants the middle class to think of itself as a class so that it will organize. But he wants the middle class to oppose a certain group of individuals (the super-rich). By individualizing the super rich and talking about how few there are he 1) makes it look like the middle class is the victim of personal greed and 2) that political change might not be so hard as it looks if the middle class pits their numbers against the super rich.
I think that when we talk about the super rich in terms of their pure income, we are talking about a group of individuals, some of whom will support political efforts on the right and some on the left. When we talk about the super rich in terms of their control of capital (and in the terms of income that Reich uses, his remarks on capital gains is a proxy for this) we are talking about the super rich as a class and about the economy as having a certain structure that moves power and resources in a certain direction. Reich does not want to change this. He is suggesting that in effect it be regulated. He is not suggesting that the super rich lose control of the economy; only that the middle class restore the political position they once held before (shall we say) Reagan.
The situation is complicated because for lots of reasons, the middle class (which Reich defines as wage workers) 1) doesn’t look at wage workers as constituting an interest as such and 2) has become increasingly nationalist during the period under discussion. In the latter case, since the US economy and military might has become stronger, they are not as much concerned where this wealth has actually gone, but they are worried about policies that will make America “weaker” and this fear is one that the right constantly hammers down their throat. In the former case, capitalism by definition individualizes people. I am not saying that capitalism artificially creates individuals. But it does work to break down possible definitions of community. Reich does want to change this. This is what his politics implies. But then it becomes his definition against everyone else’s.
Felapton, had I been Reich I would have referred to the growth in productivity rather than the growth in GNP. But productivity growth is harder for people to understand and since the management of productivity is in the hands of the owners, there is an argument there that the owners deserve all of the fruits of (their) improvements in productivity.
Improvements in productivity are ultimately paid for by the workers. Not so much the in terms of the original investment, but in the effects of the investment; it reduces the need for workers. And that’s the point. If one thinks that a worker is some unit of “human capital” in the same sense as any other classification of capital, then the owners are in fact just reaping their just rewards. If one thinks of a worker as a human being and society as a community made up of human beings, then something that causes their well being to systematically decline may just deserve compensation, if not regulation.
“I know there are lots of people who oppose increasing taxes on the rich, but as far as I can tell, it doesn’t seem to be the rich themselves. This has actually always puzzled me a little.”
“Then he refers to the middle class, which is a reference to a class. . . . he wants the middle class to think of itself as a class so that it will organize. But he wants the middle class to oppose a certain group of individuals”
________________
Irene — Not everyone always views things in adversarial terms of “us vs. them,” where one group must constantly “take on” another group, where demands for “social justice” must invariably be divisive and antagonistic.
Not everyone is wedded to this idea of class consciousness. Reich is, of course, but not everyone else is. Some actually believe that one in the “middle class” might, through his or her hard work and effort, increase in wealth so as to become “upper class,” just as they know that they might also end up being “lower class” (and those in the “upper class” might end up also being “lower class,” and the “lower class” might end up “upper class,” if only allowed the freedom to do so).
And some actually understand that the “super rich” no longer keep their wealth locked up in treasure rooms. Instead, they spend their wealth, which provides money for businesses to hire and pay employees, or they invest their wealth, which provides capital for others to create and expand businesses that provide jobs to people.
Some actually understand that when government takes an extra thousand dollars from some “undeserving” rich person, that is a thousand fewer dollars that he has to spend and provide a job to other people. Some actually understand that the greatest and most effective engine of “redistribution of wealth” is not the government, composed of elite bureaucratic “experts,” but is instead the freedom of individuals to freely engage in economic pursuits, without conflict.
When I was grossly underemployed for several years, the government did me no favors by increasing the taxes on my potential employers. It only resulted in them having less money to hire me.
Wow, where to begin. How about at the beginning? I did not hear Reich say that, “wages have been flat for workers since 1980.” I heard something more to the effect that “most” people’s wages have “barely” increased. ISTM another way of saying that is that workers’ wages have increased, some more than others. If this is news at all, I consider it good news.
Further, to the extent wages have not increased, doesn’t that mean interest, rents and profits have taken up the slack? So, if you’ve saved, haven’t you shared in the economic growth in more ways than one? That is, higher wages AND higher 401k balances?
“Some actually understand that when government takes an extra thousand dollars from some “undeserving” rich person, that is a thousand fewer dollars that he has to spend and provide a job to other people. Some actually understand that the greatest and most effective engine of “redistribution of wealth” is not the government, composed of elite bureaucratic “experts,” but is instead the freedom of individuals to freely engage in economic pursuits, without conflict.”
I think that Reich is making the point that taxation has decreased considerably for the rich (and I’ll say again that the taxes on capital are more important in this equation than the taxes on wages/wealth) and the things that you claim should have happened have not. What has happened is that wealth is being concentrated in the hands of a smaller group of people while the wider public keeps getting a smaller and smaller share.
Regarding the “redistribution of wealth” clearly wealth is now being redistributed to the top and very effectively. But if wages have been flat (taking inflation into account; he clearly says this) and if unemployment is going up and if corporate profits are going up, then what is the social value of this wealth redistribution? Why should it be redistributed up rather than out especially?
Interesting, Mark. He did say that wages were basically flat since 1980 when adjusted for inflation. (“Economy doubles since 1980, but wages flat” is one of the bullet points that appears at the end of the piece.) Of course some people make more and some people make less. But the point is, the American success story used to be that the lot of the middle class improved over all as the American economy grew. Reich makes the point that this is definitely not happening.
Regarding “doesn’t that mean interest, rents and profits have taken up the slack? So, if you’ve saved, haven’t you shared in the economic growth in more ways than one? That is, higher wages AND higher 401k balances”. Sort of. But he is making the point that the increase in profits etc are going to very top, not to everyone. You’re 401K may have more money in it than it did in 1980, but if your wages are flat, then you 401K has just accumulated some of your flat wages and is flat as well.
But I wonder if you are suggesting that the super rich became that way because of how they invested and that if the rest of us invested in the way the super rich have we would be rich too? Is that what you were implying? That wealth is moving to where it should be because top one percent is simply shrewder than the rest of us and therefore is simply reaping their just rewards?
I understand that many non-rich people do not have an adversarial view of the rich. I would like to think that I also belong to that segment of the non-rich. (Though I do think that, in hard times, it won’t kill the rich to step up and kick in a little more.)
But it seems, as Reich pointed out, that many of these same non-rich people express an adversarial attitude towards other non-rich people who have the good fortune to be unionized. Am I mistaken in this?
Does anybody see this as contradictory?
2 Reich takes groups of facts and draws links between them. Even if the facts are true, are the links of cause and effect that he is proposing reasonable? If not, why?
Reich “concludes” to “a strong middle class” as the only solution. I would suggest that what is needed in a democracy is a sufficiently intelligent populace. With respect to “economics” what is needed is a verifiable, scientific, understanding of economic activities.
Some year twelve students in a well-respected Jesuit institution in Sydney, Australia think that the central to the functioning of an exchange economy is the productive process. They are being told that the firm and household diagram which is used in economic textbooks is “unscientific” because it overlooks the fact that there are two kinds of firms: those that produce basic goods and those that produce capital goods which are used in the production of the basic goods. Basic goods are consumed directly and more or less immediately; capital goods are only consumed indirectly over a longer, often indeterminate, period of time.
The students are told that because there are two kinds of firms a “truly scientific analysis” requires an understanding of the relationship between two distinct economic circuits. The basic circuit is the flow of consumer goods and can be understood as a rate (so much every so often) and the producer circuit is the flow of capital goods and can be understood as a series of accelerators (speeding up, slowing down, or even maintaining) the rate of flow in the basic circuit. The purpose of economic analysis and policy is to monitor the relationship between the circuits in changing contexts.
Moreover, these students are able, by simple observation, to verify what they are being told. They are convinced that the single circuit of firms and households as presented in the standard textbook is indeed unscientific and seems to explain why the economy operates about as efficiently as trying to ride a standard pushbike up a steep hill. Think of a variable speed pushbike and the way it is possible to “shift gears” and change the amount of effort required to pedal when faced with a hill or a valley and make for a more leisurely, less taxing ride. The rider of a standard pushbike doesn’t have such freedom! And with freedom comes responsibility.
Notwithstanding the political prospects of a strong middle class, what seems more conducive to an economic solution (as distinct from a political solution) is a paradigm shift with regard to thinking about the economy. Perhaps the political solution lies not in a strong middle class but in a future, better educated generation of voters, consumer, and investors.
As much as I would like to agree with Reich, I find his statistics a little confusing.
”Economy doubles since 1980, but wages flat” does not say anything about class disparity. If the number of earners doubled while the economy doubled, there would be zero change in distribution. If the number of earners increased by 60% (about as close as I can get to the real number) while the economy doubled, the disparity is not as great as it seems with his remark.
Maybe he accounts for this in his discussion of productivity?
I imagine most people will see the number “400″ and intuitively realize that unless that very small number of “super-rich” each own a small country, taxing the life out of them isn’t going to bring in all that much money.
They also know – probably without giving it much thought – that almost all “rich” people these days are just employees, not evil capitalist barons like Carnegie, DuPont, Morgan, and Mellon. The “owner” these days is the guy down the street who owns the local ice-cream-parlor chain and his neighbor who owns the precision-molding plant – neither of them by any stretch of the imagination a member of the “super-rich”.
“He did say that wages were basically flat since 1980 when adjusted for inflation.”
No, he did not say that. What he said was this:
“Since 1980, the American economy has doubled in size but, adjusted for inflation, most people’s wages have barely increased.”
You are correct that one of his bullets later misquoted him (reminds me of Charles Barkley saying he was misquoted in his autobiography)–doesn’t say much for the scholarship of the presentation, but there it is.
You’ve asked a number questions regarding how I feel the “super rich became that way.” I don’t think of the world by that dichotomy: super rich vs. non-super rich. In fact, I think that view of life is corrosive of the soul. Which gets to the elephant in the living room: How do people view the “rich”? If you think their success increases your chances for success (my thinking), you’ll disagree with Reich. If you’re pretty much indifferent to the rich (and I believe most Americans are), you’ll disagree with Reich. If you think their success hinders yours (and I think most Commonwealers fall into this group), you’ll agree with Reich.
Someone once characterized people he though harboured unwarranted resentment of others as bitter-clingers. Perhaps he was on to something.
I came across a refutation of Reich that poses some interesting questions, based on tax data related to marginal income rates, and an earlier article that says the same thing about capital gains rates.
It is counterintuitive, but lower tax rates actually bring in more revenue:
“Why 70% Tax Rates Won’t Work: Memo to Robert Reich: The income tax brought in less revenue when the highest rate was 70% to 91% than it did when the highest rate was 28%.”
http://online.wsj.com/article/SB10001424052702304259304576375951025762400.html?mod=djemEditorialPage_h#articleTabs%3Dcomments (don’t know if it is for subscribers only)
The measurement gauge is revenues as a percent of GDP, accounting I surmise for greater population and other statistical considerations.
“All this nostalgia about the good old days of 70% tax rates makes it sound as though only the highest incomes would face higher tax rates. In reality, there were a dozen tax rates between 48% and 70% during the 1970s.
Moreover—and this is what Mr. Reich and his friends always fail to mention—the individual income tax actually brought in less revenue when the highest tax rate was 70% to 91% than it did when the highest tax rate was 28%.
When the highest tax rate ranged from 91% to 92% (1951-63), even the lowest rate was quite high—20% or 22%. As the nearby chart shows, however, those super-high tax rates at all income levels brought in revenue of only 7.7% of GDP, according to U.S. budget historical data.
President John F. Kennedy’s across-the-board tax cuts reduced the lowest and highest tax rates to 14% and 70% respectively after 1964, yet revenues (after excluding the 5%-10% surtaxes of 1969-70) rose to 8% of GDP. President Reagan’s across-the-board tax cuts further reduced the lowest and highest tax rates to 11% and 50%, yet revenues rose again to 8.3% of GDP. The 1986 tax reform slashed the top tax rate to 28%, yet revenues dipped trivially to 8.1% of GDP.
What about those increases in top tax rates in 1990 and 1993? The top statutory rate was raised to 31% in 1991, but it was really closer to 35% because exemptions and deductions were phased-out as incomes increased.
The economy quickly slipped into recession—as it did during the surtaxes of 1969-70 and the “bracket creep” of 1980-81, which pushed many middle-income families into higher tax brackets. Revenues fell to 7.8% of GDP.”
Another interesting point is “the Joint Committee on Taxation recently reported that 51% of Americans no longer pay federal income tax.”
Is the data on target? I can’t reproduce the entire article, but it includes more supporting detail.
On capital gains: http://online.wsj.com/article/SB120735854234491599.html?mod=djemEditorialPage
“A hefty 47% of those (capital gains) tax filers reported income of less than $50,000, while 79% had income under $100,000.” I sold holdings before the expected cap gains tax increases. Having held it all since the mid 1980′s, the inflation rate in that period was 89%.
So, 89% of the tax I paid was on a phantom gain. Then social security is cut the following year by 44% because proceeds from sales are considered income (not principal), when in reality it is what you have to live off of the rest of your life. The Medicare premium portion rises so sharply, it decimates the total check amount for a year.
“The capital gains rate is crucial to investment decisions; higher rates make capital more expensive, dampening incentives to invest and reducing economic growth. John F. Kennedy understood this, as he proposed a capital gains tax cut. Bill Clinton joined with Republicans in 1997 to sign legislation lowering the rate to 20% from 28%.
Critics howled this would reduce tax revenues, and they howled when Republicans cut the rate to 15% in 2003. What followed in both cases was an enormous “unlocking” effect, as investors sold more stock and assets to take advantage of the lower rate. Capital gains realizations soared to an estimated $729 billion in 2006 from $269 billion in 2002. This goosed Treasury receipts from capital gains, to an estimated $110 billion in 2006 from $49 billion in 2002.
Mr. Obama doesn’t have to guess what sort of “distortion” would come from significantly raising the cap-gains rate. In 1986, the tax rate jumped to 28% from 20%, a 40% increase. Tax revenues spiked briefly in anticipation of the hike (as investors moved to cash in at the lower rate), then dropped precipitously. Four years later, in 1990, the federal government was still taking in 13% less revenue at the 28% rate than it did in 1985 at the 20% rate.”
The data indicates that if you want more revenue for social justice, lower cap gains rates. “America is increasingly isolated in taxing capital gains. Many industrialized competitors publicize a lower rate, and many (Germany, Switzerland, Austria, New Zealand) have no levy at all.”
“When the highest tax rate ranged from 91% to 92% (1951-63), even the lowest rate was quite high—20% or 22%. As the nearby chart shows, however, those super-high tax rates at all income levels brought in revenue of only 7.7% of GDP, according to U.S. budget historical data.”
Carolyn –
As I remember between the 50′s and into the 60′s the economy boomed, and it was a time of great innovation. This was after the GI Bill sent hundreds of thousands (if not millions?) of men to college or back to other schools. Innovation was high and productivity improved because of the more competent input from these men. Couldn’t the greater GDP be accounted for by the innovations/efficiencies of the former GIs even as taxes remained high? Maybe there were simply a lot more wages to tax as the economy became more productive and more people worked at more productive jobs. I don’t really know, except I remember those years as the best times of all economically, and I do remember talk of how the entry of more educated people into the work force was a major plus..
I just think that it’s very simplistic to lump most of the people into the category “middle class”. If you take a closer look at the middle class, you’ll see that some sectors of the middle class (e.g. high tech employees) are doing pretty well, and some others (blue collar workers who had attained middle class wages) are sucking wind.
As Catholics, I don’t think we should support politics or policies that would tend to pit one class against another. In a growing economy, wealth isn’t “redistributed”, and we shouldn’t want the government to do any redistribution. The economy creates new wealth that didn’t exist before. There is no doubt that the economy has done this very unevenly for some time now.
My own view is that we can best help those who are hurting by fostering an economy that has more sustained growth across broad sectors of the economy. We need to figure out a way to ignite growth in manufacturing and other blue-collar jobs that don’t require a bachelor’s degree or higher. It is the less well-educated who are being left behind.
One lesson that I think a lot of voters can take away from current economic conditions is that a growing macro economy doesn’t mean that everyone is prospering equally. The recession ended at some point in the 4th quarter of 2009 – a long time ago – but it still ‘feels’ like a recession because unemployment has been stuck above 9% for 23 of the last 25 months. The economy is growing with at least 1/10 of the work force being totally irrelevant to its success. As a minister I worry about them as individuals, and as an American I worry about the damage done to the social fabric of the country by having that many people on the dole, some of them for an very extended amount of time.
“My own view is that we can best help those who are hurting by fostering an economy that has more sustained growth across broad sectors of the economy. We need to figure out a way to ignite growth in manufacturing and other blue-collar jobs that don’t require a bachelor’s degree or higher. It is the less well-educated who are being left behind.”
Jim P. ==
I’ve been reading for many years now that the US can kiss those industrial jobs good-bye as long as the third world people are willing to work for a fraction of American wages.
The only solution seems to be an economy with jobs that require a better education than most Americans have gotten. Even a typical high school education doesn’t teach a kid very much math, even of the easier kinds, and our drop-out rate is horrible. Even as to jobs for more educated people I dare say that India and China are going to catch up with us pretty soon — they seem to realize the economic value of education and Americans don’t really. If we did, we’d sacrifice for it.
“I’ve been reading for many years now that the US can kiss those industrial jobs good-bye as long as the third world people are willing to work for a fraction of American wages.”
The industrial jobs from the fifties and sixties are gone – I agree. I’m not talking about specific jobs, though, I’m talking about manufacturing as a whole. In a healthy manufacturing economy, the jobs lost to cheaper overseas (and regional) competitors in industries like automobiles and steelmaking would be replaced by new manufacturing jobs that build stuff that isn’t yet known how to make overseas, or isn’t exportable for some reason, or whose overseas manufacturing + transportation costs exceeds the manufacturing + transportation costs of domestic manufacturing.
The interests of blue collar workers are most often represented, politically, by labor unions, whose interest, naturally enough, is not in fostering a healthy manufacturing economy as much as in preserving existing jobs at existing wages. The interest of less-well-educated workers as a whole, I would argue, are not well represented at all in politics. For example, there are a lot of single and married moms with high school diplomas sitting in cubicles answering customer-service telephone calls all day. By and large, they are not organized, their wages are much lower than would be the case for a UAW assembly line employee, and their benefits are often substandard. In addition, sexual harassment is not uncommon. They are at risk of losing their jobs to call centers overseas (it is amazing how well some country’s educational systems teach English to non-English-speaking primary school students). If you average the wages of unionized blue collar workers (whose wages have increased relatively substantially since 1980) with the wages of these unskilled white-collar workers (whose wages are low), you get, overall, a picture of flat wages.
Who is looking out for their interest, politically? They are not unionized or even organized, they are not racially or ethnically monolithic – they don’t fit into the traditional coalitions that comprise the Democratic Party.
Carolyn
“no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.”
http://capitalgainsandgames.com/ Bruce Bartlett’s blog