Saturday, September 4, 2010

Labor Day Thoughts



Former Labor Secretary Robert Reich has an interesting piece out today on his blog regarding the state of the labor force and the overall economy ahead of Labor Day. While I disagree with a number of his interpretations and prescriptions, he does share a few thought-provoking things. Many have been repeated over and over, while some are under-discussed:

-Laments both poor private job creation and low % of union representation in the private sector
-The "standard" prescription has not worked: stimulus, ZIRP, tax credits to small businesses, low yileds
-So the problem must be structural, and we have to boost demand (by this paragraph, I was laughing)
-The current crisis has its origin in the growth of technology that increased productivity and enabled outsourcing
-This has kept a lid on real earnings for men for 30 years, while women entering the workforce enabled household consumption to grow
-The average workweek also went up, and, finally, debt/home equity extraction came into play
-This all came to an end, and now we have overcapacity
-The gains have been concentrated at the top, with the top 1% taking in 9% of the total income in the late 1970's, up to 23.5% in 2007; very similar to what had happened between 1913 and 1928 (as a reminder, income was not considered a bad thing and, hence, it was not taxed prior to 1913)
-This is bad because the "rich" spend less than the rest of us and this is not helping the economy (no comment)
-On top, the "rich" do not invest in America only but wherever the returns are the highest (capital mobility is a good thing, Mr. Reich)
-The Great Depression leveled the playing field with social security, union bargaining, minimum wage (laughable views, but more on that later)
-The GI bill along with a vast expansion of public education reduced economic inequality and was funded by 70-90% marginal income tax rates on top
-The result was rapid growth and more jobs (a very myopic view of the post-war economy, as Mr. Reich ignores demographics, relative peace, technology advancements, low-cost energy, no international competition, etc.)
-The only reform to "widen the circle of prosperity" since 2008 was the healthcare "reform" (another laughable statement)
What should be done per Mr. Reich?
-Extend the EITC to the middle class and pay for it with a carbon tax
-No income tax on the first $20k paid for with additional payroll taxes on $250k and over
-"0.5% transaction tax on all financial transactions" for early childhood education
-Free public universities with graduates paying back 10% of income for 10 years after graduation
-"Earnings insurance program" vs. unemployment benefits to pay 50% of the earnings difference to workers who take lower-paid jobs Here is my take.
That the problems are structural is one thing that I agree on with Mr. Reich. There have been many years of government-guided malinvestment in housing and education. Both have really distorted market dynamics and we are paying the price: too many houses, but also too many lawyers, art historians, gender study-ists, and so on. While I am all about the importance of education, the system proposed by Mr. Reich would create incentives for lower-productivity performance past graduation as it would effectively make "easy" majors free, and would not discourage loafing post graduation.

We are also facing the bill for the lack of actuarial foresight in all these great "equalizing" programs that Mr. Reich praises. At this stage, the message coming from all forms of government should be that your old age will not be what your grandparents' old age is now, and, chances are, your old age will be worse off both in terms of income from SS and healthcare price and availability.

Work (productivity), income, saving and investing are good things, not bad things, and this point is strangely missing the Labor Day piece by the former Labor Secretary. Taxation of work, savings and investment is very easy to do, but is but is simply wrong: tax the things you want to discourage: smoking, drinking, obesity, energy inefficiency, bad haircuts, etc.

Along the same lines, that mythic, evil "top 1%" is a very fluid group: many are people who have worked hard for years, built up their businesses, and are selling them before retirement. Do they deserve this spit in the face? No. The 1% subset that do deserve a kick are the likes of that tip-scrounge jumping entertainer that went to Miami, or that philandering endorser that hits plastic balls with a club, or that mummified former nude model that adopts African children as if they are some novel fashion accessories. Related, we really shouldn't be justifying policies by saying that they affect only X% and 20xX%: should we ban group Z from enrolling in college because there's only 3% of them but their disproportionate enrollment will open up space for all the rest of the population?

Former Secretary Reich also rails against the fact that the "rich" don't spend as much, and seek good returns for their savings. Capital formation, Sec. Reich, is a good thing, and capital floating to the best ideas is also a good thing. Your comrades' "usual" prescription of ZIRP discourages capital formation, and it really misprices capital, leading to a host of undesirable consequences.

Further, Mr. Reich is not considering the scalability of the rewards in the digital sector of the economy: the accumulation of wealth is now possible on a much faster and much grander scale than before because of the very high scalability of technology: that extra 1 million downloads does not require nearly the same capital as an extra 1,000 restaurant locations, thus, skewing the natural 80-20 distribution even further to the top.

If jobs are the primary concern at this stage, and I think they are for most policy makers, the discussion should center around job genesis. Is there a reason why an existing business should hire an employee today? Frankly, there isn't. From the macro-themes, like "regime uncertainty", twin deficits and kleptocracy, to day-to-day unknowns, like healthcare costs, the new burdensome IRS filing requirements, the increasing cost of simple banking, increased unionization threats, etc. there is simply no reasons for businesses to expand. Without business expansion, there won't be "good" new jobs, frustrating a full generation of people. Unfortunately, Mr. Reich (and the former media star currently occupying 1600 Penn Ave) are people who have spent their entire lives signing checks on the back, never on the front, so they can't really relate to the job-creators and are boxed in by their superficial, academe understanding of the process.

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