Robert Reich, Economic Chef

Posted on October 24, 2010


Who knew my Sunday morning coffee with the week’s recordings of The Charlie Rose Show would include culinary genius Robert Reich, former Labor Secretary under Bill Clinton? Reich just published his book “After Shock.” While I typically don’t agree with Reich on policy, he made several excellent arguments and one-liners about economic decisions ahead:

  • The Fed’s anticipated monetary policy of quantitative easing would be like “pushing a wet noodle” without a subsequent fiscal policy.  Making more money available for credit without developing consumer demand would be a re-run of what the economy faced earlier in the decade.
  • It’s better for the wealthy class (however defined) to have a “smaller piece of a bigger pie than the large piece to the small pie” as is the case now. He’s arguing that a tax hike for high-income earners and cut for the middle class would enable the economy to grow larger and is not redistributionist.  I think I buy this.

Other places where I found myself nodding:

  • This recession is not a normal business cycle recession – there is a fundamental structural change in our economy that is catching up with us. (See my eventual presentation on this topic under the working title – “The Next Dark Age.” Yes, seriously.) For now, read the Global Competitiveness Report 2010-11 and learn how the US is doing the areas of infrastructure, education, macroeconomic environment, and institutions.
  • Consumers, comprising 70% of US GDP, have no willingness or ability to buy.  This is a crisis in aggregate demand.
  • We’ve come to the end of our “coping mechanisms” in the middle class to prop up consumption – no more HELOCs or equity left in our homes, no more borrowing capacity.  This means that there needs to be a shift in the economy’s structure.
  • Globalization and technology means that routine work is outsourced and automated – no more jobs for telephone operators, bank tellers, gas station attendants, and assemblymen.  This leaves highly specialized jobs like finance or service sector (hotels, restaurants, etc.).
  • Revaluing our currency vs. the Chinese to make US goods less expensive and Chinese goods more expensive, “that’s just another way of creating jobs by getting poorer.”
  • On small business lending and credit: The government economic and bailout policies were directed to Wall Street, who is using their subsequent recovery for M&A, stock buy-backs, and expanding overseas.  Credit is not flowing down to small business and individuals that comprise 95% of economy.  Institutions and regulators tell banks not to make bad or risky loans, which equates to a credit crunch for SMEs.  I can speak for experience – my company had to jump through MAJOR hurdles just to LEASE a new set of data storage servers.  Not fun and really annoying when you know you run a successful and profitable company.

Places where Reich makes an interesting points, but I probably don’t agree:

  • Reich stated that over the past 50 years, the US economy “has succumbed to supply side economics.”  The US Gini coefficient has been consistently rising since the ’60s.  But I’m not sure if that is the fault of economic policy, or social norms that insufficiently educate and motivate large numbers of Americans to truly work hard to compete in a global economy. (Think of this as the “Jersey Shore-ism” of the US population.)
  • Refers to Henry Ford’s “Basic Bargain” that employees should be paid well to stimulate aggregate demand.  Reich then went on to discuss how economic expansion from 1945-75 corresponded with high union membership.  Ugh.
  • Reich defended the current administration as being very pro-business as illustrated by their willingness to bailout Wall Street during the financial crisis.  Even Uncle Charlie called him out on this asking whether support to the financial industry was because of “pro-business” policy or simply to keep the economy afloat.  I strongly believe that the administration gnashed their collective teeth in providing this support and would have done so had they not needed to avert economic depression.

It’s a good interview – worth watching.