Robert Reich and the Influence of Economic Fallacies

Robert Reich and the Influence of Economic Fallacies
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Few have an understanding of economics quite like Robert Reich. One would have to sift through the furthest regions of stupidity to find a consistent stream of falsehoods to match his publishing record. Recently, the public policy professor has unleashed a tirade of economic sophisms that, like a majority of modern day economic reasoning, appear to be correct on the first glance but are dreadfully wrong with each returning inspection.

In carrying on with his unrelenting soak-the-rich campaign, he writes in a recent blog post:

Higher taxes on the rich won’t slow the economy because the rich will keep spending anyway. After all, being rich means spending whatever you want to spend.

So being rich means spending whatever you want to spend? If one weren’t so familiar with words and their meaning, he could easily mistake the sage of Berkley to be some kind of economic highbrow. Instead, it is obvious that Reich wandered into the oft traveled territory of redefining terms to meet his own agenda. Perhaps a juvenile could be excused for such denseness but here is a nationally renowned speaker on all matters socioeconomic presenting an incredibly naïve view of the world.

In Reich’s admitted view, the rich are owners of vast oceans of wealth that can be tapped into at any given moment. How this came to be is not once given consideration. The rich are rich through some metaphysical phenomena and that’s it. Therefore, their wealth is up for the taking; or so the reasoning goes.

Of course, Reich’s suggestion is nothing but filthy acumen masked as informed deduction. Being rich most certainly does not mean buying whatever ones feels fancied to at any time. If anything, wealth is an identifier of a reluctance to spend like a hedonist pig. In an unbridled marketplace, the most successful reach that anointed status by serving customers. Rather than spend initial profits on immediate satisfaction, they invest in capital to grow their enterprise. Because consumers are fickle, placid days a rare blessing for the entrepreneur. They must operate in a state of flux and use all of the means at their disposal to maintain profitability. For the true businessman who receives no state privilege, capitalism is anything but the easy life.

To heap even more evidence onto the theory that he holds an adolescent’s view of enterprise, Reich recently tweeted:

“Mr. Pres, when you meet w biz leaders today remember they’re not the job creators. The middle class creates jobs through their spending.”

The immediate question that should come to mind is “so the employers who offer a salary to willing workers are not, in fact, creating a job?” Sheer common sense dictates this is the case. But the issue is much more fundamental than that. Reich asserts that the homogenous blob known as the middle class creates employment through the process of spending earned income. However such a claim begs the question: where does the income to spend come from? Clearly money has an origin and doesn’t just appear in one’s pocket. It must be created on its own, earned, or given away. It therefore has to be produced in some manner or take the form of income paid for the act of production.

As economist Steve Horowitz put it:

One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption.

Humans must function in a world limited by time and space. There can be no gratification of wants without first acting. If someone has any intention of spending, they must first produce something of value to obtain what amounts to a bargaining chip. Prior to, no spending can be done. From the capitalist perspective, only those who seek to employ workers and have sufficient savings may do so. In other words, it takes previous capital accumulation through production to hire workers. So those businessmen who do offer a salary and wages to willing workers do in actuality create jobs.

What makes Reich’s theory of “spending creates jobs” even more erroneous is that consumer spending doesn’t actually account for most spending in the economy. The money spent at the lower end and middle processes within society’s various structures of production make up the bulk of spending. As economist and investor Mark Skousen writes,

Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy—intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages—to avoid double counting. I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS).

According to Skousen, final consumer spending only makes up about 30% of the economy- not 70%. So not only is Reich wrong in theory but also empirically. When peered at under the surface, his conclusions become a poor man’s conjecture.

From a strictly economic point of view Reich most assuredly comes off as a dunce. That also means his depth of understanding isn’t far removed from the majority of commentators who speak on the same subject. From a more rational standpoint however, Reich’s opinions insinuate something else entirely. Instead of uncovering truths, his assertions lend themselves to the political class’s unyielding desire to take from, give to, and jostle society in whatever manner it pleases.

The doctrine of the collectivist state relies primarily on its listeners to act with emotion rather than reason. If the average man truly grasped the degree to which he is exploited by an all-intrusive, centralized state regime, he would take to the streets in protest. Instead, he is fed lie after lie, excuse after excuse as to why he needs government. The state, not society, is given the hagiography treatment by those like Reich who are given platforms to espouse their superior intelligence. Invocations of democracy, patriotism, moral relativism, and Keynesianism are all variations of the teaching of collectivist statism. Each emphasizes the inner-caliber of the group over the individual. And each is used to concentrate full authority in the few over the many. Within the great universities, these dogmas are taught to aggrandize the faculty and give the perception that if given the adequate amount of control and discretion, the adept among us can engineer society to resemble something resembling a well-oiled bicycle. Reich is an eager participant in this process and never wastes a sentence without venerating the political establishment in some way.

In most societies, crucial goods and services are monopolized by the state. Health care, roads, protection services, water provision, education, courts, and justice are all typically defined by complete or extreme control by government. It only makes sense that this same lust is extended to the sphere of scientific theories. And unlike the natural sciences which are strictly empirical and difficult to manipulate, the social sciences are marked by unpredictable behavior. For a science like economics that is incredibly relevant to societal function, from the point of view of control, steering its conclusions can and has made it much easier for the state to impose itself.

History has shown that irrational, unworkable theories maintain their influence when they serve as an excuse for power aggregation. The above reasoning presented by Robert Reich may be wrong but they perform as accepted knowledge in most academic circles, television broadcasts, and newspaper editorials. As long as nonsensical theories such as “the rich are endowed with nearly infinite wealth” continue to pass as enlightened thought, the state and its operators will keep their vice-grip clenched firmly on society.

  • Marina Nelson

    Please pay for your fonts to remove the trademarks. Very annoying!

  • Guggzie

    How ridiculous is it to use Horowitz and Skousen in this type of argument. There is absolutely no point in producing anything if it is not going to be consumed – Horowitz's statement is totally implausible, for the want of a more polite expression.
    As for Skousen, every single product and service in the manufacturing and wholesale area of production are all part of the consumption chain. Capital expenditure involved in setting up a manufacturing business has to involve the consumption of raw materials, of machinery, and each and every product the process uses is only provided on the basis that it will be consumed.
    To classify consumption only on the basis of a finished product is clearly ridiculous.
    However, one must take exception the Reich's argument – business is, and always will be, a mutually beneficial collaboration between the producer and the consumer. Neither can live without the other – not in today's society, anyway.
    What Reich says is part of the truth, if the consumers don't buy a producer's product, or service, he will go out of business. If the producer doesn't cater to the needs of the consumer, the consumer will struggle to survive..
    So, the producer who is more successful in meeting the needs of the consumer will prosper, and in the process, very likely, they will become 'rich'. This encourages the entrepreneur, innovation, good management and all the best aspects of the production chain.
    Where the system falls down is when "profits" are unrelated to this production chain and huge amounts of 'money' is made through gambling and trading bits of paper that serve to produce nothing of benefit to the society. Gambling in derivatives and other spurious financial products come in this category.

  • Peter

    If you were rich and had a business, would you hire more people if you became richer perhaps through your investments or would you hire more people if you thought that the middle class was going do better and spend more? Do employers hire more people during the Christmas season because all of a sudden they have more money or spending less or because they know that the middle class will be spending more? We live in a global economy and many corporations know that they can make more money by hiring cheaper labor overseas. Just look at Apple. Corporations are flush with cash. The top 2% of us have done extremely well the past 12 years. So where are the jobs? The issue is not tax rates for the rich. The issue is a dying middle class. Americans cannot compete globally in the labor market.

    This article does not touch on the real problems of the economy. The real problem is structural. The real problem is a lack of competition. The banking industry participates in the government as the Federal Reserve and there are oligopolies in the oil industry and military industry. The problem is not socialism. The problem is that too few people have too much power. The fractional banking system is probably the biggest problem we face.

  • baergy

    I'm not going to be overly surprised when one of these fools comes out and actually says: "We should just print up the money we each want to spend and thereby pre-opt the duties of the rich and the governments that seem so hesitant to put enough money into the economy."
    So many of these idiots are suggesting it without actually saying it ! !

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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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