Robert Reich Knows Nothing About Economics

Blog Post - Robert Reich Knows Nothing About Economics

Economist Robert Reich, former labor secretary for President Clinton, recently posted a video called “Three Myths of the Economy”. In it, he attempts to debunk three "myths" about how our economy works, suggesting that acceptance of these myths leads to socio-economic injustice. Here are his claims and my rebuttals.

Reich’s Claim #1: CEOs and corporations aren't actually job creators.

REBUTTAL:

Mr. Reich apparently believes that poor and middle class consumers are job creators. However, like many people, he seems to think the words “corporation” or “CEO” are indicators of size. In reality, they are terms applied to legal status and one’s role in a company, respectively, and often describe very small firms which are run by those in the middle or poor classes. A CEO, for instance, could very easily struggle to pay his/her own electrical bill, but still legally be a CEO of a small corporation. "CEO," therefore, is not a label constrained only to the wealthy.

So then, who DOES create jobs? Is it consumers from the poor and middle class, as Reich claims? Not exactly. Turns out, it's mostly small businesses and new startups which account for the majority of job creation. According to research from NBER, small businesses create more jobs on net than large firms . In fact, they accounted for 64% of job creation from 1993 to 2011. Since a small business often obtains the legal standing of “corporation," Reich is flatly wrong in saying "corporations are not job creators."

What Reich is arguing in favor of is called "demand-side economics," which emphasizes the role of the consumer, whose demand for goods offers a business an opportunity to sell said goods. But this type of thinking starts in the middle of the story, as though the consumer didn't first have to sell his/her labor to obtain cash. It was the supply of their labor, through their own employer, which allowed their demands to manifest in actual transactions. Without the supply of a job to that consumer, that consumer's demand for goods from a future business simply wouldn't have resulted in a purchase. The beginning of the story, then, cannot simply be the consumer. It's more likely to be those who employed said consumer. Thus, Reich's claim that “poor and middle class consumers” CREATE jobs, is misleading.

To clarify, it's true that consumption can SUSTAIN jobs which have ALREADY been created, but to create them, one must first assume the financial risks inherent in being an employer, such as the potential for business failure, product failure, litigation, changes in regulations, unforeseen disruptions to the supply chain, lost investments on trained employees who leave the firm, etc. This is why costs matter. But ironically, policies which are supposedly needed to combat “greedy corporations" are actually more costly to smaller firms that lack the capital and resources to absorb the added costs. Therefore, the very policies Reich supports are damaging the majority of job creators: small business startups.

Reich’s Claim #2: “Government creates the free market."

REBUTTAL:

To be clear, the government only creates a market in systems where the market is government controlled, such as communism or socialism. Markets can exist, however, in spite of governments, and always have. In fact, per research from NBER, reduced government intervention actually spurs market growth. Moreover, according to research from the Thurgauer Wirtschafts Institute, "There are strong indications that liberalization, i.e. an increase in the economic freedom index, stimulates economic growth." Therefore, the empirical evidence suggests government intervention is antithetical to freer markets.

Reich’s Claim #3: We shouldn't worry about the SIZE of government, instead, we only need to worry if we have the "right" government.

REBUTTAL:

This assumes that people in positions of authority are wholly altruistic and wouldn't abuse their power for special interests and personal gain. In his video, he repeatedly points out the corrupt relationship between the current U.S. government and special interests. He inexplicably advocates for increased government intervention to combat this, without realizing how such a stance serves to empower those who wish to exploit said relationship.

Furthermore, his claim is also economically unsound, for two reasons:

1. Long run evidence between the size of government and unemployment shows a positive relationship. In other words, more government results in more unemployment.

2. In studying OECD countries, researchers concluded that for every 100 public sector jobs created, 150 private sector jobs were eliminated. Therefore, when it comes to employment, we SHOULD worry about the size of government.

CONCLUSION:

Robert Reich presents a number of misleading claims regarding the structure and function of markets. He decries capitalism while simultaneously utilizing it to market his own documentary via Amazon, he besmirches CEOs yet earns 36% MORE than the average CEO ($242,613 to be exact, including once being paid $40,000 for a one-hour speech), he forgets that most businesses are run by people in the middle class, and he ignores the evidence that increased government intervention harms both market growth AND goals to reduce political corruption.

 

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