Debunking Robert Reich’s Debunking of Six Lies

00_world_economy

I’ve been given the charge (on Facebook no less) to counter the points made by Robert Reich in this video:

The six lies (according to Reich) are:

1) Tax cuts to the rich and corporations trickle down to the rest of us. (No it doesn’t and it never has.)
2) If you shrink government you create jobs. (No, you get rid of jobs that way.)
3) High taxes on the rich hurts the economy. (No, the economy grew when the US did this under Eisenhower.)
4) Debt is to be avoided and it is mostly caused by Medicare. (No, if debt is properly used to grow the economy, it becomes a smaller part of the budget because of increased revenue and Medicare has the lowest overhead of any health insurance plan out there.)
5) Social Security is a Ponzi scheme (No, its solid for 26 years. Social Security is solid beyond that if the rich pay the same percentage in social security taxes as the rest of us do.)
6) We need to tax the poor. (This is what Republicans have been proposing when they say any “tax reform” needs to involve all Americans because poor people pay no income tax. The poor have no money and taxing them will not solve our budget problems.)

I’ll take them in order (I suggest you watch the video first – it’s under ten minutes).

“Lie” 1
To put it very simply, tax cuts “trickle-down” everywhere, all the time.  When taxes are lessened on people or corporations, those people or corporations have more money to spend, save, and/or invest.  (Ignore the “trickle-down” moniker if you must – think of it as immediate benefit, which is what it is when there are less taxes!)  That Jon Stewart was able to recently lambast the Republicans (correctly) for saying the poor had things like refrigerators and TVs is the very essence of what “trickle-down” economics was originally meant to be; as the economy gets richer, the rich get richer, but so do the poor.  (The rising tide lifts all boats – the poor of today have a standard of living that would have made kings of old jealous, and rightly so.  We need to continue making it so that the poor continue to have their standard of living raised.)  Admittedly, there is a growing inequality (which Reich mentions) and that is unfortunate and needs correcting, as he rightly points out.

Again, the moniker of “trickle-down” is often misunderstood and misapplied; that Reich uses it as he does suggests more that he understands what it is but is using it as the convenient scape-goat for his arguments.  Regardless of his knowledgeability, the bottom line is that when government taxes less, more money goes into the economy, and the economy gets wealthier.  This point is largely moot though, since anyone or any corporation that has a lot of money also knows how to shield it from taxes.  (There is also the additional complication which such speeches as Reich’s always avoid, and that is that corporations are taxed differently, and they can carry losses and surpluses forward and back in years to assist with their past, current, or future taxes.)

Reich mentions that the corporations are sitting on piles of cash and that profits (and the wage/profit ratio) are the highest they’ve ever been in decades.  I’m not quite sure why this is a bad thing, but assuming he means it to be negative, it again eludes my grasp as to why he’s making a mountain out of a mole hill.  This is the reason corporations exist; they accumulate cash.  They use it to operate and to return value to shareholders.

(There are two additional points he may be trying to make; the first would be that they have too much money; the second may be that somehow since we’re in a bad economy that the hoarding of cash has some negative quality to it.  Addressing those two – first, I’m not quite sure how much “too much” is, but if it’s $2 TRILLION then that opens the door to such slippery slopes as who determines how much is too much and how it gets “redistributed”, and good luck forcing that one on anyone.  The second may be that corporations should be spending the money – but if that’s the case, again, it’s the job of the corporation to decide what to do with its money.)

Finally, to address one last point about trickle-down economics for tax-cuts to the rich and the corporations – corporations are notoriously skittish.  Having been through quite a bit of business school, I can tell you that there is a good amount of analysis that goes into decisions about how to invest money.  (I was surprised at how much it involves.)  Corporations (with the possible exception of those in the financial services sector) take an agonizing amount of time and effort into making sure that deals they’re going to do will be profitable and return value to their investors.  This is significantly more difficult in an uncertain economic climate, and more so when you have a government that seems to be incapable of action, let alone results.  That corporations are sitting on cash should come as no surprise to anyone, let alone a former Secretary of Labor.

“Lie” 2
This is the most disingenuous of the supposed rebuttals Reich makes.  He mentions talking to conservatives and asking how laying off government workers creates jobs.  He talks about “teachers, social workers, fireman” and others such as school builders and road repair crews.  This is either the red herring of his argument, or it proves he really doesn’t listen to his opponents.  No one who suggests that a down-sizing of government workers creates jobs would suggest that we lay off these people; for starters, they are invariably state-government workers, and even if that’s not the case, his opponents are referring to the people who work for the federal government.  These are people that work for Federal agencies such as the Department of Defense or others; people who may serve functions that are either unnecessary or redundant.  Once hired by the government, a person is more likely to die than be laid off or fired.  (http://abcnews.go.com/Politics/federal-workers-die-lose-jobs/story?id=14107075)  Additionally, while government has shrunk since the time of Bush the First, the Federal government has been slowly increasing in size again since then.  (However, as a percentage of the total population, it appears to be shrinking – this is because the population is expanding so fast.  (http://voices.washingtonpost.com/federal-eye/2010/09/how_many_federal_workers_are_t.html))  Regardless of all of that, however, the point is that what dollars the government spends it must first take from somewhere (or print, thereby devaluing the rest of the money), and a growing bureaucracy retards economic growth, thereby reducing private sector hiring.  By reducing the size of the government, more money is available in the private sector for hiring.  In the private sector, the quest for profitability leads to greater efficiencies; no such impetus exists on the Federal level.  Reich has a point that laying off government employees may be seen as reducing jobs, but he misses the larger point in that those jobs may be “artificial” jobs in the first place and/or assumes that those people would not be hired in the private sector.  (For instance, a laid off government worker who is then hired in the private sector does not negatively affect the number of jobs, yet shrinks the size of government.)

“Lie” 3
High taxes hurt everyone, regardless of their income status.  Again, this lie is really hit-or-miss; for starters, he conflates several things in his assessment of the term “economic growth”.  He argues that a 91% tax rate (and “really high” effective tax rate) under Eisenhower helped lead to a robust economy.  However, it could easily be argued that the economy’s return to a non-war footing had as much or more to do with the economic growth of the 1950s – after all, there was a significant manufacturing base in this country then and instead of making things that would eventually be destroyed in Europe or Japan during war, the output was being deployed to goods and services that people could actually buy and use.  (That they had endured rationing for so long could also have spurred significant consumer demand).  Again, the rich usually shield their money (he does make the distinction between actual and effective tax rates here, and that is important) but even if they don’t, taxing the rich is invariably ineffective at best and counter-productive at worst.  The French have recently started taxing their rich at the request of those same rich people; this is expected to raise about $300 million Euros in extra revenue.  (http://www.reuters.com/article/2011/08/23/us-france-wealthy-idUSTRE77M25320110823)  Considering that France has approximately 87% debt-to-GDP ratio (http://online.wsj.com/article/SB10001424053111904007304576496263949498784.html) and their current GDP is about $2.65 TRILLION (http://v.gd/UVdLb0), then we’re looking at a debt of about $2.35 TRILLION, of which 300 million Euros is not even a percentage point: 300 million Euros is about $413,550,000, which as a percentage of $2.35 TRILLION is 0.018%.  So the French super-rich are paying an additional tax, but it means that the French government still has to find 99.982% of the money they owe.  Yes, it’s better than zero, but not by much.  Finally, when you tax the rich too much, they tend to leave; many states have found that out.  (http://online.wsj.com/article/SB124260067214828295.html)  This makes it at best largely ineffective; at worst, counter-productive.

“Lie” 4
Debt is not necessarily to be avoided; in general, Reich is right on this point.  However, there is good debt and bad debt; good debt is the kind that is not to be avoided.  (Examples of good debts include mortgages on rental properties, or car loans on vehicles that you use for work, etc.)  Government debt is broken down into several pieces; very little of it could be considered good debt.  An exhaustive list of where the government spends money is available for anyone with access to Google or a library; a link to the Wikipedia article is the easiest to read: http://en.wikipedia.org/wiki/United_States_federal_budget.  Suffice it to say that the vast majority of government spending is on defense and health care, along with interest on the debt.  (These three account for about 50% of the government’s spending.)  There is no good debt to be had in policing the world, and few would argue that our current wars are tenable, much less affordable.  This is certainly not helping to grow the economy, with the possible exception of some manufacturing jobs and soldiers’ pay.  (I suspect that many of our military gear is not made here, but have no proof; either way, they are not utilized in a manner that helps our economy.)  As to health care, Reich claims that Medicare is highly efficient and has less administrative costs than comparable private sector plans without offering any shred of proof.  Even if it does cost less, his point about it as compared to the population is only relevant because the population is currently expanding.  If it stops expanding, then that point is either moot or wrong.  Again, this assumes his point is correct; however, it has long been argued that it is not.  (http://www.heritage.org/research/reports/2009/06/medicare-administrative-costs-are-higher-not-lower-than-for-private-insurance)

Finally, looking at debt as a ratio to GDP, we can see that even ‘socialist’ countries such as France are only at 87%, while the US is very close to 100%.  Using Reich’s own numbers, we could take the $2 TRILLION that US companies are holding, and all the wealth of the rich (approximately $1.3 TRILLION) and apply it to the debt and we would still be at 77%.  His argument that debt is good if it creates jobs may be reasonable, but there is little evidence that government debt creates jobs – one has only to look as far as our current economy for this point to be refuted.  The government has spent tens of TRILLIONS of dollars in the last twenty years; in the last three it has overspent by $3.6 TRILLION, and unemployment is still at 9%.  (Keep in mind that that’s the “official” unemployment rate, while the “underemployment” rate is above 15%. (http://www.economytrack.org/underemployment.php) (http://www.nj.com/news/index.ssf/2011/09/us_unemployment_rate_remains_a.html))  If debt spending leads to job creation, then cle
arly we should have much lower rates of un-/under-employment.

“Lie” 5
Social Security can easily be shown to be a Ponzi scheme by looking at the first recipient, Ida May Fuller.  “Ida May Fuller worked for three years under the Social Security program.  The accumulated taxes on her salary during those three years was a total of $24.75.  Her initial monthly check was $22.54.  During her lifetime, she collected a total of $22,888.92 in Social Security benefits.” (http://www.ssa.gov/history/idapayroll.html)  As the first recipient, she paid $22.54, and received more than one thousand times her initial investment.  Current beneficiaries, by Reich’s own admission, are expected to receive $0.  (He states that it is solvent for only 26 more years.)  So anyone paying in now who does not retire in the next 26 years will get nothing.  This is the definition of a Ponzi scheme; money is taken from the people who come after to pay the people who went before.  (My social security taxes, for instance, invariably go to today’s retirees; they do not get “stored” for me, or else the system would not be insolvent when I am due to collect.)  Even assuming that the inequality Reich speaks of can be fixed (a huge assumption, as he points out) and that the system can be made solvent for longer than the 26 years it is currently supposedly solvent for, there is no one today who actually plans to retire on only Social Security.  There are plenty of anecdotal stories of retirees collecting Social Security who eat cat food; even assuming these are made up there is no one who assumes that Social Security will provide any reasonable standard of living for them in their retirement, or even a minimal one.  Social Security has three other factors working against it – the first is a continually expanding population; the second is a higher unemployment rate (as the unemployed do not pay Social Security taxes), and the third is that the government continually borrows from the Social Security trust.  While it has so far managed to make all the payments from its borrowing (http://www.ssa.gov/oact/progdata/fundFAQ.html), there is no guarantee that this will always happen, and as our recent debt ceiling debacle showed, the likelihood of realistic, reasonable, and effective plans for the future are slim.  Furthermore, as these payments currently account for 20% of the government’s spending, they would only continue to grow unless the borrowing stops; at some future point they would begin to assume larger and larger portions of the debt, which is a vicious (and inescapable) cycle.  Even assuming we raise the cap rate on Social Security, we have the same issue that taxing anyone generally has – it will be largely ineffective.  It may make the system solvent for an additional period of time, but the other two factors will still be working against it.  Add to that the the government ties Social Security increases to their artificially low inflation numbers, and it certainly does not bode well for the future.

“Lie” 6
We don’t need to tax the poor.  In this Reich is correct.  I’ve addressed taxing the rich already, above.  It can be effective in miniscule amounts (at best), but taxes take money from one area and redistribute them to another area, which may be a better or worse use of the money.  (I’d argue it’s usually worse, as the government is not a good arbiter of financial decision making, as its entire budget outlay will show.)  I’d argue that we could forego taxing anyone who makes under a certain level; other than the “equitability” factor there’s no good argument for taxing the poor.  The equitability argument holds little water too, in that if we want things to be more equal, helping the poor is a great way to do that.  A progressive taxation system doesn’t have to include the lowest earners – it can still be fair by starting at the second or third “rung of the ladder”. His arguments for more tax brackets could be useful in this regard.  (I would also mention that the inequality problem is at least partially to blame on the inflationary policies of the government; the poor have their purchasing power lowered by the hidden tax of government inflation.)

Reich continues by suggesting that the crowd not give into cynicism, and that that’s what the “other side” (read: Republicans) really wants, as that cynicism deadlocks government and thereby leads to more Republican victories when Democrats lose face.  This argument works well at stirring up the crowd, but is largely nonsensical; both parties are completely inept, and both try to deadlock the other when the other is in power.  Furthermore, the people have reason to be cynical; the federal government is largely too far removed from the people to be an effective tool for positive change in the lives of most of the people it claims to represent.  Here I am not giving into the cynicism that Reich suggests; I am merely examining the possibility of a representative Democracy in which there are 535 representatives for 310 million people – it seems mathematically likely that representation on the order of 1 representative for every 500,000+ people is just not a system that can adequately address that which is important to the electorate.  That doesn’t even factor in corporate interests; while those are obviously represented more (due to lobbying) there are still more than 30 million corporations, which means that there’d be a 1:50,000 ratio, which is ten times better but still impractical at best.  (It is further skewed by the influence that larger corporations have compared to the smaller ones.)  Lastly, given the recent shenanigans over the debt ceiling, it would be difficult not to be cynical – our politicians act like children most of the time, and have managed to spend TRILLIONS of dollars to the tune of the entire GDP of the country for a year, with no end in sight.

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