The Many Wrongs of Robert Reich

Today's target: Robert Reich, and his article "We're in a One-and-a-Half Dip Recession." The absurdity of the title immediately caught my eye (I'd like to see a graph with one-and-a-half minimum points), as I sorted through the Huffington Post's daily articles looking for a true gem of ignorance--a task they make quite easy. Surely Mr. Reich has some reasoning for naming this a "one-and-a-half-dip" recession rather than simply a "double dip" recession, but if he does he fails to share it with the reader.

This is trivial, however, when compared with the actual body of the article. Mr. Reich's main contention is that "The 1.5 dip recession should cause the president to demand a large-scale national jobs program including a new WPA that gets millions of Americans back to work even if government has to pay their wages directly," this, and his general "government must do something!" attitude.

Unemployment is obviously bad, so we could hardly fail to expect someone, some simpleton, ignorant of all cause and consequence, to propose that the government should do anything and everything possible to get rid of it. Indeed, Mr. Reich characterizes opponents to his plans for society as being concerned not with the economy, not with the unemployed, and not with real people, but with supposedly meaningless budget figures and deficit numbers.

The many wrongs of Mr. Reich include his failure to realize that (1) massive government employment projects do not help with the problem of unemployment or with the underlying problems in the economy; (2) his failure to realize that large government deficits hurt rather than help the economy; (3) his failure to realize that unemployment benefits do not help by providing "fiscal stimulus"; (4) and his failure to realize that having the Fed print more money and throw it in the economy distorts, destroys, and sets back the economy.

Analysis time: (1) The root of the unemployment problem is discoordination in the labor markets: the supply of labor exceeds the demand for labor at current wage-rates. With sudden change in market conditions, such as the onset of an economic crisis, the labor-requirements of different industries and of different firms within industries suddenly change, requiring that workers move from industries where they are less urgently needed to those where they are more urgently needed. Industries whose consumer demand fall are rendered less profitable, and they correspondingly cut down on production and the amount of labor they employ. Other industries have increased consumer demands and a concomitant increase in profitability, encouraging them to increase production and their employment of labor.

The objection that a "general fall in consumption" makes all industry unprofitable and therefore drives employment in all industries down is untenable because it ignores the relevance of changes in prices in determining profit and loss. If a firm invests $100 in a production process to make 10 widgets, but can only get $8 for each widget, thereby making its revenue $80, or $20 less than its expenses, a superficial analysis will declare that this widget-making firm suffered losses. In reality, the purchasing power of the monetary unit, as determined by general changes in prices, has to be taken into account. If in this same example the purchasing power of the dollar rose by 30% over the firm's period of production, then the firm has made a "real" profit, even if it looks like a nominal loss. Math: ($80)(130%)=$104 which is greater than $100, which is a profit (abstracting from originary interest which is beyond the scope of this article).

If consumption on all goods falls because of a general increase in people's demand for money to increase their cash balances (usually denigrated as "hoarding"), then the purchasing power of money rises, all other things equal. Consumption at some level has to continue to occur regardless of how bad the economic crisis is, and therefore even with a potential reduction in nominal revenue across all sectors of the economy and all firms, the phenomenon of real entrepreneurial profits always persists, as adaption to the changing balance of consumer demand between different goods and services continues.

However, if prices are falling across the board, then all prices have to follow suit. Especially important is the price of labor, or wage-rates in the economy. As has already been pointed out, the problem of unemployment is that supply and demand for a particular labor service are unequal at the current wage-rate. The solution is obviously that the current wage-rate is not correct and has to be lowered for employing the unemployed to become profitable. That wage-rates fall in nominal terms, however, does not necessarily mean that those workers are poorer as a result, because as we have already seen, the purchasing power of money is rising/prices for consumption goods are falling, leaving real wage-rates generally intact.

Government work or unemployment projects that take unemployed workers and give them artificial employment at the expense of taxpayers, either present or future (through deficit spending), do not relieve any of the problems of unemployment. Au contraire, they actively prevent labor from moving from unprofitable uses to profitable uses by stratifying workers in newly made unprofitable uses. The senselessness!

It also cannot be argued that these government projects help relieve the suffering of the unemployed during the recovery or transitional period while the economy "recovers." The assumption is that these unemployed people can simply not find any work at all. The ludicrousness of this assumption is clear if we just think of who would not employ several dozen unemployed workers if these workers were willing to work for just one cent per hour. Obviously, if every unemployed person in the market were willing to work for such a low wage, there would be no unemployment left. Unemployment is almost always simply a sign that wages need to fall, at least in nominal terms. And unemployment is always voluntary in that a person remains unemployed because they do not like the types of jobs offered or the wages they pay.

The economy does not "recover" until economic resources have been returned to their most profitable uses (a process that never stops, hence the consistent phenomenon of entrepreneurial profits. Yet, during an economic depression, factors of production such as labor are particularly maladjusted to reality). If the government make-work programs are implemented, economic recovery can never occur because the labor diverted into these projects is not in its most highly valued uses as determined by market conditions! You can't just employ people in artificial projects until the economy recovers for this reason, the government merely creates permanent economic depression that will only end when the artificial projects end, and then the problems of maladjustment still have to be corrected by transitions of factors of production (mostly labor) away from the artificial make-work project and into actually useful jobs.

And of course, this is all without even mentioning the negative effects of taxation or deficit spending required to fund these projects.

Next post, we'll move on to the issue of deficit spending.