The United States has seen better days. The political and
economic fabric of the country is unraveling, yet there is little agreement
about how best to move the country forward. My own position has long been that
the culprits of slow growth and social discontent are the increased levels of
taxation and regulation that suck the productive lifeblood out of society. That
position today is in the minority. A vocal group of progressive thinkers are
plumping for the opposite course—and prominent among them is Robert Reich,
former Secretary of Labor for Bill Clinton. In his new book “Saving Capitalism: For the Many, Not the Few”,
he argues for a set of policies that would cripple the American economy. A
better title for his book would be”Dooming
Capitalism, For Everybody”.
Reich makes no bones about his central contention, which is
to support “an activist government that raises taxes on the wealthy, invests
the proceeds in excellent schools and other means people need to get ahead and
redistributes to the needy.” In his view, only with these reforms and by “other
means,” most of which are left unspecified, can we return to the glory days of
his father, when union members could afford to give a good life to their
children, which cannot be done today. Reich offers no explanation for why the
decline has taken place, but contents himself with denouncing the “myth of the
free market” and the idea that the government should not “intrude” into the
business of its citizens.
More concretely, Reich starts by insisting that it is a
fantasy to assume that there can be a free market without government to create
property rights, control monopoly, and enforce contracts. But he fails to note
that this exact list of tasks is what classical liberals like myself assign to
government as well. In fact, his list is too short. First, he ignores the role
of government in controlling crime and pollution. Second, he does not discuss
the limits that should be imposed on the subsidy of some businesses by others.
Third, he leaves to one side the difficult questions about the organization and
financing of public infrastructure and the management of public resources. A
good government is ironically a lot larger than Reich seems to understand.
The real differences between progressives like Reich and
classical liberals like myself come then not in the proposition that markets
depend in multiple ways on public support. Rather, the disagreement is over the
means chosen to generate social improvements. It is here that Reich repeatedly
misfires. In dealing with property rights, it’s nice that Reich comes out
against slavery—but it is troublesome how he dismisses the right of all persons
to determine what job offers to accept for work in the open market. The issue
comes to center stage on the question of the minimum wage, where Reich takes
the sunny view that the huge increase of the minimum wage to $15 per hour from
its current level of $7.25 will largely be a transfer of wealth from rich CEOs
and their shareholders to workers, who can use the money in question to get off
of public assistance.
Dream on! Reich is in serious denial when he assumes that
hard pressed firms in competitive markets won’t make serious changes in how
they do business when labor costs move sharply higher. If the minimum wage
shoots up, it will start to make more economic sense for these firms to replace
low-skilled labor with machines and technologies that can do the same work. The
employees that do remain will be, by and large, more skilled, shutting out the
poor further. For example, Reich never considers the
exceedingly high levels of unemployment among minority teenagers,
whom regulation has shut out of the labor market.
The unintended consequences of regulations count. The early
returns on the minimum wage increases in
Seattle are a loss of 1,000 restaurant jobs in the city compared to
an increase of 2,300 restaurant jobs in the rest of the state. And this is only
for the first round of minimum wage increases. It is unlikely that Reich knows
more about the restaurant business than the businesses themselves who will
likely turn to customer self-order kiosks and other adjustments to offset
rising labor costs. It is just foolish to project that the relatively small
declines in employment levels from small increases in minimum wages will carry
over when they increase the wedge between the market and the minimum wage.
Reich takes an even odder view in his discussion about the
control of monopoly power. There is no classical liberal who looks with
indifference on the creation or toleration of cartels or monopolies, especially
when propped up by state power. But the same cannot be said of Reich. In his
discussion of labor unions, he starts from the fantasy that employers in
competitive markets can “dictate” the wages that they pay their employees. The
obvious rejoinder is that workers will play one employer against another, so
that competitive wages will rise in times of high demand, and fall in times of
slack demand. Reich then fails to acknowledge that the entire fabric of labor
law since the passage of the 1935 National Labor Relations Act has conferred
government-backed monopoly power on unions who, when recognized, have the
exclusive bargaining rights to all workers within the appropriate bargaining
unit.
The exercise of this monopoly power is far more dangerous
than the power held by firms, because it can lead to the imposition of
grotesque work rules, while increasing the risk that strikes and lockouts will
shut down essential services when the two sides butt heads. The system also
tends to collapse under its own weight as new nonunionized firms, both domestic
and foreign, can deliver better goods at lower prices, to low income families,
than firms hobbled with onerous union contracts. It is no wonder that the
percentage of union
membership in the private sector has dropped from a high of about 35
percent in 1954 to about 6.6 percent in 2014.
It is only the rise of public union membership, which now
stands at about 35 percent that keeps overall union membership at around 11
percent today. Many of those public employee union members are teachers who
exact a heavy toll in their nonstop efforts to maintain a public school
monopoly in the United States. Reich wants to invest the proceeds from higher
taxation into education, but at no point does he discuss the dangers teacher
unions pose to that mission. Nor does he mention the possible role that
nonunion charter schools play in improving education. There is no doubt that
charter school kids in New York, for example, decisively
outperform non-charter public school students—which is why parents
are clamoring to get their kids into charter schools. There is a stark choice
here. Does Reich think that a commitment to unions should take priority over
educational excellence?
Next there is the question of how to fund Reich’s ambitious,
if misconceived, program of income redistribution. Reich is silent on the
question of what programs advance growth, and his prescription for higher taxes
on the wealthy for ordinary income and for capital gains only makes matters
worse. He gets no quarrel from me on the proposal to tax unrealized gains (i.e.
those from unsold stock) at the time of death, and, similarly for allowing
deductions for unrealized losses. These have been part of the classical liberal
agenda for ages, given that any exemption of large quantities of income from
the tax system casts extra burdens on others, which slows down the rate of
capital formation and voluntary exchange.
Yet his call for progressivity that targets the top
one-percent will backfire. He cannot grow the economy by fleecing the most
productive members of the workforce or on investment income from a low-growth
economy. Reich laments the inordinate power of the nameless rich, but never
explains how that amorphous
group contrived in 2012 to pay roughly 38 percent of the taxes on
21.9 percent of income, when the bottom 50 percent paid about 2.8 percent.
Nor does he consider the risk that higher levels of taxation
on ordinary income will tend to dull the incentive to work, inclining people to
retire sooner or pass up on second jobs. Likewise, he is oblivious to the risk that
high capital gains rates make investors reluctant to dump low performing stocks
which would then allow them to invest in more productive companies—the very
mistake that Hillary
Clinton made in her problematic proposal to increase short-term
capital gains rates.
Reich is also not alert to the dangers of subsidies to
certain well-connected political groups. The ever-expanding
subsidies for wind and solar energy that he recommends are
ill-advised. If these forms of power can make it in the marketplace, no one
should block them. But if they cannot compete with fossil fuels without the
subsidy, then so be it. They should be allowed to languish. The basic point is
subject to the simple caveat that fossil fuel subsidies are inappropriate as
well, and that all forms of energy should have to take into account whatever
externalities they create, be it from polluting the air or killing endangered
birds. The same judgment applies most emphatically to lavish ethanol
subsidies, which manage to distort both energy and food markets in
one ill-conceived program.
There is a large point that comes out of Reich’s social
agenda. Notwithstanding his long service in government, he seems to have no
understanding of the enormous slip that takes place between an ambitious
program for social reform and its successful implementation. I have spent most
of my academic life in the weeds, looking at the specific operations of
government action as it applies to pharmaceuticals, to the environment, to
housing, to securities, to education, to employment, banking, insurance, and other
social institutions.
In all of these areas, I have come to the conclusion that
the modern progressive state has wrought untold damage for two very simple
reasons. First, it has no sense as to when government should intervene and when
it should stay its hand. The regulation of competitive labor markets is almost
always a loser, and the ever-heavy hand of government in this area does much to
explain the decline in working class incomes.
Second, the government has no sense of which means work and
which do not. If the risk is monopoly, control it with an antitrust law that is
limited to monopoly. But don’t wreck competitive industries, and by all means
don’t use government power to prop up monopolies, as in labor markets.
But Reich is blind to all this. There is not a single
proposal for deregulation in his disjointed book. Unfortunately “Saving Capitalism” won’t help the
many as it promises to. If its policies are implemented, it will wreak economic
and social mayhem on everyone.
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