Tag: Robert Reich

Reich Is Wrong on the Minimum Wage

Watching Robert Reich’s new video in which he endorses raising the minimum wage by $7.75 per hour – to $15 per hour – is painful.  It hurts to encounter such rapid-fire economic ignorance, even if the barrage lasts for only two minutes. 

Perhaps the most remarkable flaw in this video is Reich’s manner of addressing the bedrock economic objection to the minimum wage – namely, that minimum wage prices some low-skilled workers out of jobs.  Ignoring supply-and-demand analysis (which depicts the correct common-sense understanding that the higher the minimum wage, the lower is the quantity of unskilled workers that firms can profitably employ), Reich asserts that a higher minimum wage enables workers to spend more money on consumer goods which, in turn, prompts employers to hire more workers.  Reich apparently believes that his ability to describe and draw such a “virtuous circle” of increased spending and hiring is reason enough to dismiss the concerns of “scare-mongers” (his term) who worry that raising the price of unskilled labor makes such labor less attractive to employers. 

Ignore (as Reich does) that any additional amounts paid in total to workers mean lower profits for firms or higher prices paid by consumers – and, thus, less spending elsewhere in the economy by people other than the higher-paid workers.

Ignore (as Reich does) the extraordinarily low probability that workers who are paid a higher minimum wage will spend all of their additional earnings on goods and services produced by minimum-wage workers. 

NYT Room for Debate: the Oregon Medicaid Study & ObamaCare

Today’s New York Times Room for Debate” feature poses the question, “Do the mixed results of an Oregon health care study show that government medical insurance should provide only catastrophic coverage?” From my contribution:

ObamaCare aims to cover 16 million poor uninsured adults through Medicaid, plus 16 million higher-income uninsured Americans through government-subsidized “private” insurance. Supporters portrayed these “reforms” as a matter of life and death, particularly for the poor. Yet a monumental new study finds that “Medicaid coverage generated no significant improvements in measured physical health outcomes” for poor adults. These findings strengthen the case that states should stop implementing ObamaCare, and Congress should swiftly repeal it…

The absence of physical-health improvements indicts the entire enterprise. Supporters have an obligation to show that the $2 trillion in entitlements ObamaCare will launch next year would actually improve enrollees’ health. The Oregon study shows they cannot meet their burden of proof. What part of “no discernible improvement” don’t they understand?

Read the whole thing here. See also the contributions by Drew Altman, Austin Frakt, Robert Reich, and Grace-Marie Turner.

Memo to Robert Reich: Rewrite Your Brief

Robert Reich posted a letter in June 20 Wall Street Journal responding to my article of June 16, “Why 70% Tax Rates Won’t Work.”

He argues that I distort his proposal (though I wasn’t talking about his proposal) and ignore his argument that, “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur [economic] growth.”

This strikes me as a futile effort to change the subject.  Since I proved that past tax rates of 50-70% on relatively modest incomes raised less revenue than a top tax rate of 28%, how could Reich’s proposal of 50-70% rates at incomes above $500,000 raise more revenue?   And if 50-70% tax rates would not raise more revenue, then how could he possibly promise “substantial rate reductions [actually a refundable tax credit] for people with incomes under $100,000”?  

The original draft of my article was not focused on Reich, but included others − including two of his Berkeley colleagues (Brad DeLong and Emmanuel Saez) who recently suggested a tax rate of 70% would be “revenue-maximizing.”  The details of Reich’s proposal were not in the blog I quoted, but such details have no relevance to any points I made.

Only after top tax rates came down, I noted, were we able to afford very substantial reductions in taxes for people with incomes under $100,000.  Since President Reagan took office the average income tax rates have become negative for the bottom 40% and were cut in half for the “middle class.”   In 1980, when top tax rates were 70% and nearly 40% on capital gains, such rates brought in so little revenue that the Feds were compelled to tax low and middle-income families quite heavily to bring revenues up to the normal 8% of GDP.

At his blog, Reich argues that, “Reynolds bends the facts to make his case. The most important variable explaining the rise and fall of tax revenues as a percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.”

For that to work as an explanation of why individual tax revenues were higher when the top tax rate was 28% than when it was 70-91%, Reich is logically obligated to argue that the economy was growing more briskly when the top tax rate was 28% than when the top tax rate was 70-91%.  Contradicting his own logic, however, Reich instead claims that “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur growth.”

Reich is not proposing to add new tax rates to 50-70% on salaries, dividends and capital gains because he believes it will raise more revenue (my data show otherwise), but because he believes it will raise the growth of real GDP.   This is breathtaking. Reich should be glad that I ignored his “central argument” about super-high tax rates boosting economic growth by taking income from those who earned and giving it to those more likely to squander it.   I was just being too polite.

Within his hyper-Keynesian lawyer’s brief, Reich is logically required to argue that top tax rates of 70-91% (1) raised revenue, and that (2) this imaginary added revenue allowed imaginary tax reductions on poorer people with a lower propensity to save.  He must then arrive at the logical conclusion, which is that (3) the average savings rate must have been much lower when top tax rates were 70-91% than since 1988 when to tax rates have frequently been 28-35% and as low as 15% on capital gains and dividends. A low savings rate, in Reichian theory, is what makes the economy grow.

My article proved the first two premises are false.  High statutory tax rates on the rich generated less revenue, and the poor and middle classes paid much higher taxes as a result.

The third premise of Reich’s brief is key to the Keynesian fable about growth depending to incentives to consume rather than incentives to produce.  Once again, the facts are the exact opposite of what Reich imagines. The personal savings rate was 9% from 1959 to 1981 when top tax rates were 70-91%, and 4.5% from 1988 to 2007 when top tax rates were 28-39.6%.

Reich’s comment that “the richest 1% of Americans got 10% of total [pretax, pretransfer] income in 1980, and get more than 20% now” refers to income reported on individual tax returns, assembled by Thomas Piketty and Emmanuel Saez.   When top tax rates went way down, particularly in 1988, 1997 and 2003, the amount of reported income and capital gains went way up.  As Saez explained in the 2004 issue of Tax Policy and The Economy (MIT Press, p.120): “Top income shares … show striking evidence of large and immediate responses to the tax cuts of 1980s, and the size of those responses is largest for the topmost income groups.”   That is why revenues from high-income households went way up rather than down, and why it then became feasible to hand out refundable credits to the bottom 40% and cut tax bills in half for those earning less than $100,000.

Reich would apply his 50-70 % tax rates to reported capital gains and dividends, which is a surefire way to make taxable capital gains and dividends vanish from tax returns.  No high-income taxpayer can be compelled to sell property or financial assets for the sheer joy of paying 50-70 % of the gain to the IRS.  No investor can be compelled to hold dividend-paying stock rather than tax-free bonds.  

With the enormous amount of revenues lost under the Reich tax proposal, we would have no choice but to revert to the pre-1986 stingy personal exemptions and standard deductions while also repealing the Bush child credit and the vastly expanded earned income tax credit.

Fixing the Economy Demands More Than a Stroll across Lafayette Park

President Obama’s visit with the Chamber of Commerce this week has infuriated the anti-business Left.  But short of expropriation and nationalization, what doesn’t? 

Robert Reich and NPR and the scribes at the Huffington Post just don’t get it.  Their man may be in the White House, but business holds the keys to the kingdom.  Whether the president’s priority is job creation or reelection, nothing matters more than sustained economic growth. And without business having confidence that policy in the United States will become more hospitable and predictable, investment and job creation will remain tepid.

The president doesn’t have nearly the leverage assumed in the delusions of groups like Public Citizen, which wrote: “What America needs is not olive branches to giant corporations but controls over the companies that sank the economy.”  Back here in reality, businesses have options.  Many can choose to produce and operate in other countries, where the economic environment may be more favorable.  In that regard, globalization has produced a veritable Galt’s Gulch, which serves as an important check on bad economic policy.  Governments are now competing with each other to attract the financial, physical, and human capital necessary to nourish high value-added, innovation-driven, 21st century economies.  Gratuitously punitive anti-business policies will only chase away the companies that the president exhorts to invest and hire.

According to a survey of 13,000 business executives worldwide, conducted by the World Economic Forum, 52 countries have less burdensome regulations than the United States.  Add to that the fact that the United States has the highest corporate tax rate among all OECD countries and it becomes less mysterious why U.S. businesses shift more operations abroad.

As I wrote in a December 2009 Cato paper:

Governments are competing for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative frictions.

This global competition in policy is a positive development.  But we are kidding ourselves if we think that we don’t have to compete and earn our share with good policies.  The decisions we make now with respect to our policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

The president is beginning to get it – though grudgingly.  He acknowledges the burdens of excessive and superfluous regulations and bureaucracy (remember his SOTU story about the jurisdictions entangled in the salmon’s journey from salt water to fresh water to the smoker?).  The president has hinted that he would like to see the corporate tax rate lowered.  He knows that businesses have options to invest, produce, and hire abroad—and that oftentimes U.S. policy chases them there.  But, so far, rather than push policies to encourage domestic investment, production, and hiring, the president has done the opposite, while demonizing businesses that follow the incentives to go abroad.

The president’s position during his exchange at the Chamber of Commerce was that he has made concessions to business by moving toward the center on tax and trade policy, and that now it is time for business to show good faith by investing and hiring.  But Obama’s small steps toward the center come after two years of sprinting to the left on economic policy.  After ObamaCare, Dodd-Frank, taxpayer bailouts, unorthodox and legally-questionable bankruptcy procedures, subsidies for select industries, Buy American and other regulations governing how and with whom “stimulus” dollars could be spent, and the administration’s tightening embrace of industrial policy, businesses want a more quiet, less intrusive, less antagonistic, predictable policy environment before they will feel comfortable playing the role Obama wants them to play.

Until that happens, the president shouldn’t expect torrents of investment and hiring from the business community.