Yesterday evening (2/20/14), my college showed Robert Reich's documentary Inequality for All to interested students, faculty, and members of the community and had the good sense to ask me to join a post-viewing discussion panel. The format was not shared with me beforehand so I brought a variety of props (one of which I threw across the stage at one point but not at anyone). I can't reproduce the discussion here, but I can share the remarks that I prepared (and did not have the opportunity to read). In short, Reich's name is very Dickensian as he has produced a (albeit liberal) propaganda film and narcissistic memoir best relegated to Billy Joel's "discount rack like another can of beans."
In his
new documentary, Inequality for All,
Robert Reich, who is no relation of mine by the way, is trying to match the
success of Al Gore’s 2006 documentary An
Inconvenient Truth. The documentaries
are similar in important ways. Growing income inequality, like global climate
change, is undisputable and both are clearly problems, by which I mean outcomes
that policymakers should strive to mitigate rationally. The magnitude of both
problems, however, remains unclear and, more importantly, the causes of both
problems remain contested. The causes are the crucial thing because they lead
to policy recommendations and possibly to actual policies with real world repercussions.
Policymaking is tricky business even when the causes of a problem are clear.
When policymakers have the causes wrong they are almost certain to develop the
wrong prescriptions. I think Reich’s analysis is off the mark because instead
of following the evidence in a nonpartisan manner, as he promises early in the
film, he leans heavily on liberal causes. That was a double entendre by the
way.
Please
allow me to provide an exaggerated example so there is no mistake here. Reich
is doing the equivalent of pointing out that sometimes grain mills explode.
Sure enough, that is the case, though he exaggerates the extent of the problem
by not dropping mills destroyed by military action or other external causes
from the data. Then, Reich ascribes grain mill explosions to an excess of
bilious humors that increase the amount of phlogiston to the point that an
explosion is inevitable. If you have never heard of bilious humors or
phlogiston, good for you as they were concepts long ago abandoned by scientists
because they were nothing more than conceptual black boxes that could not
predict when grain mills would explode or anything else for that matter. Reich
has done something analogous here by pointing to a real problem, income
inequality, but exaggerating it somewhat and, more importantly, attributing the
wrong causes to it.
First, the
exaggeration. Reich uses data on Real Wages, which have indeed stagnated since
the 1970s. Real total compensation, however, has continued to increase. The
difference is fringe benefits, especially healthcare. Here is the chart, right from the St. Louis
Federal Reserve’s FRED data system:
The core
problem on the bottom end of the distribution, then, is not the demise of labor
unions or low marginal tax rates on the rich but rising healthcare costs. Reich
probably blames healthcare costs on quote unquote markets but in fact the core
problem is a hybrid of government and market failures, of which the most
important are government tax rules, first implemented during World War II, that
encouraged the development of health insurance provided via employers. That led
to a whole host of problems, including runaway costs and large numbers of uninsured
individuals. I analyze the healthcare crisis more fully and offer solutions in
two books, Mutually Beneficial and Fubarnomics.
Real
wages have stagnated and real compensation increases have slowed because of
globalization, which is just jargon for competition. The 1940s, 50s, and 60s were
so sweet because the U.S. emerged from World War II not only unscathed but with
tremendous productive capacity and hence was able to extract monopoly rents
from the rest of the free world and even from the Soviet bloc to some extent.
Unions waxed over that period because there was plenty of free money to go
around. By the 1970s, however, the monopoly was gone as evidenced by the
disintegration of the Bretton Woods system of fixed exchange rates, and Americans
had to compete against Europeans and East Asians at both home and abroad. That
competition was a good thing for the U.S. economy as it forced Americans to work
harder and smarter but it also meant that the expectations of many Americans, especially those who assumed, for
reasons that I’ll never quite understand, that an easy life was their
birthright, were more Dickensian than Great. (I sincerely hope that you are
enjoying the delectable word stew I have created for you today.)
Of
course the disappointment of poorer Americans is relative: better to be in the
bottom quintile of incomes in the U.S. than in the middle class, even the upper
middle class, in most of Latin America, Africa, Central Asia, or Micronesia.
But Reich doesn’t want to consider world income distributions even though there
is a wonderful little book out about it, The
Haves and the Have Notes, by Branko Milanovic, who points out that the global
Gini coefficient, a widely used measure of inequality, is 70, far higher than
the 45 that the U.S. currently registers.
The Gini
coefficient in South Dakota, by the way, is 33, tied for the lowest in the
entire nation and similar to that of the western European democracies that left
leaners so love. Clearly, there is more to income distribution than just
politics but you don’t hear that from Reich, who wants to concentrate on real
wages in the U.S. because that allows him to pull out his Keynesian jargon
about consumption and the need for a strong middle class, whatever that is.
It’s all as much economic voodoo as trickle down economics ever was. Producers
have a good idea what the income distribution in their markets is like and
respond accordingly. Where income inequality is high, for example, they target
a high margin luxury niche and/or make their wares as affordable as possible in
a low margin mass niche. Check out C. K. Prahalad’s The Fortune at the Bottom of the Pyramid for details.
Another inconvenient truth, unitalicized and uncapitalized
of course, about Inequality for All
is that Reich also fails to adequately explain the movement at the top of the
distribution, to wit why the rich are getting richer. Globalization is at play
here, too, at least when it comes to top actors and athletes, who now reach
audiences that number in the billions. That is just market forces at work and
taking Reich at his word that he is not a socialist there is nothing to be done
there. Of course the title of the documentary, Inequality for All, belies Reich’s real views. The Pledge of
Allegiance reads “with liberty and justice for all” and says nothing about
equality. Reich can’t mention liberty, however, because his policies restrict
it and he can’t rely on justice because we can’t agree on what it means.
In any
event, when it comes to CEOs, market forces are not at play. Reich can’t see
that because he conflates markets with corporations, a mistake that many
left-of-center thinkers make. Corporations interact with other corporations and
with consumers in markets but within
themselves corporations are essentially governments and hence subject to
politics and power plays. Due to a combination of market and government
failures that I explain in detail in my new book, Corporation Nation, the ability of stockholders to minimize
managerial rent seeking has waxed and waned over time. Most importantly, it
waned after the Great War and after the Fall of the Wall, leading to increased
rent seeking by CEOs and other top executives, variables that Reich is
completely oblivious to in his infamous bridge graphic. Let me be perfectly
clear here: inequality in the U.S. is rising in part because stockholders and
governments have, once again, allowed CEOs to determine their own compensation
without effective checks or balances.
The same loss of checks and balances has made Washington
rich as it sucks resources from the rest of the nation into its gaping maw.
Suburban Washington now boasts several of the counties with the highest per
capita incomes in the nation because they are chock full of high level
government officials and government contractors. Reich claims that Americans at
all income levels don’t want to pay taxes. I counter that Americans happily pay
taxes when they know it is going to provide services that they actually need and
in a relatively efficient way. Reich wants to restart his so-called virtuous
cycle, which by the way is full of non sequiturs and other half truths, by
taxing the rich instead of by trimming back government spending. We don’t need
to throw more cash into DC, we need a government that uses what it already has
more effectively. That means reforming education, including higher education,
and not just shoveling more money at the problem. America already spends more
per student than most of its peer nations do, it just doesn’t get as much bang
for the buck because its schools and colleges don’t teach independent thinking as
well as they could. For details, see my Fubarnomics
or my Higher Education and the Common
Weal: Protecting Economic Growth and Political Stability with Professional
Partnerships, which was so radical that it was only published in India.
In
conclusion, Robert Reich is right when he says that income inequality is
increasing. He is also right that inequality is problematic but due to its
negative effect on incentives to work hard and smart not due to kooky Keynesian
concepts. Reich’s analysis of causes and hence his policy suggestions are way
off base. If we fix corporate governance, healthcare, higher education, and the
social safety net, inequality as measured by the Gini coefficient will decrease
to the mid-30s of its own accord. If resorting economic freedom doesn’t work, then,
and only then, we can think about increasing tax rates, keeping in mind, however,
the inconvenient truth that with the free flow of capital globally actually
collecting anything over 50 percent is highly unlikely, which is why the
marginal rates were reduced in the first place. Thank you and God bless.
