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'It's the demand side, stupid'
Robert Reich
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Bob Moon: President Obama had a message for Congress today as he faced reporters at the White House. He challenged Republicans to go along with eliminating certain tax breaks for the super-wealthy.
Barack Obama: The revenue we're talking about isn't coming out of the pockets of middle-class families that are struggling. It's coming out of folks who are doing extraordinarily well, and are enjoying the lowest tax rates since before I was born.
At the same time, the president urged lawmakers
to extend his tax cuts for middle-income Americans. He pressed Congress to raise the debt ceiling. And he says there's an important way
lawmakers can help put more Americans back to work.
Obama: Right now, Congress can advance a set of trade agreements that would allow American businesses to sell more of their goods and services to countries in Asia and South America.
That may be one way to get more people back on the payrolls. Commentator Robert Reich has another idea: Work on increasing demand for goods and services here at home.
Robert Reich: What to do about raging unemployment? Many Republicans and a few Democrats are peddling supply-side solutions. Cut corporate taxes. Reduce the cost of capital. Cut the employer share of payroll taxes.
This is nonsense. The problem is not on the supply side.
Companies don't need financial incentives to hire. They're sitting on $1.9 trillion of cash. They don't even know what to do with it all. If they wanted to use this cash to hire additional workers, they could. Instead, they're buying back their own stock and buying other companies.
Nor is the cost of capital an issue. Capital is cheap. Companies can get bargain-basement interest rates on new loans.
Nor does it make any sense to lower the employer share of payroll taxes. This won't create jobs. Payroll taxes are not deterring companies from adding employees.
Let's get real: The problem is on the demand side. It doesn't make economic sense for businesses to hire more workers unless businesses have more customers. And they don't.
These days consumers are reluctant to buy. That's because their real wages are falling, their home values are plummeting, they're still under a huge debt load, and they're worried about keeping their jobs.
Supply-side solutions have nothing to do with any of this. They're like pushing wet noodles. The economy needs a boost on the demand side.
For 30 years now we've been hearing from "supply-side" economists say that if we reduce tax rates on the rich and on corporations -- and keep the cost of capital low -- we'll get more jobs and growth. And the benefits will trickle down to everyone else.
Well, we've tried the theory out, and little or nothing has trickled down. Tax revenues are now 15 percent of the national economy. That's the lowest in 60 years. And capital is cheaper than ever. But the economy is going nowhere.
Can I be blunt? It's the demand side, stupid.
Moon: Robert Reich was secretary of labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America's Future. Next week, David Frum. Send us your comments in the meanwhile -- click on this contact link.
About the author
Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.Pages
As Reagan said, "the trouble with our liberal friends is not that they're ignorant; it's just that they know so much that isn't so." The reason supply-side economics was revived under that name is that demand-side economics was given free rein in this country, turning a moderately-severe recession into the Great Depression, and in the world, leading to mass starvation in the Soviet Union. And recent attempts at supply-side solutions have been highly naive and half-hearted at best; one of the few points that Professor Reich gets right is that lowering the cost of capital further won't help, but capital costs are the *only* area where government-imposed costs have been lowered recently. We need to significantly lower the cost of *employment*---and payroll taxes are the *least* of it.
To characterize American economic policy of the last two decades as being of "Supply Side" is like believing in a commercial selling quackery. Our economic policy of the last two decades has been nothing but a die-hard "Demand Side" economy. The economic statistics showed that 75% of our GDP has come from "consumption" - driven by the "Demand" of consumption. America hardly manufactures anything that we consume any more. Many of the so-called manufacturing companies are doing the assembly of imported parts. This country is pretty thoroughly de-industrialized. But the politicians would have us believe that we can continue to consume our way to prosperity. Damn the ever increasing trillions of foreign debt. Whichever party that won the Whitehouse has sought to secure their next election/re-election by over-spending our tax dollars and shoving more money (credit or debit) into the hands of consumers(voters). The continuing saga of our "Demand Side" economy hit a brick wall in 2007. Since then, trillions of dollars have been poured into the economy and the interest rate has been driven down to zero - all for a faint hope of continuing our "Demand Side" miracle. In a de-industrialized economy of ours, domestic jobs are mostly created in the service sector by shoving cheap money into the hands of the consumers hoping they'll "consume more services and imported goods". Do we really want to continue this "Demand Side Economy"? Where are our esteemed Economists? Shouldn’t we consider rebuilding our industrial bases and practice true “Supply Side†economy?
Thirty-five years working in the real estate finance and development sector taught me that property markets are THE primary driver of what we think of as business cycles. And, property markets are driven by the dynamics of land markets, which are by their nature speculative. Easy credit provided to property (i.e., land) speculators is like throwing an accelerant onto a burning fire.
As I wrote earlier, the systemic solution is to adopt the public collection (via taxation) of location rental values while exempting property improvements from the tax base.
While the political struggle is undertaken to change the way government raises its revenue, an important regulatory reform would be to prohibit any financial institutions that accepts FDIC-insured deposits from providing credit for the purchase of land or accepting land value as collateral for other borrowing. This, by the way, was the effect on residential property markets just a few decades ago when purchasers were required to make a 20 percent cash downpayment. As property prices escalated and down payment requirements were lowered (and in some cases eliminated) the banks were financing more and more land cost and less and less housing value. History shows that land markets reach a specualtive peak every 18-20 years and then crash. This last land market cycle was one of the most speculation-driven and so crashed the hardest. This should be of no surprise to anyone who has been associated with property markets, even if only a small number of economists seem to understand what is occurring.
The problem with Dr. Reich's solution is that it is the title of the book without the contents. If American workers won't buy American products because they don't have the money or are afraid to spend it because they fear losing their jobs, then the only possible source of demand will have to come from foreign consumers. And what do existing American companies have to sell that foreign consumers would want to buy in greater quantities than they do now? We simply need to make better products than we do now, and to do that will require a cooperation between American government, management and labor that does not exist. There is a model in the world today of what we could be doing -- it is the German industrial model. But many American politicians of both parties consider untouchable the concept of government cooperating with business and labor to both create products of such high quality that they will be in high demand AND preserve and create new jobs in America. Please, Dr. Reich, tell us how American politicians, business and labor leaders can be taught to think outside the box to create the demand you suggest.
Yes, it is the demand side & I agree with all that he says except: "Nor is the cost of capital an issue." His next sentence: "Capital is cheap." needs to be reconsidered - what if capital is too cheap and actually has a privileged position in the market relative to labor and real assets. I would love to hear Reich's opinion of the demurrage currency (a 'rusting' currency which depreciates in value similarly to consumable goods) suggested by Silvio Gesell (http://www.utopie.it/pubblicazioni/gesell/money_as_it_is.htm)
We need to recognize that monetary systems reflect specific values and that real free market competition includes complementary currencies that reflect different values. Our current usury based currency values speculation too heavily at the expense of people who wish to pursue other goals. Those who enjoy the game of wealth building and leverage this currency which is expected to grow in value and provide a positive rent/interest are well served by this system. The problem is we are all captive to this winner take all game & the currency is rigged against those who would prefer to put their energies to other purposes (and hire the wrong financial adviser). There is a reason that 90% of the wealth has migrated into the hands of less than 5% of the people. This is because the money flows are set up to move the money to the people who receive more interest than they pay from the larger population of people who are paying more interest than they receive. As this money pools into fewer hands the velocity slows, particularly at times like this when large speculative bubbles need time to unwind.
Having a currency designed specifically to address the function of 'medium of exchange' (even during times like this when the 'store of value' has been degraded in the speculative currency) is an important part of the ecology of healthy economic exchange. One good example is the CHIEMGAUER (http://www.ijccr.net/IJCCR/2009_%2813%29_files/IJCCRvol13%282009%29pp61-...) in Austria, which is a demurrage currency having a small 'holding fee' attached to boost the velocity of the money. This is the same thing as having a small flat tax on the currency & if local governments would do that, then they could spend the currency into circulation on the social infrastructure like teachers, police and fire departments. Democratizing the credit commons that Thomas Greco speaks of would then be done by spending local demurrage currency into the community based on the bond issues we vote on (rather than borrowing dollars at interest). During the last depression this was tried very successfully in Worgl (see minute 2 of this 4 minute video http://www.youtube.com/watch?v=hxdPIOUTd2k).
It is the demand side, yes.
Also, it is technology that has made so many jobs irrelevant. Computers do the work of many people. Large highway machines do the work of what used to be hundreds more. Fresh & Easy has no cashiers.
Technology, automation, computers, and the internet have taken away many jobs that may never come back. Anywhere.
People who advocate more tax cuts have really short-term memories: over half of the much reviled stimulus bill was tax cuts. And, nearly two years later, the proof seems to be in the pudding: 9.1% unemployment, 4 million + unemployed for over 2 years. If tax cuts were the answer, we would have seen something. Now, let's at least try the other side and see what happens. This is a moment to experiment as much as the Great Depression was, and experimenting is what America is best at. Why can't we have a little faith in the DNA of American Ingenuity and roll up our sleeves together?
He's right.
Min wage when adjusted for inflation at an all time low.
Middle class wages flat.
2 and 3 generations living under one roof while the rich get richer.
Think of all the gov't giveaways:
Health insurance for kids of poor families.
Earned income tax credit
Subsidized loans for students and home borrowers.
Food Stamps for working families that fall below a certain level.
If the working class was paid enough money the gov't would not have to devise elaborate redistributions schemes or subsidize the salaries or health care of businesses employees.
What we need is to repeal Taft Hartley and the other anti union legislation and pave the way for a renewed union movement.
We also need to close off borders so that businesses can not scab out strikers and keep wages low thru the use of vulnerable illegals or guest workers.
We need to start on this now or the US will decline.
Dr. Reich has described the part of the problem relating to demand, mentioning the problem of too much debt, but insists on attacking "supply side" thinking prefering his own "demand side" solution, which he does not detail. Unfortunately the level of debt is the problem. Increasing debt has been the basis of the prior prosperity. Over much debt is the basis of our current and future misery. Until nominal debt vs domestic product is rebalanced, there will be no "sustainable recovery". Debt must either be extinguished through bancrupcy or diluted through inflation (or some combination thereof). Either way is a painful hangover from the party hardy days of yore, yet a most important remedy and lesson for those willing to learn. There is no other way to reconcile the gross sickness in our global economies.
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