Robert Reich Gets These Seven Economics "Fundamentals" Very Wrong

Authored by William Anderson via The Mises Institute,

Nearly 40 years ago, Lawrence Reed published “Seven Fallacies of Economics” in The Freeman in which he noted that much of what the public believes about economics is fallacious because most people fail to understand simple opportunity cost. Given the current trends in political economy, it is a sad certainty that most if not all of the fallacies Reed listed are still taken as economic truths in much of the academic world.

Fast forward to former Secretary of Labor Robert Reich, who now is a public policy professor at the University of California-Berkeley, and is a popular economic and political commentator on the Internet, making good use of Youtube for his lessons accompanied by board drawings. As if to counter Reed’s economic wisdom, Reich presents his “7 Incredibly Clear Economic Fundamentals.” As one will see, they not clear, they are not “economic fundamentals,” and they certainly do not represent sound economic thinking.

Reich has a brief video in which he confidently presents his “truths” to an audience I suspect believes everything he says.

For those that don’t watch the video, he lays out his seven points as follows:

  1. Workers are consumers.  

  2. Consumer spending accounts for 70% of all economic activity in the United States.  

  3. People at the top spend a much smaller portion of their incomes than people in the middle class and below.  

  4. So when most of the economic gains go to the top, there's not enough purchasing power to keep the economy moving.  

  5. Which means that in order to have sufficient demand for goods and services, a larger share of total income has to go to the middle class and the poor.  

  6. Which requires a higher minimum wage, a bigger earned income tax credit, lower taxes on the middle class and the poor financed by higher taxes on the wealthy, and stronger unions capable of negotiating higher wages.  

  7. These don't hurt the wealthy. It's not a zero sum game. In fact, the wealthy will do better with a smaller share of a rapidly growing economy than they're doing now with a large share of an economy that's barely growing at all.

While I will deal with each point individually, it is important to note what is missing: any mention of capital.

To a leftist like Reich, capital is irrelevant and actually could be harmful, since it replaces labor, and “everyone knows” that labor is the source of all value. Furthermore, Reich would argue that capital formation doesn’t come about without spending, and unless authorities find a way to “put money into the hands of the middle class,” there won’t be enough economic activity to justify any investments into capital. In other words, there will be no capital investment if there is no demand for capital, and there will be no demand for capital if people don’t have enough money to spend. (No doubt, in discussions about capital, he would refer us to Thomas Piketty, who claims that returns to capital favor the wealthy and increase the rich-poor pay gap, so that over time, capital actually shrinks the economy unless government intervenes and re-distributes income from the wealthy to everyone else.)

The way to bring about more spending, reasons Reich, is to transfer money from the wealthy to the middle and lower-income groups, since people in those categories likely will spend a higher percentage of their income on consumption goods rather than investment (or, horrors, luxury) goods. At the same time, the government should ensure that minimum wages are raised to higher levels and that labor unions should be made stronger through government policies that protect them.

So, we have the following scenario: In order to keep the economy moving, workers must be paid higher wages brought about by higher minimum wage laws and expansion of labor union power. Reich claims that these points are “incredibly clear economic fundamentals.”

The only “incredibly clear” fundamental point is this: Robert Reich is as clueless on economics as he ever has been in his public career, and one is amazed that he did not do more damage to the U.S. economy while he was at the Department of Labor. There likely is not enough cyberspace to deal with all of the fallacies that Reich has presented, but I shall evaluate what I can.

Reich: Higher Costs Equal More Wealth

A number of economists, including some on the Mises page and others elsewhere, have exposed the “consumer spending comprises 70 percent of the economy” fallacy, and those knowledgeable about Austrian Economics are familiar with Say’s Law. Thus, I will not plow that ground, since others, such as Ludwig von Mises, have expertly explained how production is what drives consumption.

Reich’s thesis is that because workers are consumers, they would benefit from having higher rates of pay, since higher pay would raise their incomes, and higher incomes would allow for them to engage in more consumption, making them better off. Any of us that have received substantial pay raises will agree that economically speaking, we were better off afterward (ceteris paribus).

In watching his video, one gets the sense that Reich truly believes that if only – IF ONLY! – business owners understood what he understands: Paying high wages leads to higher wages and higher wages lead to more prosperity. All it takes to kick start the economy into overdrive is for government to mandate higher wages, empower labor unions to force up pay for their members, and have government impose massive taxes on high income earners along with returns to capital. The only way for business owners to experience universal prosperity is for the government to force up their production costs.

While Reich’s policy demands resonate with people on the left, his ideas are utterly fallacious.

First, and most important, Reich claims that if government engages in policies that increase costs of production, businesses will prosper more. Thus, higher costs lead to higher overall incomes and more prosperity.

The supposed example of this principle in action is the famous Henry Ford decision to nearly double the pay of many of his workers from about $2.50 to $5 a day, an action which some claim created the American middle class. As the argument goes, Ford raised the wages of his workers to that they could afford to purchase the products they were making. The real reason for his actions – to reduce crippling costs associated with high turnover rates in his workforce – often is lost in the “virtuous circle” of higher pay and higher consumption rhetoric.

To put it more succinctly, we are supposed to believe that by nearly doubling his labor costs, Ford magically produced a nationwide change in consumer behavior. One can make the argument that if business owners could double their other factor costs, then the economy would boom, since all factors of production produce incomes for someone.

(Yes, I am sure that Reich proponents would argue that other factors tend to be owned by rich people, and rich people don’t spend enough on consumption goods to keep the economic “circular flow” in place. We easily debunk that argument by noting that development of all factors of production require work forces comprised mostly of employees earning regular middle-class and below incomes, and the bulk of the factor payments would go to them.)

Such backward reasoning stands in contrast to the simple fact that when producers see increases in relative costs over time, the supply of goods they create will fall, not rise, which means real prices of those goods will go up. Thus, Reich turns everything we know about productivity on its head by claiming that government policies that increase factor costs and shrink production is the key to having a strong economy.

Economies grow when entrepreneurs are able to move resources from lower-valued to higher-valued uses, a process that over time reduces the real costs to society and permits the economy to produce more wealth. Forcing up costs through government edicts does not create more wealth; it destroys wealth.

My second point deals with the heart of Austrian Economics: economics is part of human action. In the Austrian paradigm, individuals act purposefully using means to achieve desired ends. In a market setting, individuals engage in production and exchange in order to meet their needs and improve their current lot in life. People produce in order to consume, and they consume because they perceive that doing so makes them better off.

Contrast that concept to the Reich economic paradigm: people produce in order to get money and they consume in order to clear the shelves of goods so that they can produce more goods to have incomes, which then allow them to consume further, keeping the cycle going. Austrians hold that people produce to consume; Reich believes that people consume in order to produce in order to consume in order to produce, and so on. Economic exchange is nothing more than a glorified hamster wheel that has no real purpose other than to repeat itself.

Reich is not giving “economic fundamentals,” since there is nothing “economic” about what he is saying. His pronouncements are not about economics at all, but rather are anti-economic, clarion calls to destroy wealth and spread poverty.


DownWithYogaPants BennyBoy Tue, 03/13/2018 - 18:33 Permalink

He does a brisk business playing malignant little dwarves in movies.

.........he's tiresome in in persistent adherence to the Bankster's line.  If you were a Private Central Banker you'd love retarded little economists that gave you excuses to print money too!

For the love of Christmas THEY GET TO PRINT MONEY.  

Nice work if you can get it.

In reply to by BennyBoy

TeethVillage88s VAL THOR Tue, 03/13/2018 - 21:42 Permalink

Actually you have a big point.  Leftists are Fascist, Socialist, Communists, and leaders of the USA, and a majority of Leaders of US Congress.  US Foreign Wars are a clue.  Status Quo for 60 years since entrance to Viet Nam is another.  Sure, we have a Republic that was used in Banana Wars under Smedley Butler... but even as we curtailed use of Military against Workers who Strike or Unions... the fact that the Military was used for support of Corporations/Business Interests seems relevant.

- Where to go from here on Fake News, Fake Wars, Fake WMDs, Fake Incubator Babies on the Hospital Floor... Fake Conspiracy of Russia with Trump and US Political Entities.... Fake cover up of Hillary Clinton Sexism against Clinton Sex Accusers... Fake Cover up of Clinton Email Security Breach... Fake Cover up of HRC lawlessness and brazen flouting of Federal Security Laws... Fake Cover up of HRC as Traitor, Seditious Actor, Racketeer, Influence on FBI & DOJ, Cover up of Clinton Crimes and Stab in the Back of Workers with NAFTA, CAFTA-DR, WTO, Most Favored Nation for China... and Fake Free Trade with Europe, Latin America, and China.

- Jeezus Fucking Christ 

In reply to by VAL THOR

Mikeyyy GUS100CORRINA Tue, 03/13/2018 - 18:28 Permalink

Which of the seven is wrong Einstein?  


#2?  "Consumer spending accounts for 70% of all economic activity in the US"?

Tyler has bemoaned that very fact right here on the pages of ZH.


and you get 20 up votes.  I swear to God, someone could tell you dumbasses black was white and you'd believe him if he was on your team.

In reply to by GUS100CORRINA

Oldwood DownWithYogaPants Tue, 03/13/2018 - 23:12 Permalink

Economists business is the understanding of humanity and how to manipulate it to get desired results. That implies that they do NOT believe in any real "natural" economy, but one specifically designed for effect, the work of manipulating human behavior to benefit some at cost to others.

Justice is not an absolute, it is subjective, dependent upon each person's perspective. We are allowing economists and giving them the tools that only government can provide to CHOOSE, (and even IF they could do as they wish, their collateral damage is incalculable) winners and losers.

Reich wants to promote the poor over those qualified for jobs, affirmative action that puts performance in the back seat.

If you want to see an economy fail, simply disincentivise production, especially of those who actually know how to produce. On par with Africans kicking white farmers off their land in pursuit of justice, that ultimately destroys their economy. And like many who would happily see the economy torched just to see a little economic justice applied to the rich.

Progressivism is suicide.

In reply to by DownWithYogaPants

Entertaining1 putaipan Tue, 03/13/2018 - 19:35 Permalink

Finally.  Who cares about any ideas he supports now?  He's a fake.  When he mattered, he supported the industry-destroying NAFTA--as the Secretary of Labor, no less.  On general principle, if he said fresh air was good for me, I'd break out the Marlboro Lights I keep in my sock drawer for emergencies.   

Only in the United States of Amnesia could someone make a career pretending to support what he actively fought against in public.  He has as much credibility on helping the little guy as Roman Polanski would opening a facility for exploited teens.     

The author of this piece also needs to read more broadly.  Each school of economics has utility in different fields.  Mises's tenets are less effective here than other places.  The problem is that economics creates disciples looking to convert the world rather than mechanics who want the right tool for the job.  See Economics:  The User's Guide, for more.



In reply to by putaipan

DanDaley Mikeyyy Tue, 03/13/2018 - 18:46 Permalink

#2?  "Consumer spending accounts for 70% of all economic activity in the US"?


The government LIES in the way that it inflates economic activity, don't forget!...the same way that it lies about unemployment, inflation, and everything else under the sun. No, Reich is merely a useful stooge for the left that has a chronic case of diarrhea of the mouth.

In reply to by Mikeyyy

GeoffreyT Mikeyyy Tue, 03/13/2018 - 19:55 Permalink

Consumer spending does not account for 70% of economic activity; it accounts for 70% of GDP by expenditure. Non-final goods are not counted in GDP; nor are transactions in second-hand goods.

One way to understand economic arguments is to understand the data. I am certain Reich understands the data, and he uses "economic activity" as a shorthand for "GDP by expenditure"... but generally speaking, political apparatchiks use sloppy expression when they know that a more precise statement would undermine their argument.

In reply to by Mikeyyy

Kickaha Mikeyyy Tue, 03/13/2018 - 20:18 Permalink

The article was obviously above your intellectual capacity.  It proposed the idea that producers of consumer goods accounted for 70% of all US economic activity.  Consuming anything is by definition the destruction of the item consumed.  Consumers do not create wealth.  They destroy it.  If they are fortunate, they have a job creating stuff that in total is more valuable than what they destroy as a consumer.  If we as a society are unfortunate, we will be afflicted with lots of useless eaters who produce nothing and destroy large quantities of valuable goods and services by consuming them.

Somebody in here is a dumbass, unless you've left the room by now.

In reply to by Mikeyyy

Twee Surgeon Kickaha Tue, 03/13/2018 - 20:54 Permalink

You sound fairly thick yourself. If a Consumer is able to Consume then the wealth they Consume with was created somewhere by someone at some time. If they buy a house, the house is not destroyed but most likely upgraded, same with Land. A can of Corn get's destroyed. A Cheeseburger get's destroyed. Consumers create wealth because they Work to Consume.

Why do you think a Shoemaker makes shoes, a Hobby.

In reply to by Kickaha

DontWorry Tue, 03/13/2018 - 17:36 Permalink

I think what Reich is saying is that fraud and corruption is putting more money in the hands of the elite and leaving less for everyone else, which is ruining the country.

Oldwood DontWorry Tue, 03/13/2018 - 23:25 Permalink

And rather than rooting out the fraud we instead perpetuate it in law while taxing cigarettes. Fraud is almost exclusively a product of government action or inaction. There are laws, and then there are not, but inevitably enforced arbitrarily and for desired effect. We don't punish criminal banks, we're fine them a percentage of their criminal take.

And if anyone thinks we can end poverty by simply redistributing wealth, they are ignorant fools. Poverty is caused by ignorance and by CHOICE.

We can show them the way, but we can't make them prosperous. Freedom is about choice, and choosing poorly is our RIGHT, as is its consequence.

In reply to by DontWorry

slightlyskeptical Tue, 03/13/2018 - 17:37 Permalink

Relative costs do not equal demand.

Higher wages raise demand which in turn will increase production even at higher prices, as long as wages rise faster than prices, which they should since labor is generally 10-15% of the cost of production..

Oldwood slightlyskeptical Tue, 03/13/2018 - 23:47 Permalink

If higher wages increase demand, why is Reich says that only the poor and middle class spend.

I think the chicken and egg argument over high wages or low prices driving demand is a waste.

I believe that once our basic needs for food and shelter are met, all other labor and consumption are emotionally driven.

People's wants are almost in contradiction to their actual needs or ability to pay, which a massively indebted public created largely on disposable Chinese crap I think proves.

People run to either surpass others or escape pain and loss. Modern economics is based upon incentivising us to RUN.  We run to get ahead of our peers or our indoctrinated perceptions of what we are told everyone else wants or has. We run to purchase this emotional fix when inflation is hyped to make us believe if not now, maybe never. As with our current stock market phenomena, it is as much a fear of missing out as any real economic metric or need that drives consumption.

What Trump understands is the ONLY economy we have is one that we believe is growing and that if we don't get in early, we'll miss out. Waiting for proof of reality is too late to make money...easy money. Ultimately no one really wants to WORK for prosperity. Real prosperity is easy money, and easy money only exists for long IF enough people are willing to produce in the belief they will be richly rewarded eventually.

The economy is a mental construct that relies on delusion, which is why it always will be cyclical, manic depressive. So let's not pretend there is some Utopian economically "just" system. Like our tax system, the moment the majority figures out how it works, they have to change it. If we knew the real rules, no one would play. We would still be living in caves likely, or under bridges if we could figure out how to trick someone into building them for us.

In reply to by slightlyskeptical

wisefool Tue, 03/13/2018 - 17:39 Permalink

Robert Muller thinks jet fuel can melt steel beams. (school of chemistry)

Ohh wait ...  this is the other manlet who believes in the broken windows fallacy. (school of economics)

Invest in popcorn folks. And learn how to cook it properly. You'll get +10 I.Q. points on any checks against the deep state retards.

wisefool DownWithYogaPants Tue, 03/13/2018 - 19:09 Permalink

They did not have to bring him back for the 2016 baba yega hunt. And at 70+ (age. not I.Q.) he most certainly did not have to accept.

But you are right, it is deadly for deep state whistleblowers. The rest of us have been tax slaves for perma war on earth. There is an entire generation who does not know about 911. So they are setting up the obummer 501c3 tax scams for gun control hoaxes.

The Devil knows exactly what he is doing. He gets every soul ... no  matter your, or your children's level of integrity. And he does it on 1000 year timelines.

pay your taxes folks.

In reply to by DownWithYogaPants

CHX13 Tue, 03/13/2018 - 17:39 Permalink

However, if the top 1% bag 80% of all income then something is indeed not quite right with this system anymore. That wasn't the case back in the golden days... 

EndOfDayExit Tue, 03/13/2018 - 17:43 Permalink

Points 1-4 are valid. But then points 5-7 are not (the only) solution to point 4. Point 4 can also be addressed by reducing overpopulation, but this is of course a lot harder to do compared to making every individual worker (umm.. consumer) poorer by taking from those who still have some and sharing with those who don't. This way corporations will have more paying customers resulting in more revenue and more money going to corp owners. No surprise, all the billionaires are for socialism, they just never mention that socialism is intended to be for the masses, not for them.

Deep Snorkeler Tue, 03/13/2018 - 17:45 Permalink

The Seven Fundamentals of Trumponomics

1. the Trump Tower service elevator is packed with hard-working porn stars most nights

2. the interval between golf outings need not be productive

3. whale oil and tallow candles are coming back

4. working people really don't need to be paid that much

5. economic pundits on Fox News are frick'n geniuses

6. smart billionaires are smart because people they exploit are dumb

7. a lie is only valid for five seconds or until a new lie overlaps it