Monday, November 10, 2008

Robert Reich's Economic Solution

One of the few blogs I read regularly is Robert Reich's blog. Reich used to be President Clinton's Labor Secretary, and he now teaches at U.C Berkeley's Goldman School of Public Policy. He believes that our nation's economy is now in such severe difficulty that it qualifies as being in a "mini-depression," and that what we need is a "maximum strength remedy" of substantial deficit spending on our crumbling infrastructure.

Reich argues that just bailing out the financial sector isn't good enough because "the real problem is on the demand side of the economy" with consumers who are afraid to spend or borrow (even if extremely cautious banks would lend to them) because they're already deeply in debt, their real incomes are falling, and they're afraid of losing their jobs. Cutting taxes won't work either because this mostly benefits the wealthy who'll tend to save the money they obtain from tax cuts more than they'll spend it, and the rest of us will tend to use our modest tax rebates to pay off debts or buy products made mostly overseas.

So, what we need to do, argues Reich, is spend $700 billion or more next year on "repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation" to cause a "double whammy" effect of creating many new jobs and improving the workings of the future economy. However, we need to draw up a "capital budget" that lists spending priorities to make sure that we "avoid pork." To objections that we can't afford to increase our already monstrous budget deficit, Reich replies:
Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
I'm not an economist. Hell, I couldn't even stay awake when I tried to read my economic textbooks in college. But what I'm gathering from reading the "experts" now is that an increasing number of them agree with Reich about what we need to do to rescue our economy from its downward spiral. And I suspect that Barack Obama is going to do or try to do what Reich recommends.


Tom said...

All right! The good news, today, is that Treasury Secretary Paulsen seems to have halfway come around to Reich's way of thinking: Demand needs to be stimulated; not the credit market greased.

But Reich is still most right here. He would 'get value' for the cash the Feds put into the economy. Hooray, this. If the US gov't doesn't 'get value' out of what it spends, then it is an inflationary activity (in the longrun). [Cutting taxes would be inflationary, for example.] While infastructure takes a lot of time to get underway, our mini-depression is likely to last for a while anyway. And, we desperately need the infastructure improvements.

Reich is an advisor to Obama. It would be great if Obama gave Reich a cabinet positon -- but that's unlikely, I suppose, because of Reich's left-leaning reputation and the rather sour end to his role as Clinton's Labor Secretary.

Nagarjuna said...

I don't recall the "sour end" of Reich's job as Labor Secretary. Could you elaborate?

Tom said...

Well, may be my words weren't well chosen, but there is the controversy surrounding Reich's 1997 book that he wrote following his time in the Clinton Administration, Locked in the Cabinet. Here a report in Slate after the book came out: "Robert Reich, Quote Doctor."

The American people are looking for comity from the new Obama Administration and, unfortunately, Republicans would be justified to resent Reich.