Monday, February 18, 2008

Reich is Wrong

Former Labor Secretary Robert Reich appeared the New York Times last week with an editorial about how we the people have spent ourselves into financial oblivion...and his formula for giving a lasting hand-up to the middle class.

The piece was reprinted in Sunday’s Houston Chronicle, alongside a summation that stated “the only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans.”

Can’t argue with that.

Bringing home more bacon would make any household a happier, heartier place.
Where I fundamentally disagree with Prof. Reich is in how this might be accomplished.

True to his bureaucratic roots, Reich prescribes the government as the fount from which such largess would flow, and completely misses the “lasting” part of his formula. It all gets back to feeding a man fish vs teaching a man to fish, basically.

Prof. Reich proposes providing larger earned-income credits for workers at the bottom of the financial food chain. He would do so by raising taxes on the higher-earning sectors of society. Taxing the rich is a convenient tactic, especially during election cycles.

In a recent blog, Reich suggests funding all sorts of government agendas--including universal health care, better schools and infrastructure reconstruction--by socking it to the upper crust wage earners because…because, well, they can better afford it.

He writes, “…the wealthiest 1 percent of Americans are earning more than 21% of all income -- a postwar record -- while the bottom 50% of Americans combined are earning just 12.8% of total income.”

What Reich fails to disclose is that the wealthiest 1% of the population are also paying 37% of the income tax. According to statistics quoted by Stephen Moore, Senior Economics Writer for The Wall Street Journal, “the top 10% of wage earners pay 68 % percent of the tab. Meanwhile, the bottom 50 percent—those below the median income level—now earn 13% of the income but pay just 3% of the taxes."

Not surprisingly, the former Labor Secretary also prescribes stronger labor unions in sectors that are sheltered from global competition. That could be a political placebo, however, since such sectors are shrinking each year. Reich apparently hasn’t been following the fortunes of General Motors, Ford, or Chrysler, who have been nearly bankrupted by workers’ generous pension plans negotiated by the Unions. What good is a pension if the company that’s providing the promise is penniless?

Reducing taxes—whether by increasing tax credits, or just cutting the rates—is the only way the American republic is going to survive financially. Dr. Art Laffer’s famous napkin-drawn curve, demonstrating the principle of reduced tax burden actually resulting in increased tax revenues, is proven fact.

Reich is counting on a “peace dividend” to break out when the troops come home from Iraq as one source of additional funding.
Don’t count on it.
Most intelligence people believe we will have a lasting presence in that region of the world, much like we did in Germany following the Second World War.

According to his blog, Mr. Reich also advocates “modest” deficit spending by the government to fund projects to spark economic growth.
Sorry, Rob, but “modest” does not exist in the government lexicon, especially when it comes to stewardship with tax dollars. Either you’re going to balance spending with revenue or you’re not; there is no grey zone.

Frankly, Reich and his Washingtonian brethren are the biggest ducks in the puddle. Scolding American consumers for spending beyond their means is much like calling the kettle a Cookware-American.

To me the most-troubling element of the Reich troika for economic wellness is the notion of increasing taxes. That’s just wrong-headed thinking. No government ever taxed its way into prosperity, and the U.S. is unlikely to be the first alchemists to turn fiscal lead into gold.

Writes Moore, Overall, taxes are between 10 percent and 20 percent lower in the United States than they are in most other industrial nations. [Right now,] this gives America a competitive edge in world markets. The United States now has the second- highest corporate income tax in the developed world, after Japan, [and] our personal income tax rate is still low by historical standards.”

But have you noticed what’s been happening recently in many European and Pacific Rim countries, as they’ve slashed their income tax rates? Moore notes that there are now ten Eastern European nations with flat-tax rates between 12% and 25%.
In Washington, the political pressure seems to be to raise them.

Not a lasting competitive strategy, is it?

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