Robert Reich Answers Your Labor Questions

Robert Reich

We recently solicited your questions for former labor secretary Robert Reich.

He met your questions with earnest, interesting answers and some good advice — like how to avoid being outsourced.

He also opined that there are too many M.B.A.’s running around, and that “they are killing the economy!” You might also like this line: “Democrats aren’t disciplined at anything; that’s why they’re Democrats.”

He also divulged what it was like working for the Clinton administration:

The (T.V. show) West Wing is fairly accurate, except that the people who inhabit the real West Wing aren’t as clever with one-liners. … I often thought of myself as being at the top of one pyramid (the Labor Department, which then had about 18,000 employees) and at very bottom of another, inverted one …

Thanks to Robert for his answers, and to all of you for your thoughtful questions.

Q: As an educator, what skills/courses do you recommend to your students to ensure their job security? What if you’re too old to be an auto mechanic, but loathe the thought of getting an M.B.A.?

A: I tell my students there’s no job security in the economy they’re entering, but if they want employability security — a good chance of maintaining a fairly good paycheck — they need to master a domain of knowledge during their undergraduate years adequately enough to enable them to continue to learn on and off the job from then onward. The old domain will become obsolete, but their learning skills won’t.

Auto mechanics, for example, can become automotive technicians who install, fix, and upgrade all the electronics that now comprise a significant part of the modern automobile.

But don’t get an M.B.A.! We have too many M.B.A.’s as it is, and they’re killing the economy!

Q: You have known the Clintons almost their entire adult lives.

The public persona of Bill Clinton has changed during this election cycle — he seems to be much less positive than in the past. He looks and sounds almost angry at times. Is this the real Bill coming out under pressure and without all the stagecraft afforded a president?

A: I’ve been disappointed in how he’s behaved during this election, and said so publicly. In fairness to him, I can imagine it’s different being a candidate from being the spouse of a candidate in that the barbs and bruises could hurt more when your wife is the recipient.

But still, he should know better.

Q: Labor has been relegated to the backseat in favor of capital which has given illusory gains. Are you in favor of rescuing failed investments undertaken by excessive risk-takers even when their failure would cause systemic disruptions?

A: Absolutely not. I can understand why the Fed felt it had to bail out the biggest investment banks on Wall Street, but the Fed (or Congress) should demand as a quid pro quo that the banks increase the amount of capital they have on hand in proportion to the risks they’re taking on, and should also require that taxpayers (who are taking on the ultimate risk) share in any future increases in share price.

Q: In your book Supercapitalism you talk about how you think labor unions need a seat at the bargaining table in order to bring around more equality in earnings. What do you think of a situation where unions become so powerful that they force companies to teeter on the brink of bankruptcy because they have given such generous salaries/benefits. How do you prevent a powerful union from threatening the long term viability of a company or even a whole industry?

A: Fifty years ago, when over a third of the American workforce was unionized and most big industries were oligopolies, it was fairly easy for unionized workers to get higher wages and benefits without putting any individual company at a competitive disadvantage. The higher wages and benefits were merely passed on to consumers in the form of higher prices or came out of profits that would otherwise go to investors.

Today, though, most companies are in fierce competition because new technologies combined with globalization have destroyed the old oligopolies and allowed many new entrants. This is good for consumers and investors, who have a much easier time finding great deals.

But it’s bad for us in our capacity as workers — especially if we’re doing routine work. And it’s been terrible for unions. If they try for higher wages and benefits, they put their company at a competitive disadvantage – which means their company shrinks or goes under. That’s why industrial unions themselves are shrinking.

But look at unions in the local service sector that’s protected from much competition. They’re growing, precisely because the higher wages and benefits can be passed on to consumers and investors.

Q: How accurate is the B.L.S. data and what could or should be done to make it as sound and accurate as possible?

A: The Bureau of Labor Statistics is the crown jewel of data gathering and analysis in the federal government. It needs more money to do its job properly — to upgrade and expand its surveys, for example.

Q: I loved it that you participated in public-radio’s April Fool’s joke on the Marketplace program. Anyway, any idea why voters seem to fall for tax cuts and trickle-down theory? Any ways to convince them otherwise?

Also any suggestions to someone in their late 30’s who may get their job outsourced? I’m talking about a highly skilled research job, one that already requires a lot of education (Masters/Ph.D.), but is easily outsourced to other countries.

A: Thanks. The Marketplace crew do a fabulous job.

Why do voters fall for tax cuts and trickle-down economics? Because most need a tax cut!

The median wage is only slightly higher than it was 30 years ago, adjusted for inflation. It’s below where it was in 2000. And most Americans are deep in debt. So tax cuts are appealing to middle- and lower/middle-class voters.

What they need to understand is that the lion’s share of the Bush tax cuts have gone to the very rich — people in the top five percent of income, who have also got the lion’s share of the benefits of economic growth. As a result, services the middle and lower-middle classes depend on — schools, roads, fire and police protection, enforcement of environmental and health regulations — are all being cut, and the national debt keeps growing.

Supply-side, trickle-down economics has been a cruel joke, perpetrated on most of us by a cabal intent on justifying widening inequality. Nothing has trickled down except cuts in services.

As to your fears about outsourcing, I’d recommend shifting into a part of your industry that depends on being close to customers — tailoring technologies to particular end users, for example. These jobs won’t be outsourced.

Q: What steps, if any, can the U.S. take to consider staying on par with China — in terms of economic growth capital, G.D.P., etc?

A: China is still playing catch-up with the United States and other advanced nations. It’s relatively easy to chalk up fast growth when you’re not the technological leader. All you need to do is follow the leader!

But that’s no reason for complacency on our part. If we want to stay in the lead, we’ve got to invest far more than we now do in basic research and development (green technologies, for example), as well as education (starting with early childhood). And don’t forget infrastructure: our roads, bridges, and pipes are falling apart. All these public investments are at least as important to our future growth as private investment, but we’ve been skimping on them.

Q: Do you believe in redistribution of wealth via taxation?

A: I don’t believe in redistribution of wealth for the sake of redistributing wealth. But I am concerned about how we can afford to pay for what we as a nation need to do — not just recruiting talented teachers to our classrooms and providing better access to health insurance for all our people, but also paying for national defense and homeland security and all the other things this nation needs.

Remember, almost all the economic gains of the last decade have gone to the people at the top. And they pay a relatively small percent of their income compared to what the people at the top used to pay. The marginal income tax on the highest earners was 93 percent under Dwight Eisenhower. It dropped to a little over 70 percent under John F. Kennedy. Now it’s 35 percent. It’s 15 percent if you’re lucky enough to be a private-equity fund manager or anyone else who can shift their income into capital gains.

[Taxes should pay] for what we need in order to be safe and productive. As Oliver Wendell Holmes once wrote, “taxes are the price we pay for a civilized society.”

Q: Why do you think the Democrats do such a poor job of framing their policies? How can the spectrum of economic wisdom distributed through the media be broadened, rather than jammed through a relatively narrow paradigm?

A: Republicans have been very good and very disciplined at framing policies in ways that average Americans find attractive. Democrats aren’t disciplined at anything; that’s why they’re Democrats.

We Democrats try to frame issues in a certain way for maybe a year or two and then give up (Bill Clinton talked eloquently about “investing” in the nation’s future through education, health care, and infrastructure, but gave up on the word “investment” after Democrats got trashed in the 1994 election).

On the other hand, the public has now seen the results of Republican you’re-on-your-own policy: a failing economy, a record number of Americans without health insurance, millions of families on the verge of being unable to afford the insurance they have and also on the verge of losing their homes, Katrina, Walter Reed, and so on. No amount of “framing” can mask the abject failures of these policies, and the need for a new approach that acknowledges we’re all in this together.

Q: Barack Obama said last week he favors raising the capital gains tax for “fairness” reasons, even though a higher tax rate may not increase tax revenue. Wouldn’t a higher capital gains tax rate eventually lead to less investment and fewer new jobs created?

A: The evidence isn’t all that clear on this because tax revenues are far more sensitive to the business cycle than they are to rates.

But as far as we can tell, a lower capital gains rate leads to higher tax revenues initially, as investors rush to sell assets in order to take advantage of the lower rate. But once the initial round of selling is over, the lower rate leads to lower revenues overall. Note that when the capital gains rate is lower than the tax rate on ordinary income, individuals shift as much income as they possibly can into assets that qualify for capital gains treatment. So while revenues from capital gains may continue to be higher than they were before rates were cut, revenues from income taxes tend to be lower.

Q: What incentives can government or society provide to individuals to encourage actions that benefit those individuals and society in the long-term?

A: History suggests that societies become more conscious of their long-term needs after they’ve experienced deep stress — wars, economic depressions, plagues. Perhaps these upheavals give societies broader perspectives on themselves — on where they’ve been and where they may be heading, as well as the ties that bind their members to one another — and thereby encourage them to invest in and make plans for generations as yet unborn.

To take the most recent example from modern American history, the Cold War prompted America to invest in its long-term infrastructure (the National Defense Highway Act), train a whole generation of scientists and engineers (the National Defense Education Act), and rebuild war-torn Japan and Europe.

Q: What measures will you recommend to the incoming president to implement a fair and sustainable income and wealth distribution?

A: Expand the Earned Income Tax Credit — a wage supplement for lower-income people, and finance it with a higher marginal income tax on the top five percent. For the longer term, invest in education for lower income communities, starting with early-childhood education and extending all the way up to better access to post-secondary education.

Q: Do you believe that wealth concentration is bad for the economy and can U.S. manufacturing be revived to be competitive again?

A: Two different questions. Yes, wealth concentration is bad for the economy because it tends to depress aggregate demand. Not enough people can afford to buy all the goods and services the economy produces. The rich won’t do it because they already have most of what they need. That’s what it means to be rich.

As to manufacturing, I do believe we can create new industries, such as green technologies, but I don’t think we’ll see the assembly line again. Look inside most modern factories these days and you’ll find robots and numerically-controlled machine tools, and a handful of technicians sitting behind computer monitors controlling all this computerized equipment. In other words, factories are becoming more and more automated, which means they won’t need armies of blue-collar workers.

Q: As an econ professor and Democrat I’m still having trouble with the protectionist talk of the two candidates. Do you think Obama is handling trade issues properly or should he be more pro-free trade?

A: While it makes sense to argue in favor of labor and environmental standards in trade deals (so long as they’re on a sliding scale, and poorer nations don’t have to reach the same standard as richer nations), I don’t think the candidates should feed the current frenzy against free trade.

Q: What was it like working for the president? Did you often interact with the other secretaries? What sorts of tasks were you responsible for? What sorts of tasks did you often delegate to others in your department?

A: The (T.V. show) West Wing is fairly accurate, except that the people who inhabit the real West Wing aren’t as clever with one-liners and don’t treat each other as if they’re one big family.

As a cabinet secretary, I spent about a third of my time in my department, a third on the road, and divided the other third between Congress and the White House. I often thought of myself as being at the top of one pyramid (the Labor Department, which then had about 18,000 employees) and at very bottom of another, inverted one (answerable not only to the president and V.P. and many White House staffers, but also 535 members of Congress and lots of inhabitants of semi-official Washington who thought they were entitled to a return telephone call).

If you want to know more, I modestly invite you to pick up my book, Locked in the Cabinet.

Q: What do you believe would really happen, if in a growing economy (such as the one we had under President Clinton), we left the rate be, and allowed the economy to grow large enough for say, 99 percent employment?

A: We’d have inflation.

When I took office in 1993, most economists assumed that unemployment couldn’t get below six percent without igniting accelerating inflation. Alan Greenspan understood that globalization, technological change, intensifying domestic competition, and the decline of unions all created a different economy — one in which unemployment could get to four percent, even below four percent, without causing inflation to accelerate. But I don’t think unemployment can fall to one percent without having an inflationary impact.

Q: Do you think the growing income inequality in America is a product of economic forces (globalization, skill-based technological change, immigration) or political and social factors (decline of union membership, for instance)?

A: You can’t really separate the economics from the political and social factors. Union membership has declined in part because consumers have far easier access to cheaper goods made with non-union labor. My latest book, Supercaptalism, goes into this in detail.

Q: I’d be interested to know your thoughts on the feminisation of poverty and the male-female wage differential. How much of that is due to career choice?

A: Rough estimate: About 50 percent of the differential has to do with different career choices made by women and men. Twenty-five percent involves greater time women spend on care-taking of children and elderly relatives. The other 25 percent is due to bias and prejudice in the labor market.

Q: Mr. Reich, What does the U.S. have to do in order to raise the value of the dollar against world currencies?

A: Theoretically, the Treasury (along with the finance ministries of other major economic powers) could temporarily raise the value of the dollar by buying dollars.

But this would only work temporarily. The fundamental problem is that the dollar, as our international I.O.U., is now encumbered by so much debt (public and private) that global investors and traders worry about its future value. So they’re diversifying their dollar holdings into yen, euro, and other currencies.

Even more worrying, the dollar is losing its footing as the international reserve currency in which global deals are made. Here again, buyers and sellers (including oil producers) are starting to hedge their bets by diversifying out of dollars. I doubt there will be a run on the dollar — nobody wants that, and, as I said, major finance ministries can prevent it from happening — but I don’t see how the dollar can avoid a gradual decline.

Q: I love watching you and Steve Moore on C.N.B.C.’s Kudlow and Company. I usually find your points to be valid with respect to the politics of the left, but do you really feel that changing N.A.F.T.A. would be a good thing for our county as both Senators Obama and Clinton are proposing? And if so, what would we have to give up in the event that N.A.F.T.A. was to be renegotiated?

A: I think N.A.F.T.A. has become a symbol for all the anxieties and frustrations — dare I say bitterness? — of many middle class and working class people whose jobs have been lost or become less secure over time. I don’t think we can or should renegotiate N.A.F.T.A. — it isn’t to blame for what’s happened. But we need to address and respond to those anxieties and frustrations.

Q: You seem to be against public welfare — wanting to transfer money from unemployed citizens to the businesses that hire them — are you also against corporate welfare? Would you want to transfer money from businesses that finance mortgages to the citizens that actually live in the houses?

A: I’m against corporate welfare, bailouts for business, and other forms of socialized capitalism. But I believe individual families sometimes get into trouble through no fault of their own, and they deserve help to get back on their feet.

So let’s help families stay in their homes and continue to pay mortgages that are refinanced so they can afford to pay them. And let’s have better financial oversight so the next time money is cheap, mortgage lenders don’t shove it into the hands of people who don’t know what they’re getting into.

Q: What is your take on higher commodity prices and do you think this trend will continue?

A: Commodity prices are trending upward mainly because China and India have a voracious appetite for commodities, but secondarily because speculators expect them to trend upward and are thereby fueling them. It’s a small bubble right now but it could get to be a bigger one.

By the way, the Fed isn’t responsible for preventing speculators from blowing bubbles and then getting injured when they burst.

Q: Do you think that corporations should still hold a status similar to citizenship, but in a diminished form? If so, what would that form look like?

A: As I’ve argued in my latest book, Supercapitalism, corporations are not citizens and should not be treated as such. They’re contracts, pieces of paper. Hence, there should not be corporate criminal liability; corporations shouldn’t pay income taxes; corporations should have no right to sue the federal government; corporations should have no constitutional
rights.

Q: What should the U.S. do to help educate our youth for a sound personal financial foundation?

A: An introductory course in personal finance and economics should be required in all high schools.

Q: What should the U.S. government change in its current fiscal policies in order to lead by example?

A: The federal budget should be divided between past obligations (Social Security and Medicare), current expenditures (Medicaid, food stamps, national defense), and future investments (infrastructure, basic research, and education).

Past obligations should be funded by past and current contributions for these purposes. Current expenditures should be paid for by current revenues. Future investments may generate a deficit if the estimated future benefits from such investments exceed the estimated future borrowing costs. Families should do the same, no?

Q: What large-scale policies are consistent with reducing both domestic and international inequality?

A: The most important thing we can do to reduce global poverty is to end agricultural price supports and eliminate tariffs and quotas on agricultural commodities coming into the U.S. These make it difficult if not impossible for developing nations’ farmers to sell their produce on world markets. They also raise food prices for U.S. consumers, and drain the Treasury of money needed for other purposes.

Q: As a fellow Grinnell 2002 graduate I’d like to know: Is a liberal arts education a worthwhile investment? Does it have value in today’s labor market, or is it an outdated concept? Is America’s higher education producing the workforce that will be needed to compete with China and India in the future? What needs to change and why? What does the U.S. do right when it comes to education?

A: The purpose of a liberal arts education isn’t just to make more money (four-year college grads have lifetime earnings that are about twice that of the typical high-school grad without any college) but also to be able to have a fuller life and be a more engaged and responsible citizen. So yes, without a doubt, it’s a worthwhile investment.

As to whether we’re producing the workforce needed to compete with China and India, the answer is yes — at least up until now. U.S. colleges and universities are still the best in the world, and continue to attract students from all over the world. But we can’t be complacent. Public and private universities need more and better funding, and students need more affordable access to them.

Q: Overwork was one of the central themes of your 2001 book, The Future of Success. I wonder if you could comment on the extent to which economists have contributed to overwork by misinformed policy prescriptions?

A: Economists tend to believe that economic efficiency and economic growth are the two most important values. Therefore, any policies that reduce the incentive to work hard are suspect. (Economists worry, for example, that a higher Earned Income Tax Credit for low-wage workers may discourage them from working harder, since wage increases would lead to correspondingly larger declines in the E.I.T.C. wage subsidy.)

This strikes me as wrong-headed. The economy exists to make our lives better; we do not exist to make the economy better.