Saving Capitalism from Robert Reich
SUMMER 2016 • REGULATION
By David R. Henderson
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Robert Reich, a former U.S. secretary of labor under President Bill Clinton and now a professor of public policy at the University of California, Berkeley’s Goldman School of Public Policy, has written a book whose title suggests that he wants to save capitalism. Well, not quite.
The good news is that Saving Capitalism is nothing like Locked in the Cabinet, his earlier memoir about being labor secretary, in which he literally made up stories that made himself look good, as reported by Jonathan Rauch in his Slate review, “Robert Reich, Quote Doctor,” (May 30, 1997). In the new book, Reich starts by making an important—probably correct—point and, to his credit, documents virtually all of his empirical assertions with checkable citations. But some of his most important empirical claims are wrong, he has a peculiar sense of what is a large amount of wealth and what is a small amount, and one of his claims shows a basic misunderstanding of wealth accumulation.
Government and free markets / Reich starts by decrying the way so many arguments about government economic policy quickly degenerate into whether the free market “is better at doing something than government.” In his view, that makes no sense because, he argues, “There can be no ‘free market’ without government.” The free market, he writes, “does not exist in the wilds beyond the reach of civilization.” That’s true. But according to Reich, civilization is created by government because government “generates the rules.” Yet there were many historical instances in which civilized rules were generated without government. Economist Edward P. Stringham has written about some of these cases in his recent book, Private Governance: Creating Order in Economic and Social Life. And, of course, centuries ago there was the Lex Mercatoria, the Merchant Law, which businesses created and enforced in Europe, completely separate from any government.
But maybe we shouldn’t throw out Reich’s baby with the bath water. He argues correctly, for example, that copyright law, patent law, and bankruptcy law are government creations and that they could be set up differently. He points out that much wealth in the U.S. economy consists of intellectual property. Without patent and copyright law, that property would be worth much less. For instance, in 1998, Congress passed the Copyright Term Extension Act, giving corporations a copyright for 95 years after the date of creation. For obvious reasons, wags at the time called it the Mickey Mouse Extension Act. One cannot argue that this extension was needed to give people an incentive to produce what had already been produced.
Whatever the optimal length of a copyright is, I’m fairly confident that it is well below 95 years. But the bigger‐picture point is that Reich is right that these rules, which many free‐market economists like me favor, are government‐made. For that reason, in fact, some free‐market economists go so far as to oppose patent and copyright as unjustified government‐created monopolies, and they make a stronger case for that policy than you might think.
Some serious problems / Unfortunately, this is the high point of the book. The rest of it reads like one of the standard books that “progressives” write advocating heavy government regulation of human affairs. And Reich’s case is about as unpersuasive as the cases made by others for those same or similar interventions. It’s impossible, in a short review, to cover all of his arguments for all of his regulations, so I will single out five of the most important.
One of his biggest objections is to the 2010 U.S. Supreme Court decision in Citizens United v. Federal Election Commission. Citizens United is an incorporated nonprofit political group that released a movie criticizing Hillary Clinton when she was running for the Democratic presidential nomination in 2008. That violated the McCain‐Feingold Act of 2002, which forbade such actions for the period just before an election. The Supreme Court found for Citizens United. One of the majority’s arguments was that just as media corporations such as the New York Times are free to advocate the election or defeat of a federal candidate, other corporations should have this same freedom.
Reich does not deal with that argument. Instead, he writes, “As a practical matter, freedom of speech is the freedom to be heard, and most citizens’ freedom to be heard is reduced when those who have the deepest pockets get the loudest voice.” Actually, freedom of speech is not the freedom to be heard; it’s—as the term implies—the freedom to speak. There is no guarantee, nor should there be, that you will be heard. Moreover, the New York Times is heard, or read, more than I am. Without the New York Times around, my work might be read a little more. Reich’s reasoning, taken all the way, would argue for prohibition or at least regulation of the New York Times.
In his discussion of antitrust laws, Reich contradicts himself in the space of a page. He criticizes—correctly, in my view—Amazon’s successful urging of President Obama’s Justice Department “to sue five major publishers and Apple for illegally colluding to raise the price of e‑books.” Just two paragraphs later, he complains that “the new monopolists have enough influence to keep antitrust at bay.” But his own example shows that Amazon did not keep antitrust at bay, but used antitrust to go after competitors. So, apparently for Reich, antitrust is good except when it’s not.
At places in the book, he makes one wonder if he understands the importance of incentives. Consider his discussion of student loans. Former students are “laden with student debt,” he writes. He mentions that in 2014, student loans were a whopping “10 percent of all debt in the United States.” He then writes, “But the bankruptcy code does not allow student loan debts to be worked out under its protection.” The “but” makes no sense. It’s precisely the fact that student loans cannot be discharged in bankruptcy that gives lenders an incentive to make such loans, causing the loans to be such a big percent of all debt.
Reich advocates letting students use bankruptcy to get out of loans that “were made to attend schools whose students have low rates of employment after graduating.” That would create a huge incentive problem: students would have even less incentive than they do now to get into schools and/or majors that give them a good shot at a job. On the other hand, maybe his proposal is not so bad. Lenders would respond by charging huge interest rates for students in such situations, and maybe students would get the market‐induced hint.
Reich has long advocated a high minimum wage, and in this book he calls for raising it to half the median wage. How does he handle many economists’ concern that a high minimum wage would destroy job opportunities for people with the fewest skills? He cites work by economists who have found little negative effect of minimum wage increases to levels well below that which he advocates. Interestingly, California Gov. Jerry Brown recently signed a law that will raise the minimum wage to about 69 percent of the median by 2022, considerably above what Reich advocates. It will be interesting to see if Reich opposes such a move.
In response to a claim that many poor Americans do not work hard, he claims that, au contraire, they do. He writes, “The reality is that America’s poor work diligently, often more than 40 hours a week, sometimes in two or more jobs.” But the U.S. Bureau of Labor Statistics study he cites to back that claim is not of the poor, but of the “working poor.” It’s not surprising that the working poor work, but that says little about the work habits of poor people in general.
Reich says that he wants to save capitalism for the many, and he may believe that. But to save capitalism we need to eschew most of what he proposes.
The data on how much poor people work are not hard to find. According to the U.S. Census Bureau, in 2013, 61.5 percent of households in the bottom fifth of the income distribution (and that would include all poor households because they are about 70 percent of the bottom fifth) had no one working at any time during the year, even at a part‐time job. Only 13.4 percent of households in the bottom fifth had someone working a full‐time job for more than 27 weeks.
Reich does give some news that most Americans would welcome, though he does not: in order to get certain kinds of government aid—in particular, the Earned Income Tax Credit—one must work. He comments, “In effect, the new work requirements have merely reduced the number of poor people who are jobless, while increasing the number of poor people who have jobs.” It’s unclear why he thinks it’s bad for poor people to get jobs.
In a paragraph about Bank of America’s $16.65 billion 2014 settlement with the federal government over practices connected to the previous decade’s housing bust, he shows a peculiar sense of what a big number is. That settlement, he writes, “paled in comparison to the bank’s earnings.” And what were those earnings? In 2013, he writes, they were $17 billion. So $16.65 billion pales in comparison with $17 billion? It’s 98% of $17 billion. If Reich were making $300,000 a year and the government forced him to pay a fine of $294,000, would he think the fine “paled in comparison” to his pre‐tax income?
One of Reich’s important empirical claims about wealth betrays a misunderstanding of how wealth is accumulated. See if you can spot it: Referring to a 2013 poll of Americans with more than $3 million of investable assets, Reich writes:
Nearly three‐quarters of those over age 69 and a majority of boomers just below them are the first in their generation to accumulate significant wealth. For the rich under the age of 35, however, inherited wealth is more common.
Of course, it’s more common. Accumulating wealth takes time. So, naturally, the ones who have great wealth at age 35 are necessarily more likely to have inherited it. I’m a good example. When I was 35 and my wife was 36, our combined net worth, including all our IRAs, was about $20,000. If I continue working full‐time until age 69, our investable assets should be about $1.5 million. That’s what a 30‐plus year stretch of saving and investing does.
Conclusion / Reich says that he wants to save capitalism for the many. He may genuinely believe that. But he has two problems.
First, he rarely if ever notes the regulations that keep the fruits of capitalism from the many. Consider housing. He tells how his modest‐income parents were able to buy a house in the 1950s. Left unsaid but implicit is that it’s much harder now, especially—as he well knows—in coastal California. But why? Could it have something to do with restrictions on building houses? Harvard’s Edward Glaeser and Wharton’s Joseph Gyourko have shown that a huge part of the premium for houses in high‐priced areas is due to restrictions on building (“Zoning’s Steep Price,” Fall 2002). But Reich says not a word about such restrictions.
Second, the various regulations that he advocates would make economic growth even more tepid than it is now, making it even harder for the many to rise. We do need to save capitalism for the many, not just the few. And to do that, we need to eschew most of what Reich proposes.
