Another Dinner With Robert Reich

I never tire of listening to economics guru, Robert Reich, speak about the economy. He was former Labor Secretary under Bill Clinton, and ran against Mitt Romney for governor of Massachusetts (he lost). He has published 13 books. Oh, and he dated our recent Secretary of State, Hillary Rodham, when they were in law school together at Yale.

I got to know Bob well when I took two of his courses at UC Berkeley, on public policy and labor statistics. His insights into the long-term evolution of the US economy are nothing less than breathtaking. New students are ordered to the bookstore to buy 400 pages of photocopied jobs data, which they must commit to memory. And he is damn funny.

Not everything Bob has to say makes pleasant listening. The central challenges for the economy are jobs and wages, not deficits or inflation. A rush to trim spending too fast unnecessarily robs the economy of growth. Look no further than Europe, where ill advised and ideologically driven austerity policies have led to near economic collapse. If similar policies are implemented here, they will no doubt bring the same result.

Past economic recoveries brought far more dramatic snap backs. After the 1929 crash, the GDP fell a staggering 28% over the following three years. Then in 1934 it bounced back by 8%, in 1935, by 8%, and 1936 by 10%. The stock market recovered two thirds of its losses. That compares to today’s tepid 2% growth rate.

Then in 1937, a rush to end stimulus prematurely sent the country into the second leg of the Great Depression. That didn’t end until 1942. Stocks fell again by half. The big question for us today is whether 2014 will be a replay of 1937.

All middle class coping mechanisms to deal with falling incomes have been exhausted. First, women entered the workforce during the seventies to offset spouses’ declining wages. Then both began working longer hours. Today, Americans work 300 hours a year longer than Europeans and Japanese.

Finally, they turned to the home ATM in desperation during the nineties and 2000’s to make ends meet. Those cash machines abruptly shut down in 2008. Today, families have no resources left to maintain standards of living. This is why there has been no growth in the American median wage for 30 years. The declining consumer spending these trends inevitably delivered produced our present slow growth economy.

There were two turbocharges that assured the downfall would be as dramatic as it has been. Globalization suddenly meant that the $75/ hour blue-collar worker was competing head to head against a $2/day Chinese wage slaves. The Internet made this face off practical.

Technology also created robots to replace workers on an enormous scale. Bob like to tell the story of an invitation he received to speak at a much-publicized factory reopening in the Midwest. When he took the tour, he found only 13 workers staring at computer screens running the place that had replaced 3,000 before them.

While we are seeing a weak recovery now, entry-level positions are paying a fraction of what they did a decade ago, not far above minimum wage. Those with only a high school education or less have taken the biggest hit, seeing unemployment rates soar to 15%. By contrast, college educated workers have an unemployment rate as low as 5%.

Of course the challenge for me has always been to translate Bob’s lofty, 30,000 foot views, steeped in millennia of history, into Trade Alerts tomorrow morning which make money for you, the reader, by Monday. That’s easier said than done. Give my 86% net trading profit since the service started 26 months ago, I’d say so far, so good.

SPY 4-3-13

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Robert Reich

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